The Impact of Dodd-Frank's "Incentivized" Whistleblower Provisions on Corporate Compliance Programs
Anecdotally, the Securities and Exchange Commission is receiving one or two "high value" whistleblower tips and complaints a day since the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) statute was signed into law in July 2010. The statute, which enacts sweeping financial regulatory reforms, establishes an expansive whistleblower program. The program provides that a whistleblower, who voluntarily gives “original information” to the SEC that leads to a successful enforcement action with penalties exceeding $1 million, will receive a reward between 10 to 30 percent of the total recovery. To further incentivize whistleblowers, the Act allows for whistleblowers—who can be “any individual,” including corporate insiders, consultants, and service providers—to remain anonymous and cooperate with the SEC through an attorney. The Act also provides robust anti-retaliation protections, which permit federal lawsuits for wrongful termination, suspension, harassment, or other discrimination resulting from the whistleblower’s reporting to the SEC.
In enacting this whistleblower program, Congress sought “to motivate those with inside knowledge to come forward and assist the government to identify and prosecute persons who have violated securities laws and recover money for victims of financial fraud.” But, how does this expanded SEC whistleblower program impact corporate compliance programs, many of which were enacted to combat bribery and corruption in the wake of Sarbanes-Oxley?
Last November, the SEC proposed regulations to implement Dodd-Frank. Although the proposed rules make clear that they are not intended to discourage corporate whistleblowers from first availing themselves of their company’s compliance program, many companies nonetheless fear that the average employee has little or no incentive to provide his or her employer with an opportunity to investigate, and, if necessary, correct and self-disclose alleged wrongdoing. Doing so, after all, likely would eliminate that employee’s prospects of receiving a significant award.
Prior to the passage of Dodd-Frank, the SEC was empowered to reward whistleblowers that helped the government prosecute successful enforcement actions. However, the SEC was not legally obligated to do so. With little incentive to bypass corporate compliance programs, whistleblowers availed themselves of such programs in hopes of motivating the company to address possible wrongdoing. But now, prospective whistleblowers are motivated to do just the opposite, to take advantage of the potential payday that lies ahead.
Those who fear that whistleblowers will now proliferate believe that the SEC should require whistleblowers, in order to be eligible for an award, to use available internal reporting procedures before going to the government. The SEC is not likely to warm to this position, because of the concern that such a requirement will have a chilling effect on the number of legitimate tips. Possible retaliation by employers is very much at the heart of the SEC’s concerns about such an approach.
In response to corporate concerns about Dodd-Frank rendering compliance programs ineffective, the SEC has proposed two rules:
First, the SEC has proposed a 90-day reporting window, which allows an employee to report complaints to internal compliance personnel and still be eligible for the reward if the company, in the whistleblower’s estimation, fails to properly address the complaint. This 90-day grace period also may serve to limit the number of allegations ultimately brought to the SEC, by allowing a company’s internal compliance program time to investigate and possibly ferret out meritless claims.
The challenge, however, is that this grace period may not be enough to temper those who aspire to a big payday and, thus, are less motivated by a desire to see wrongdoing addressed internally. Moreover, 90 days may not be enough time for a company to conduct a thorough investigation, particularly in instances where the allegations implicate a statute such as the Foreign Corrupt Practices Act. Thus, the grace-period proposal ultimately may do little to stem the undermining of corporate compliance programs.
Second, the SEC proposes to take into account, when determining the award amount, whether a whistleblower reported the violation through internal compliance mechanisms before approaching the government. The SEC will consider higher percentage awards for whistleblowers who first report violations through these programs. In effect, then, the SEC seeks to counter any disincentive to internal reporting arising from the prospect of a significant award. (Under this proposed rule, however, whistleblowers who fail to avail themselves of these programs before going to the government will not be penalized, provided that they have a “fear of retaliation or other legitimate reasons.”)
Here, too, skeptics abound. Some commentators on the proposed rules take the position that whistleblowers may opt to “leave money on the table” by bypassing their internal compliance program rather than use those procedures, for fear that the employer might otherwise address the problem altogether or in a manner that minimizes the whistleblower’s potential award. This view hews closely to the position that the SEC mandate use of internal compliance programs in order for whistleblowers to be eligible for an award. Because that position might discourage potential whistleblowers, however, a middle road may be necessary.
One possible solution that has been put forth by some commenting on the proposed rules is to require whistleblowers to report allegations of wrongdoing simultaneously to the government and to the company, assuming the company has implemented and advertised an internal compliance program. Simultaneous reporting would allow the company to investigate the matter, while the SEC defers action until it hears back from the company. A whistleblower would be permitted to bypass reporting to the employer in instances where a legitimate reason, as determined by the SEC, exists.
This middle-of-the-road deferral approach acknowledges the government’s interest in encouraging valid tips and the interests of well-intended companies in being afforded an opportunity to conduct internal investigations that might, where appropriate, stave off unnecessary expenditure of corporate and public resources. Furthermore, because of the simultaneous-reporting requirement, whistleblowers can take comfort in knowing that the government, and not just the company, is aware of their allegations of wrongdoing. Presumably, an employer will think twice about retaliating against a whistleblower, whose identity—or, at a minimum, their legal counsel’s identity—is known to the government. This might very well prove to be a workable, win-win approach.
Absent such an approach, companies can best protect themselves by identifying any potential issues as early as possible through internal audits. Once identified, companies must then respond quickly and definitively to address the problem. Anything short of early and prompt response places the company at risk of government action initiated by a heavily-incentivized whistleblower.
