Whistle While You Work! SEC Proposes Whistleblower Rules under Dodd-Frank

The SEC yesterday issued proposed rules (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 press release issued by the SEC summarizes the new rules. In order to qualify for a bounty under Section 21F, the 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 proposed rules clarify these concepts. The rules also define a number of types of individuals who are not entitled to the bounty, including the wrongdoers, persons with a pre-existing duty to report the information or attorneys or accountants in certain cases.

My main concern about Section 21F is that the bounty program will encourage employees and other potential whistleblowers to bypass the internal reporting systems public companies have carefully set up in the past decade to comply with the provisions of the Sarbanes-Oxley Act of 2002. The SEC has tried to address this concern in the proposed rules, which would facilitate and encourage internal reporting in the following ways:

• The rules allow an employee to report information internally as a whistleblower and still get credit for original reporting to the SEC as of the same date – as long as the employee provides that same information to the SEC within 90 days of that date. According to the SEC, “ . . . employees will be able to report their information internally first while preserving their ‘place in line’ for a possible award from the SEC.”
• The rules provide that the SEC may consider higher percentage awards for whistleblowers who report internally first, as long as the company has an effective compliance program.

Comment. The proposed SEC rules are an improvement over the provisions of the Dodd-Frank Act. However, there are still concerns that the bounty program will encourage whistleblowers to “take no chances” and report any questionable information to the SEC. The potential financial rewards for a whistleblower are huge.

Also, there are numerous reports that plaintiffs’ employment attorneys are actively encouraging whistleblowers to file reports. Broc Romanek in a post in thecorporatecounsel.net Blog referred to this recent article, “Get Snitch Quick,” by Kaja Whitehouse in the New York Post about a lawyer who is playing a commercial in New York movie theaters before showings of “Wall Street: Money Never Sleeps.” The commercial directs viewers to go to his website, SECSnitch.com, to get information about whistleblower reporting. In the words of Gordon Gekko, “Greed is good. . . .”

In light of the bounty program, public companies will need 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. Just wait until listed companies need to draft new clawback policies, under SEC and stock exchange rules expected in 2011, which will require companies to recover incentive compensation from former as well as current officers. . . .

ISS Recommends Annual Say-on-Pay Vote

In this draft policy recommendation, the shareholder advisory service ISS recommends that Say-on-Pay votes be taken annually as a way of providing the most meaningful communications between shareholders and public companies. Assuming the final ISS policy is to recommend an annual vote, this is one more consideration for boards of directors in deciding whether to recommend an annual, biennial or triennial vote, as described in this prior post.