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Whistle While You Work (Part 2)! SEC Adopts Final Whistleblower Rules

(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)

May 25, 2011

The SEC today adopted its final whistleblower rules (302 page PDF) under Section 21F of the Securities Exchange Act of 1934 (Section 922 of the Dodd-Frank Act), which provides a bounty to whistleblowers who disclose securities law violations leading to large monetary sanctions. This SEC press release summarizes the new rules.

The whistleblower bounty can range from 10% to 30% of the amount of the sanctions. To qualify, a whistleblower must “voluntarily” provide the SEC with “original information” that “leads to” successful enforcement in which the SEC obtains monetary sanctions totaling more than $1 million. The final rules track the proposed rules fairly closely on these concepts. See this previous post for a description of the general nature of the rules and some commentary on corporate compliance. The post also describes the creative use of commercials by a whistleblower lawyer who directs viewers to go to his website,, to get information about whistleblower reporting and possible bounties.

The big news is that, after months of extensive lobbying by business groups and whistleblower advocates, the SEC declined to change the proposed rules to require that a whistleblower use the company’s internal reporting system as a condition to receiving the bounty. Large companies and the US Chamber of Commerce had pushed for this change, as described in the SEC release (pages 96-97). However, the SEC did alter its rule in several ways in an attempt to further encourage employees and other potential whistleblowers to use internal reporting systems, as described at the end of the press release. For example, the rules “. . . make a whistleblower eligible for an award if the whistleblower reports internally [consistent with the company’s internal policies] and the company informs the SEC about the violations. . . .”

Comment. In light of the bounty program, as I said in the previous post, public companies will need to continue to refine their whistleblower policies and training programs. This is only one of the aspects of Dodd-Frank in which we corporate lawyers will need to partner with our colleagues who specialize in employment law (i.e., clawbacks under Dodd-Frank are on their way!).

The Current Tally on Say When on Pay Votes

Semler Brossy Consulting Group recently published Say on Pay Results, a report of its a study of the Russell 3000 companies that had filed results of shareholder advisory votes under the Dodd-Frank Act as of May 11, 2011. The report indicates the following results, of the 628 companies in the Russell 3000 that had supported the various frequencies:

  • Shareholders supported an annual Say-on-Pay vote at a total of 82% of the companies.
  • Of the companies that recommended an annual Say-on-Pay vote, not surprisingly, shareholders supported an annual vote at more than 99% of these companies.
  • Of the companies that recommended a triennial vote, shareholders at 43% of these companies supported a triennial vote (the number fell to 22% out of the largest companies included in the S&P 500). In his Proxy Disclosure Blog on (subscription site), Mark Borges reports a similar number – of the companies that recommended a triennial vote, shareholders at around 48% of these companies followed the recommendation.

Comment. Certainly, shareholders supported annual Say-on-Pay votes at a large majority of companies, especially the larger companies. However, even among Fortune 500 companies, in a significant number of cases shareholders have been willing to go along with a triennial vote. Therefore, for companies that have not yet filed their proxy statements, if the board of directors believes a triennial vote is the best choice for the company and can articulate the reasons for that decision, it is certainly a supportable decision to make this recommendation. If the shareholders disagree, however, the board will then be in a position of evaluating whether to follow the preference of the shareholders despite its recommendation. See this previous post for steps to follow in dealing with this situation.


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