SEC Rules Strengthen Whistleblower Protections

Published on May 25, 2011

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SEC Rules Strengthen Whistleblower Protections

Washington D.C. May 25, 2011. Today, the Securities and Exchange Commission (SEC) announced rules to implement the whistleblower provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The rules will have a major impact on the ability of corporate employees to report fraud and protect the integrity of financial markets.

According to the Fact Sheet issued today by the SEC, the Commission rejected corporate-sponsored demands that would have required whistleblowers to report their concerns internally to their employer before blowing the whistle to the government.  The NWC strongly opposed these lobbying efforts, spearheaded by the Chamber of Commerce.

The SEC final rule sided with the whistleblowers. According to the Fact Sheet distributed by the SEC, “The final rules would not require that employee whistleblowers report violations internally in order to qualify for an award.”

The final rules also adopted a proposal introduced by the NWC that would fully protect employees who voluntarily chose to report concerns internally.

The Fact sheet explained its new rule permitting internal reporting as follows:

[T]he rules strengthen incentives that had been proposed and add certain additional incentives intended to encourage employees to utilize their own company’s internal compliance programs when appropriate to do so.  For instance, the rules would:  Make a whistleblower eligible for an award if the whistleblower reports internally and the company informs the SEC about the violations.
Stephen M. Kohn, Executive Director of the National Whistleblower Center (NWC), issued the following statement:

Today, investors and whistleblowers scored a major victory.  The SEC refused to buckle under tremendous pressure from Wall Street lobbyists (led by the Chamber of Commerce) who worked overtime trying to undermine historic corporate whistleblower protections contained in the Dodd-Frank Act.Central among the Chamber’s demands were its insistence that the SEC place strict prohibitions on the right of employees to directly contact the SEC and law enforcement when they witness serious corporate fraud.   The National Whistleblowers Center, along with thousands of citizens and numerous other public interest groups, strongly opposed these efforts.  The SEC heard our voices.       The Chamber’s central demand was rejected.

The SEC also adopted a path-breaking proposal suggested by the NWC.  Instead of restricting an employee’s right to blow the whistle, the SEC has given employees a choice.  Employees can either contact the government or work with their internal compliance programs (or do both).  Employees who contact their internal compliance programs will be eligible for rewards if those contacts result in successful enforcement efforts by the SEC.  In other words, employees can be rewarded if they report fraud internally or if they can contact the SEC directly.  This rule makes perfect common sense.

The Dodd-Frank Act was designed to encourage employees to report fraud.  The law, if properly administered by the SEC’s Whistleblower Office, will result in the detection of multi-million dollar frauds and will create the enforcement hammer needed to make real change in the culture of corruption that fostered fraudsters like Bernie Madoff and led to countless Wall Street debacles, costing innocent investors trillions of dollars.

Although the Commission did not adopt all NWC proposals, the Commission’s rejection of the Chamber of Commerce’s attempt to undermine the Dodd-Frank Act was a significant achievement for whistleblowers.
The National Whistleblower Center (NWC) has also been heavily involved with the rulemaking process, trying to ensure that the final rules adequately protect whistleblowers.  The NWC Executive Director and legal staff have met personally with each Commissioner in order to explain the detailed public comments and to rebut arguments raised by the Chamber.  The NWC filed on-the-record nine formal public comments addressing every major aspect of the rule.

NWC Dodd-Frank Rulemaking page — links to memos from Commissioner meetings, NWC public comments, and other related materials

CNBC Series “Bounty Hunters”

Wall Street Journal “Whistleblower Group Issues Report Saying Cash Incentive Doesn’t Drive Informants to Authorities”

Washington Post “Wall Street Snitch Pitch”

New York Times “For Whistle-Blowers, Expanded Incentives”

New York Post “Whistleblower Skirmish”
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