Provision could have a negative effect on the ability of public companies to identify securities law violations
The SEC’s whistleblower provision, due to come into force in the first half of 2011, has raised concerns over the impact it will have on internal reporting systems.
The rule – introduced as part of the Dodd-Frank Act – allows the SEC to compensate whistleblowers with a proportion of the fines it imposes on firms found guilty of corporate malfeasance as a result of the information provided. This compensation will be 10 percent-30 percent of fines in excess of $1 mn.
A key worry is that the new provision will encourage employees to bypass internal compliance systems and, as a result, hamper companies’ ability to identify and deal with potential breaches of securities law.
‘I think the whistleblower provision has the potential to have a very big impact,’ says Norman Blears, a partner at law firm Hogan Lovells. ‘It is a very powerful incentive for people to come forward instead of reporting issues internally.’
The provision could also encourage the SEC to hand out fines in excess of $1 mn just to ensure whistleblowers are rewarded for their efforts, adds Blears.
While whistleblower payments are nothing new – the False Claims Act has offered significant rewards for information about government contractors since 1986 – the Dodd-Frank Act changes the game by extending the rules to all securities law breaches.
The SEC has tried to allay concerns about the new rules by exempting people who work in internal compliance from making claims, and giving companies a period of grace to report any breach that has already been brought to their attention by a whistleblower.
But many companies are adamant the rules will still damage the internal reporting structures they have worked to put together. McDonald’s, Delta Air Lines and GlaxoSmithKline are among the dozens of companies that criticized the provision during the SEC’s public comment period, which closed in December.
‘We believe the commission’s proposals will have the impact of thwarting internal compliance and reporting programs in a manner inconsistent with the intent of the Dodd-Frank legislation that authorized them,’ wrote the companies in a joint letter to the SEC.
Whatever the outcome of the new rules, it is now more important than ever to try to foster a culture of internal reporting, advises Blears.
‘There may be little companies can do to persuade individuals to continue to report potential problems internally, but – at minimum – it is worth reminding people of the procedure and reiterating that the company would prefer individuals to use the internal procedure,’ he says. ‘It also needs to reassure that there will be no retaliation or other negative consequences for using existing internal procedures.’
‘It will become critical to establish clear and comprehensive procedures regarding privileged corporate information,’ states Rob Berick, senior managing director at communications consultancy Dix & Eaton.
From the perspective of IROs, however, the new provision may deliver some benefits, with some feeling it could end up empowering IR professionals.
‘From an individual standpoint, I think this new provision creates an opportunity for IROs to get themselves more closely integrated into their organization’s risk management and corporate governance functions,’ explains Berick.
For more thoughts from IR experts on the implications of new financial regulation, visit our Ask the Expert section at IR Magazine, where panelists explain what they think the biggest changes stemming from the Dodd-Frank Act will be.
