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The Securities and Exchange Commission ("SEC") has recently adopted rules implementing the whistleblower provisions of the Dodd-Frank Act. The new rules direct the SEC to pay awards to whistleblowers who voluntarily provide original information leading to the recovery of monetary sanctions exceeding $1 million.
The most contentious part of the rules is their likely impact on internal compliance programs. The business community has expressed concern that the rules will undercut the reporting requirements of corporate compliance programs. Notwithstanding this concern, the SEC has decided against requiring whistleblowers to report internally. Instead, it has determined whistleblowers are in the best position to know which reporting avenue to pursue.
As a result of the newly established bounty program, companies should be prepared for a flood of complaints. Below is a summary of key concepts under the new rules.
Defining a Whistleblower
The rules define a whistleblower as a person who provides to the SEC information relating to a possible violation of the securities laws that has occurred, is ongoing or is about to occur. A whistleblower must be an individual; companies are not eligible.
To be considered for an award, the rules require a whistleblower to do the following:
(a) Act voluntarily
(b) Provide original information
(c) Provide sufficient information leading to a successful enforcement action
(d) Facilitate a recovery totaling more than $1 million
Whistleblower Protection from Retaliation
Under the rules, it is unlawful for anyone to interfere with a whistleblower's efforts to communicate with the SEC, including threatening to enforce a confidentiality agreement. In addition, the rules do not require an actual violation or the successful receipt of an award for the anti-retaliation protections of the Dodd-Frank Act to apply. In an attempt to deter both bad-faith and frivolous reports, the SEC has imposed a "reasonable belief" standard that requires an employee to hold a subjectively genuine belief that the information demonstrates a possible violation and that this belief is one a similarly situated employee might reasonably possess.
No Internal Reporting Required
The new rules present challenges to established internal compliance programs because they do not require whistleblowers to first report internally before turning to the SEC. However, the SEC has attempted to incentivize utilization of internal compliance programs in three ways:
Company Response
Companies need to recognize that compliance risks are not caused by whistleblowers. Instead, they are generated by weak compliance programs that fail to identify, assess and control risks before violations are discovered by whistleblowers or regulators. Therefore, companies must make compliance risk assessments an integral part of compliance programs.
Further, an essential part of an effective compliance program is a process that encourages employees to report possible compliance violations without fear of retaliation. In fact, companies should find creative ways to reward employees who come forward with a good-faith belief that compliance violations are occurring. In the end, the quality of internal programs will impact a whistleblower's decision to report to the company as opposed to the SEC first.
For more information about how to appropriately respond to the whistleblower rules, please contact our director, Compliance Risk Services, Jim Bowers, at (860) 275 0339 or jebowers@daypitney.com, or any of the individuals listed above.
White Collar attorneys John Vukelj, Sarah Krissoff and Gregory R. Bruno authored an article for the New York Law Journal titled, "Stock Trading Plan Rule Amendments Augur Changes to Securities Fraud Litigation."
Day Pitney Alert
Judge Christopher Droney (ret.) and Matthew Austin co-authored the article, "The Investigation and Enforcement Landscape Under the Garland Department of Justice," for the New York Law Journal.
Judge Christopher Droney presented a webinar, "Perspectives on Practicing in the Age of COVID-19" for the Holy Cross Lawyers Association (HCLA).
Day Pitney Counsel Steven Cash will serve as featured panelist for the webinar "Decisional Advantage and Intelligence."
New York partner Eliza Sporn Fromberg was featured in a Law360 article discussing the potential impact of the SEC's first enforcement action on crowdfunding portals.
Day Pitney Press Release
Washington Legal Foundation quotes Day Pitney's White Collar Roundup in its recent article, "SEC Takes a Crack at Expanding Misappropriation Theory to 'Shadow' Insider Trading."
Day Pitney Press Release
Stan Twardy was quoted in the New York Times article, "Top Aid in Review of Russia Inquiry Resigns From Justice Dept."
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This website may use cookies, pixel tags and other passive tracking technologies, including Google Analytics, to improve functionality and performance. For more information, see our Privacy Policy. By using our website, you are consenting to our use of these tracking technologies. You can alter the configuration of your browser to refuse to accept cookies, but if you do so, it is possible that some areas of web sites that use cookies will not function properly when you view them. To learn more about how to delete and manage cookies, refer to the support instructions for each browser (e.g., see AllAboutCookies.org). You may locate Google Analytics' currently available opt-outs for the web here.