Financial Regulatory Forum

SEC whistleblower rules raise risk for companies, lawyers say (Complinet)

By Guest Contributor
February 3, 2011

By Emmanuel Olaoye

NEW YORK, Feb. 2 (Complinet) Proposed increases in federal rewards for whistleblowers who report securities violations to the Securities and Exchange Commission raise the risk that employees will go outside their firms to report trouble, according to industry officials. Firms can avoid being the victims of potential whistleblowers by better publicizing their internal channels for reporting wrongdoing and getting creative with incentives for using them, they said.

Tonya M Grindon, partner at Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, in Nashville, Tennessee, said: “Making sure every employee in the organization is aware of the internal mechanism makes it less likely they will go to the SEC first.”

Grindon said that making an internal compliance program better known could allow the firm to reach employees who might not actually be aware that a policy existed for reporting violations. The SEC has proposed rules under the Dodd-Frank financial regulation overhaul which would allow whistleblowers in public companies to receive up to 30 percent of a monetary penalty if the SEC secured a successful sanction and a fine of $1m or more. The rules, which must be finalized by April 15, allow employees to bypass their firm’s compliance program and report wrongdoing directly to the SEC Whistleblower Program. Critics of the plan have said that it would encourage potential tipsters to take the path of riches instead of reporting the violation to the firm’s compliance program.

MORE INVESTIGATIONS, BIGGER FINES

Legal experts warned that firms faced more investigations and prosecutions if employees reported to the federal whistleblower program, which could lead to large fines if the firm were to be sanctioned. They therefore urged firms to see the whistleblower program as an opportunity to improve employees’ awareness about the firm’s compliance program.

Keith P Bishop, partner at Allen Matkins Leck Gamble Mallory & Natsis LLP, in Orange County, California, said: “I tell my clients this is an opportunity to address ongoing problems in the organization before they get out of hand.” Bishop said that making an internal compliance program popular with employees allowed the firm to address problems early, before they got bigger, and suggested that firms should consider providing financial rewards to employees to blow the whistle internally. Rewards might encourage employees to see the internal program not just as a requirement, but as something that could benefit them, he said. “I’m not aware of anyone trying to ‘compete’ with the SEC, but it’s something that companies can look at.”

Peter Henning, professor of law at Wayne State University Law School, said that rewards were a creative solution to the federal whistleblower program, but pointed out that employees might not want to risk retaliation by going to the firm. He acknowledged a need for firms to think of incentives to preserve their internal compliance programs, but he said that employees might prefer the protections offered by the SEC’s program. “If I’m advising someone, I would be asking them whether they can trust their employer. Essentially you will be accusing somebody else of committing a crime. As an employee, reporting internally puts you at greater risk. The anti-retaliation provisions in Dodd-Frank give[s] you more protection,” Henning told Complinet.

HIGHER AWARDS

The SEC has said that it will consider higher percentage awards for whistleblowers who report violations to the firm first. The move was partly in response to criticism that the whistleblower program would undermine internal compliance programs. Grindon said that higher awards for employees who used their firm’s compliance program might encourage employees who were motivated by a higher payday. She also said that firms should tighten up their compliance programs by ensuring that the policies and procedures covered not just accounting fraud but all elements of securities fraud.

Robert Brighton, partner at Shutts & Bowen LLP, in Fort Lauderdale, Florida, told Complinet that it was important for firms to respond quickly to potential whistleblowers. That would not only stop problems from getting bigger but would also help reduce the firms’ liability in an enforcement proceedings. He advised firms to develop training sessions which educated managers about how the firm’s whistleblower policy worked. The policy should make it clear that the firm would not retaliate against an employee who reported wrongdoing. “Sometime people have a grudge and feel they’ve not been dealt with. You can’t always take every report of wrongdoing as gospel but at a minimum you need to investigate,” Brighton said

Emmanuel.Olaoye (emmanuel.olaoye@thomsonreuters.com) is a correspondent for Complinet. Complinet, part of ThomsonReuters, is a leading provider of connected risk and compliance information and on-line solutions to the global financial services community. Established in 1997, Complinet serves over 100,000 industry professionals in 80+ countries. Its connected approach provides one single place to get all the relevant regulatory news, analysis, rules and developments from the region to support firms in highly regulated industries.

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