(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.)
Last Friday, the SEC’s whistleblower rules (PDF) went fully into effect, and the Office of the Whistleblower web page went live. The Office’s Chief, Sean McKessy, spoke forcefully about why companies should not be overly alarmed. But the proof will be in the results.
The SEC web page now includes links to the necessary forms for submitting tips or claiming bounty awards under the rules, as well as FAQs for tipsters. The page also includes a link to a speech by McKessy, explaining that the rules are still misunderstood and should in fact be considered a positive factor for companies. In particular, he tries to counter the perception that the rules will undermine internal compliance systems by giving whistleblowers incentives to go directly to the SEC:
. . . The rules specify that employees who report wrongdoing internally first and, within 120 days, then report the wrongdoing to the SEC, benefit in two significant ways. First, those employees will be deemed to have reported the information to the SEC on the date they reported internally. This preserves their place in line in terms of when information was provided to the SEC. Second, the employees who report internally first receive the benefit of all the information uncovered by the company in connection with its own internal investigation of the alleged wrongdoing. . . .
McKessy goes on to explain how this latter factor will allow the whistleblowers who first report internally to share in the potential for a percentage share in a much greater ultimate recovery. Further, a whistleblower who first reports internally will likely receive a higher percentage bounty within the 10% to 30% range established by the rules. The rules “. . . require that cooperation with internal compliance programs be considered as a positive factor that could increase a whistleblower award, and interference with such programs as a negative factor that could decrease an award.” He concludes that these incentives built into the SEC program will actually improve the strength and effectiveness of internal compliance programs.
These statements won’t alleviate fears that the rules will lead to a flood of whistleblower complaints that bypass internal compliance programs. For example, in “W-Day is Here: The SEC’s Whistleblower Rules Are Now Effective” in TheCorporateCounsel.net Blog, Broc Romanek points out that “The opportunities [for Foreign Corrupt Practices Act violations claims] are so great that U.S.-based plaintiffs' lawyers are ramping up their advertising throughout Europe, Asia and Africa in order to bring SEC whistleblowers out of the woodwork.” These sorts of reports don’t make corporate compliance personnel rest any easier.
However, according to a Reuters report, the SEC promises to make changes in the whistleblower program in the event of unintended consequences. In “US SEC says will fix whistleblower rule if any problems” by Andrea Shalal-Esa, McKessy is quoted as stating, “If our program is not doing what it’s intended to do, then we’ll look at it and figure out ways to fix it.”
In the meantime, McKessy, a former compliance officer with AOL and Altria, recognizes that siding with whistleblowers is not exactly going to win him any popularity contests in corporate America. The Reuters article quotes him as saying:
Look in a thesaurus under 'whistleblower' and see what kind of words you get out. I'm either the head of the office of the rats, or the rat finks, or rat bastards . . . .
[But] if even one fraud is stopped before it gets to a Madoff-type situation, then all the effort has been worth it.