During May 2011, SEC or the Securities and Exchange Commission sent across a notice to American public firms and proposed a rewards program for whistleblowers who give top-notch tips that lead to successful and proper enforcement initiatives.
The new SEC whistleblower rules came into effect 60 days after it was submitted to the Congress. The new rules were very hotly debated and it created quite a stir in the business community.
Most of them feared that the new rules would have a detrimental impact on firms, and by extension, would impact shareholder value as well.
Though the new SEC whistleblower rules were not quite popular, there were quite a few surprises in store when the final proposal came online.
One of the unexpected conditions was that for a whistleblower to get eligible under the scheme for payment, he or she would have to submit original data to the SEC voluntarily.
Failure to do so would result in an administrative or federal enforcement action through which the SEC would obtain penalties over $1 million.
Mary Schapiro, SEC Chairman, said that for agencies with limited resources, such as the SEC, it is important that the agency leverages the resources of individuals, who could have first-hand data relating to violations of securities laws.
While the Securities and Exchange Commission has received large volumes of complaints and tips in the past, the quality levels of the tips became far better after the legalization of Dodd-Frank.
Mary Schapiro also said that SEC expects the continuation of the trend, and the final rules give out transparent and simplified procedures for whistleblowers to give SEC some critical data.
The new SEC rules had public company directors and management on their edges, who feared that the compensation incentives would undermine the meticulously developed reporting and compliance programs that were implemented by most firms, following the Sarbanes-Oxley passage.
Along with concerns about disincentives for reporting problems internally, many firms and their advisors feel that the award system would serve as an incentive for people to delay the reporting deliberately hoping that the problems would catapult in scope and size, so as to result in an increased and substantial financial penalty and, therefore, a larger whistleblower payout.
This and other concerns relating to internal compliance programs were some of the problems raised by SEC Commissioners, Troy Paredes and Kathleen Casey, while they were voting against the new rule adoption. The vote passed through with a majority of 3-2.
SEC responded to this by stating its belief in the new rules giving ample encouragement to the employees for respecting the internal procedures.
Therefore, if an employee reports to his firm before SEC acquires the data, the employee (whistleblower) would get credit for quick reporting. Furthermore, the whistleblower’s participation in the firm’s reporting program would be considered favorably.