On November 3, the Securities and Exchange Commission issued a proposed rule implementing a program to pay eligible whistleblowers rewards for providing information about federal securities violations.  Under Section 21F of the Securities and Exchange Act, which was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Commission is required to promulgate rules establishing a program to pay whistleblowers rewards for providing original information leading to successful judicial or administrative enforcement actions.  Under the Act, if the Commission obtains at least $1 million as a result of the whistleblower's information, then the whistleblower is entitled to receive ten to thirty percent of the monetary sanctions obtained by Commission and other regulatory agencies. 

While these provisions necessarily evoke comparisons to qui tam actions brought under the False Claims Act—and apprehension regarding the massive settlements routinely obtained by qui tam relators—the Commission's whistleblower program does not authorize citizen suits.  Rather, the Commission's program solely provides rewards for disclosing evidence of securities violations, without delegating its enforcement authority.  Though this will prevent disgruntled employees from directly bringing actions against their current or former employers, it creates strong incentives to disclose violations to the Commissions instead of bringing them to the management's attention.  Though the Commission has expressly provided that employees may report violations to management and still remain eligible to receive whistleblower rewards, this proposed rule appears to incentivize whistleblowing over internal compliance mechanisms. 

However, these rules should not discourage companies from fully investigating potential violations because the proposed rule prevents employees conducting compliance-related tasks from receiving whistleblower rewards, e.g., employees who receive information about a violation through an internal investigation are similarly ineligible.  More importantly, a company's legal and accounting team may not obtain whistleblower rewards for violating their confidential relationships.  While this may become a boon to the SEC enforcement, most companies criticize this program as undermining the costly Sarbanes-Oxley Act compliance improvements. 

The Commission has requested comments on these proposed rules; all comments must be submitted by December 17, 2010, and can be submitted on line at www.SEC.gov

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Categories: Financial System

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