The SEC recently proposed rules to implement the “Securities Whistleblower Incentives and Protection” provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules explain the scope of the whistleblower program to the public and to potential whistleblowers and provide a complete and self-contained set of rules, including an outline of the procedures for applying for awards and the SEC’s procedures for making decisions on claims.

Under the whistleblower program, the SEC is required to pay awards to whistleblowers who voluntarily provide the SEC with original information about a violation of securities laws or the Foreign Corrupt Practices Act (“FCPA”) that leads to a successful SEC enforcement action brought with monetary sanctions exceeding $1,000,000. The SEC will pay awards in totaling between 10% and 30% of the monetary sanctions that are collected in the action.

Companies are concerned that the potential for paying cash incentives to whistleblowers may reduce the effectiveness of a company’s existing compliance, legal, audit and similar internal processes for investigating and responding to potential violations of the federal securities laws and the FCPA. In response to this concern, the proposed rules include several exclusions, including an exclusion that applies any time that information is obtained from or through a company’s internal procedures for identifying, reporting and addressing potential non-compliance with applicable law. It should be noted, however, that this exclusion is not applicable if the company does not disclose the information to the SEC within a reasonable time or if the company proceeds in bad faith.

OUR TAKE: Public companies should be aware of the whistleblower incentives and protections afforded by the “Securities Whistleblower Incentives and Protection” provisions of the Dodd-Frank Act, the heightened risk of investigations into their business practices and the impact on existing internal procedures. In particular, public companies may see that it is more important than ever to take appropriate action with respect to any non-compliance with federal securities laws discovered through the company’s compliance, legal, audit and similar internal processes.

The publications contained in this site do not constitute legal advice. Legal advice can only be given with knowledge of the client's specific facts. By putting these publications on our website we do not intend to create a lawyer-client relationship with the user. Materials may not reflect the most current legal developments, verdicts or settlements. This information should in no way be taken as an indication of future results.

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