The Securities and Exchange Commission created a new program that could result in significant payments to corporate whistle-blowers. In a 3-2 vote, the SEC finalized plans for a fiercely debated mandate included in the sweeping financial reforms of the Dodd-Frank Act. The federal regulator said the whistle-blower program is intended “to reward individuals who act early to expose violations and who provide significant evidence that helps the SEC bring successful cases.” “For an agency with limited resources like the SEC, it is critical to be able to leverage the resources of people who may have first-hand information about violations of the securities laws,” SEC Chairman Mary Schapiro said. “While the SEC has a history of receiving a high volume of tips and complaints, the quality of the tips we have received has been better since Dodd-Frank became law. We expect this trend to continue, and these final rules map out simplified and transparent procedures for whistle-blowers to provide us critical information.” A whistle-blower must voluntarily provide the SEC with original information that leads to successful enforcement in which the agency receives sanctions of more than $1 million. Prior to Dodd-Frank, a monetary award for whistle-blowers was limited to insider-trading cases and capped at 10% of penalties collected. The new program expands eligibility and boosts awards to potentially 30% of penalties. The new rules are effective 60 days after submitted to Congress or published in the Federal Register. Last fall, the SEC set aside $452 million for anticipated claims resulting from the whistle-blower program. Many companies worry the program will spur employees to circumvent internal policies and procedures. “There is little doubt the new whistle-blower program will result in increased SEC enforcement activity,” Jordan Eth, Randall Fons and Justin Hoogs of Morrison Foerster wrote in a note to clients. “But it is likely that the program, especially as now structured, will also cause an uptick in tips and complaints being provided to companies’ internal compliance programs and hot lines,” according to the lawyers. Rather than suffer through an often long and difficult SEC investigation, the lawyers advise companies to update compliance and ethics programs to “identify, investigate and handle possible misconduct quickly and effectively.” Companies also need to “reinforce the message to employees that adherence to the securities laws is a consistent and core value, and that concerns will be taken seriously,” the Morrison Foerster lawyers said. “Understanding how to deal with whistle-blowers and the concerns they raise can minimize the disruption and expense that begins when the SEC enforcement division comes calling.” Ira Hammerman, senior managing director and general counsel at the Securities Industry and Financial Markets Association, said the trade association now wants the Commodities Futures Trade Commission to revise its proposed rule to align with the SEC’s final rules, “to ensure regulatory consistency and clarity.” “We applaud the SEC for taking a constructive and thoughtful approach to these rules,” Hammerman said. “We appreciate the SEC’s willingness to work with the industry and make important and necessary changes to the internal reporting provisions and the provisions on who can collect monetary awards.” In early May, a House subcommittee heard testimony about the issue, and Rep. Michael Grimm (R-N.Y.) has introduced a bill, seeking to amend Dodd-Frank and require employees to make an initial report to the employer before going to the SEC. Write to Jason Philyaw.
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