Final Dodd-Frank whistleblower rules reject internal reporting mandate

Final rules only incentivize employees to use corporate compliance programs.

Employers concerned about implementation of the broad whistleblower provision of the Dodd-Frank Act found little comfort in the SEC’s mostly unchanged final rules, which the commission approved in a 3-2 vote on May 25. Effective August 12, whistleblowers who deliver to the government original information about a possible violation of federal securities laws can garner awards ranging from 10 percent to 30 percent of the penalty if their information leads to an enforcement action and monetary sanctions exceeding $1 million.

It’s quite the incentive for employees—10 percent of, say, an average Foreign Corrupt Practices Act (FCPA) settlement could yield real money and, accordingly, the fear of more FCPA claims is often mentioned in the same breath as the Dodd-Frank whistleblower program. In 2010, companies paid a record $1.8 billion in penalties to settle FCPA-related charges with the SEC and DOJ. While garden-variety disclosure and accounting issues may comprise the majority of whistleblower tips, lucrative FCPA claims remain the “holy grail for the plaintiffs bar,” says David Woodcock, a partner at Vinson & Elkins.

Staying Inside

The final rules incentivize but don’t require whistleblowers to first report to company compliance programs by providing that the SEC will consider whether the whistleblower cooperated or interfered with internal processes when determining what size award the whistleblower receives.

The Association of Corporate Counsel (ACC) commented that the proposed rules would encourage employees to find ways to profit from corporate wrongdoing rather than improve corporate behaviors.

“Fraudulent misconduct, the bane of good compliance systems, then becomes the gold mine,” the ACC wrote, “rather than an impetus for companies with effective compliance systems to address the underlying issues.”

Associate Editor

Melissa Maleske

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