One of the more attention-grabbing sections of the recently enacted Dodd-Frank financial reform bill is the mandate that the Securities and Exchange Commission offer rewards or “bounties” to whistleblowers who provide information to the SEC about violations of the federal securities laws. The SEC has published proposed rules implementing the whistleblower program, and the public comment period expired in mid-December. Final rules are expected in April 2011.
The Dodd-Frank whistleblower provisions have been controversial. Companies that have spent considerable time and money building internal corporate compliance programs have expressed concern that the new whistleblower statute will undermine those programs by providing incentive for employees to bypass internal protocols in search of financial reward from the SEC. Dozens of high-profile companies such as Kimberly-Clark Corp., MillerCoors, McDonald’s Corp., Delta Air Lines Inc. and Kohl’s Department Stores, Inc. have formally expressed these concerns in letters to SEC officials .
With required monetary rewards between 10 and 30 percent of fines and settlements in excess of $1 million, it can be expected that employees will be more likely to report potential violations externally to the SEC. The SEC’s proposed rules have tried to strike a balance between competing concerns by excluding from those eligible for bounties compliance personnel and supervisors tasked with receiving information about potential violations. In addition, the proposed rules encourage employees to raise issues internally first; if the whistleblower submits the same information to the SEC within 90 days, the SEC will treat the disclosure to the SEC as if it were made the day of the internal disclosure.
Many of the companies commenting on the SEC’s proposed rules do not think this goes far enough. They want rules that would require employees to first use existing internal compliance and reporting systems and then allow companies a reasonable opportunity to respond. Advocates for whistleblowers are equally adamant that the SEC’s proposed rules conflict with Dodd-Frank’s statutory mandate by preventing the most knowledgeable employees from being whistleblowers and otherwise discouraging disclosure of violations to the SEC.
Regardless of the outcome of this rulemaking process, companies no doubt need to be prepared for the fact that employees will have incentive to report information about potential securities laws violations to the SEC. There are steps that companies can take now to lessen the risks associated with the whistleblower rules. Specifically, companies should focus on three areas:
- Fortifying internal audit procedures.
- Promoting a culture of compliance.
- Developing procedures for prompt self-reporting to the SEC.
Fortifying internal audit procedures means reviewing existing compliance policies to ensure that they are geared to catch problems before whistleblowers do and before any problems escalate to the point where they satisfy SEC “bounty hunter” thresholds. Additionally, internal audit procedures should be regularly reviewed to identify areas for improvement, taking into consideration problems identified over the most recent six or 12-month period.
Companies should try to develop a culture of compliance in which employees will want to report issues internally rather than to the SEC. This means implementing genuine “open door” policies that allows employees to have access to executive and managers, who take the time to listen, and when appropriate, respond accordingly to such complaints. A company’s human resource department should make employees aware of policies and procedures. Employees should be assured that there will be no retaliation against those who report a wrongdoing and that confidentiality will be honored where possible, meaning only personnel who need to know or are necessary for an appropriate investigation will be notified of the report and who made it. Investigations of concerns should take place in a timely manner along with giving the informant a timely response.
Finally, prompt disclosure to the SEC may be beneficial to companies that want to get ahead of potential whistleblowers and secure so-called “cooperation credit” for self-reporting. Employers should consider having in-house experts or outside counsel ready to move quickly with respect to internal investigations. Every effort should be made to eliminate any argument that the company did not disclose information about a complaint in a reasonable timeframe or otherwise acted in bad faith. Senior management and board members should be made aware of internal investigations and should be involved in decisions relating to potential self-reporting.
Underscoring all of these procedures should be a focus on minimizing the risk that a company be perceived as having retaliated against a whistleblower. The Dodd-Frank bill provides enhanced protection to those who provide information to the SEC or assist in any investigation or enforcement action.
Bryan House is a partner with Foley & Lardner LLP and a member of the firm’s Securities Enforcement & Litigation and Government Enforcement, Compliance & White Collar Defense Practices.