Legal Trends

SEC ADOPTS FINAL WHISTLE-BLOWER RULES

The SEC has adopted the final rules for its whistle-blower program, offering employees financial incentive to report potential misconduct in their companies directly to the government rather than working through compliance programs.

Section 922 of the Dodd-Frank Act adopted last year required the SEC to adopt rules for a program paying 10% - 30% of any penalty over $1 million collected for a securities law violation to any person who provided "original information."

The whistle-blower provision in the Dodd-Frank Act was in addition to the requirements of the Sarbanes-Oxley Act, which mandated corporations to create effective internal reporting mechanisms to learn about potential wrongdoing. While compliance programs are still required, the new whistle-blower rules give corporate employees tremendous financial incentive to bypass them and report directly to the government.

The SEC sought to soften the blow to corporations by stressing that the final rules have incentives that may persuade employees to use a compliance program rather than go directly to the government with original information. For example, if an employee reports misconduct to the corporate employer first, then this may be seen as a positive indicator that may ultimately result in a larger award. Additionally, the new rules now make it clear that a corporate confidentiality agreement cannot limit the right of an employee to report information about possible violations to the government.

In light of the new rules, the question for corporations becomes whether these incentives will be adequate to dissuade whistle-blowers from going straight to the government instead of attempting to comply with corporate compliance programs.

Back