On May 25, 2011, the SEC adopted final rules establishing a whistleblower program pursuant to Section 922 of the Dodd-Frank Act. The final rules were approved by a narrow 3-2 vote by the five SEC commissioners, and are designed to reward individuals who voluntarily provide the SEC with original information relating to possible violations of the securities laws that leads to a successful enforcement action in which the SEC obtains sanctions of more than $1 million. The final rules, which will consist of Rules 21F-1 through 21F-17 under the Securities Exchange Act, will become effective 60 days after publication in the Federal Register.
Although some revisions from the proposed rules were made, the final rules stop short of requiring potential whistleblowers to report internally through their firm’s compliance program before reporting going to regulators. This was arguably the most controversial aspect of the proposed rules, due the potential adverse effect this could have on firms’ internal compliance programs if individuals have little or no incentive to report internally in order for the problem to be addressed without the involvement of the regulators. The rules do contain some incentives to report internally before blowing the whistle to the SEC. For example, the SEC has the authority to increase the size of a financial award paid to a whistleblower if he/she brings the issue to the firm’s compliance department and assists with an internal investigation. The SEC could also reduce the award if the person sabotages or undermines the firm’s compliance efforts with respect to investigating or addressing the matter. However, because the rules do not require such internal reporting either before or concurrently with notifying the SEC, it is critical for firms to establish an effective “culture of compliance” and encourage individuals to bring concerns to the compliance department before going to the regulators.
For additional information on the SEC’s new whistleblower program or assistance with updating compliance policies and procedures to reflect the new rules, please contact Zac Rosenberg, Compliance Consultant by email at email@example.com or by phone at (619) 278-0020.