Friday, August 12, 2011

SEC Launches Office of the Whistleblower Website, New Chief Examines Whistleblower Rules

Concomitant with the August 12, 2011 effective date of the SEC whistleblower regulations, the new Office of the Whistleblower website was launched. The first Chief Office of the Whistleblower, Sean McKessey, said that the SEC’s whistleblower program embodies a balanced approach designed to aid the Commission by encouraging those aware of misconduct to come forward while at the same time incentivizing those individuals to report their suspicions of misconduct to their companies first so that the companies take appropriate action to remedy it.

The SEC's new webpage allows people to report a violation of the federal securities laws and apply for a financial award. It includes information on eligibility requirements, directions on how to submit a tip or complaint, instructions on how to apply for an award, and answers to frequently asked questions. Mr. McKessy said that securities fraud is not a victimless crime. That is why it is important for people to step forward when they witness an ongoing securities fraud or learn about one that has taken place or is about to occur. The SEC’s new whistleblower award program makes it easier for people to take that step, he said.

In remarks at Georgetown University, Mr. McKessey assured the corporate community that the new whistleblower program would bolster, not hamper, the internal compliance systems at companies across the country. Indeed, the whistleblower program is the first and only such program in the country that makes available a monetary award from the government to an individual that reports possible wrongdoing internally. The SEC’s program extends significant benefits to individuals that report internally, enhancing the opportunity for a whistleblower award, and possibly an award at a higher end of the allowable range.

Under SEC rules, employees who report wrongdoing internally first and, within 120 days, then report the wrongdoing to the SEC, benefit in two significant ways. First, they will be deemed to have reported the information to the SEC on the date they reported internally. This preserves their place in line in terms of when information was provided to the SEC. Second, the employees who report internally first receive the benefit of all the information uncovered by the company in connection with its own internal investigation of the alleged wrongdoing.

These are not hypothetical or inconsequential benefits, emphasized the Chief, because, under this scenario, an employee who reports information internally that itself might not have warranted an SEC investigation, could nonetheless become eligible for an award if the internal investigation uncovers such information that does lead to an SEC investigation. For example, he set out a scenario on which an employee who, based on his experience, knows but does not have sufficient proof to substantiate that something is amiss with the company’s accounting for a certain matter. That gut feeling in and of itself may not be sufficiently timely, specific and credible to cause the SEC to open an investigation, noted the SEC official, but if the employee were to report that gut feeling internally, and the company’s subsequent investigation were to uncover specific, timely and credible information that is reported to the SEC, the reporting employee, who might not have otherwise even qualified for an award, would then be eligible.

Moreover, the employee gets the benefit of all the facts and details uncovered and reported to the SEC by the company in connection with its internal investigation of the issue. So, the percentage of the award to the employee could be increased based on the enhanced quality and value of the information uncovered by the company’s internal investigation. The rules also require that cooperation with internal compliance programs be considered as a positive factor that could increase a whistleblower award, and interference with such programs as a negative factor that could decrease an award.

In the view of the SEC official, these benefits to those who report internally first offer a great opportunity for companies and their compliance officers. Far from undermining internal compliance programs, he emphasized, the SEC’s whistleblower program should empower internal compliance personnel to advocate for stronger and more transparent internal compliance programs. The SEC rules leave it to the employee to decide whether to report internally first, or to contact the SEC, and those companies that ensure that their employees view internal reporting as a viable and credible option to address possible securities law violations are more likely to have the wrongdoing reported internally first.

Mr. McKessy also addressed the concern that by failing to adopt an absolute exclusion on attorneys, auditors and compliance officials, the SEC rules encourage these individuals to abandon their professional responsibilities in favor of a potential bounty award. The purpose of the whistleblower award program is to add a tool to the SEC’s arsenal to identify wrongdoing, prevent or stop it and, if appropriate, punish those responsible. By providing for the possibility of a whistleblower award to attorneys, compliance officials and auditors, he reasoned, SEC regulations recognize that the Commission may in some narrow circumstances need these individuals to come forward in order to accomplish that goal. And, in those narrow circumstances, these individuals can and should be eligible for an award.

And those circumstances are narrow, he emphasized. A monetary incentive is provided to these types of professionals to report to the Commission essentially only when it is necessary to prevent imminent or ongoing misconduct or the misconduct has been identified and reported, but not remediated in a timely fashion. With regard to external auditors, their eligibility is limited to the narrow circumstance when they have a reasonable basis to believe that their employer (the audit firm) failed to make the required disclosures of the audit client’s wrongdoing under Section 10A of the Exchange Act. In these rare instances, the eligibility for an award is limited to the reporting of misconduct that has been detected but not reported to the SEC.