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Focus: Whistling up a reward – new US SEC whistleblower rewards rules

15 September 2011

In brief: The US Securities and Exchange Commission has introduced rules that reward individual whistleblowers who provide information that leads to a successful prosecution for breaches of US securities laws including the Foreign Corrupt Practices Act. Partner Matthew Skinner (view CV), Senior Associate Tim Robinson and Lawyer Roslyn Stein look at the new rules.

How does it affect you?

  • The US Securities and Exchange Commission's (the SEC) whistleblower reward rules generally apply to contraventions of US securities laws by any company with securities listed on a US exchange.
  • The rules provide significant incentives for employees to report suspected breaches of US securities laws including the Foreign Corrupt Practices Act (the FCPA) directly to the SEC.
  • The rules underline the importance of implementing robust anti-bribery compliance procedures including well publicised and effective internal whistleblowing mechanisms.

Introduction

There have been several successful high-profile enforcement actions against multinationals under the FCPA in recent years. Recent whistleblower reforms under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) introduced in July 2011 intend to strengthen US government investigations by providing monetary incentives for individual whistleblowers to report suspected breaches of US securities laws by 'issuers' (a term which generally includes US or foreign companies with any securities listed on a US exchange). The rules cover breaches of all securities laws, including the prohibition on bribery of foreign public officials under the FCPA.

Following the release of draft rules and a period of consultation, the final SEC Rules came into effect in August 2011. These rules significantly increase the SEC's whistleblowing program, offering cash rewards of between 10 to 30 per cent of monetary sanctions over US$1 million for individuals who report breaches of US securities laws that are subsequently successfully prosecuted.

The rules attempt to strike a balance between incentivising whistleblowing by individuals and encouraging organisations to maintain and use internal reporting mechanisms as a first line of defence against the organisation becoming involved in foreign corruption. The Rules only apply to natural persons and the SEC has established an Office of the Whistleblower, which will support whistleblowers and manage their tips.

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The rules

In order to be considered a whistleblower under the rules, the individual must voluntarily provide the SEC with original information that leads to successful enforcement action in which the SEC obtains monetary sanctions totalling more than US$1 million. To qualify, information must be provided before the government, a self-regulatory organisation or the Public Accounting Oversight Board asks for the information directly.

There is no requirement that the whistleblower use internal reporting mechanisms within their company before approaching the SEC. However, if a whistleblower attempts to pursue internal reporting mechanisms before approaching the SEC, the whistleblower may be entitled to a cash reward at the higher end of the reward range.

One way the SEC has attempted to strike a balance between supporting whistleblowing and encouraging internal reporting mechanisms within organisations is the creation of a 120-day 'look back' period. Should the whistleblower choose to report information about a suspected violation internally, the whistleblower will remain eligible for a reward if the same information is reported to the SEC within 120 days of the internal report. This is designed to give the organisation 120 days to investigate the claim, and, if they do not, or the whistleblower is not satisfied with the outcome, the whistleblower may still approach the SEC within the 120-day period and be eligible for the cash reward. Alternatively, if an organisation subsequently self-reports based on information from an employee whistleblower, the SEC will give this whistleblower credit for the information shared with the SEC by the organisation.

There are several mechanisms under the Rules that are designed to protect the whistleblower from employer retaliation such as discrimination or dismissal. Under the Rules, if the whistleblower provides information under the reasonable belief that the information relates to a possible securities law breach, the whistleblower is protected against dismissal and discrimination. The Rules provide recourse for whistleblowers in the event their employer retaliates, through such measures as reinstatement and back pay. The SEC also has the power to initiate proceedings against the whistleblower's employer for any acts of retaliation.

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Exceptions to the rule

Certain groups of people are excluded from cash rewards under the rules. In particular, individuals with existing reporting obligations, such as compliance and audit personnel and public accountants, as well as lawyers, are excluded. Similarly, exclusions apply for foreign government officials and officers, directors, trustees or partners of an organisation.

However, even individuals excluded in this way may be able to claim a whistleblower reward if 120 days has passed since the excluded person reported the breach internally to their supervisor or to an appropriate internal body. An excluded person can also seek a reward for whistleblowing if they reasonably believe disclosure is necessary to prevent conduct causing substantial financial injury to an organisation or investors or if they reasonably believe the organisation may be impeding investigation of the issue.

Individuals who are found to have obtained the relevant whistleblowing information through criminal means are excluded from receiving a reward. In addition, when determining if the US$1 million threshold has been reached, penalties based on conduct that the whistleblower directed, planned or initiated will be excluded. This is designed to limit the ability of culpable whistleblowers to profit from their own wrongdoing.

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Implications

The new SEC rules create a significant financial incentive for whistleblowers to communicate with the SEC on possible FCPA breaches, particularly where they feel that internal whistleblowing mechanisms will not result in an adequate response to the issues raised or provide sufficient protection for the whistleblower. The existence of whistleblower rewards is already reported to have increased the number of potential FCPA violations brought to the attention of the SEC.

The commencement of the new rules underlines the importance of implementing robust compliance procedures to prevent FCPA breaches in the first place, especially for companies with securities listed in the US. It is also critical that such companies maintain a whistleblower program that is well publicised within the company and provides a satisfactory response within 120 days of any report, while protecting the interests of the whistleblower.

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