Attorneys at Kohn, Kohn & Colapinto have raised concerns that the SEC is at risk of undermining post-financial crisis efforts to promote the reporting of corporate wrongdoing.
The agency in late June proposed amendments to the rules governing its whistleblower program. It was established in 2010 under the Dodd-Frank Act to encourage individuals to report high-quality tips to the agency by offering potential rewards.
Eligible individuals can receive cash if they voluntarily provide original information that leads to successful SEC enforcement actions resulting in sanctions of more than $1 million. Such awards are worth between 10 percent and 30 percent of the sanctions collected. Since the program came into effect, the commission has ordered that more than $266 million be paid out in 50 awards to 55 whistleblowers.
The proposed changes are intended to help the commission ensure that deserving whistleblowers are appropriately rewarded, increase efficiencies in the whistleblower claims review process and clarify the requirements for anti-retaliation protection, among other things.
One change would affect ‘exceedingly large’ awards that could yield total collected monetary sanctions of at least $100 million. The proposal would authorize the commission to adjust the award percentage so that it would yield a payout - subject to the 10 percent minimum – ‘that does not exceed an amount that is reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers,’ SEC officials write in a related filing.
Attorneys with Kohn, Kohn & Colapinto, which represents whistleblowers, argue in a recent comment letter that curbing awards would have negative effects. ‘Other whistleblower award laws that lack mandatory awards and/or cap awards have universally failed, as there is no incentive for whistleblowers to risk their careers to file complaints with the government under these ineffective programs,’ they write.
They add that what they refer to as the ‘SEC’s proposed 10 percent cap on large whistleblower rewards’ would ‘discourage potential whistleblowers in many of the largest or most important financial fraud cases. The cap would send the wrong message to both fraudsters and employees contemplating taking the risk of blowing the whistle on major corporate and financial fraud.’
The proposed limits would create an appearance of bias against whistleblowers, particularly given the risks they face and the lack of caps on executive compensation in the financial services industry, the attorneys write.
SUPREME COURT RULING
The SEC is also proposing changes so that its whistleblower rules conform with a recent US Supreme Court ruling in Digital Realty Trust, Inc v Somers. In terms of retaliation protection, an individual would have to report information about possible securities laws violations to the commission ‘in writing.’
According to Kohn, Kohn & Colapinto, the proposal conforms the anti-retaliation provisions of the SEC’s rules to the Supreme Court’s decision. ‘However, the commission ignored the impact of that decision on other rules related to internal reporting requirements,’ the lawyers write. ‘The commission rules that encourage internal reporting under [Dodd-Frank], or force various classes of employees to report internally in order to be classified as a whistleblower under [Dodd-Frank], are now, at best, inconsistent with Digital.’
They urge the SEC to review all of its Dodd-Frank rules regarding internal reporting and amend them to be consistent with the ruling. For example, the lawyers say the Digital decision raises the question of what constitutes a corporate compliance program – through which, for example, internal reports of potential wrongdoing are made.
‘Although it is well recognized that a company has wide discretion in creating a compliance program, a company’s branding of a department with the title compliance program does not create a compliance department,’ they say.
‘It is absolutely essential that the commission define the meaning of a corporate compliance program as understood in the [Dodd-Frank] whistleblower rules and prohibit the practice of confusing a company’s legal department with a company’s corporate compliance program.’
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Ben Maiden
Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...
