SEC Adopts Favorable Rules for Whistleblowers

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The Securities and Exchange Commission is being praised by whistleblower advocates for issuing finalized rules that will effectively incentivize employees to disclose fraud and other securities law violations.  The Dodd-Frank Act – enacted in July of 2010 – established a new whistleblower program within the SEC, requiring the SEC to reward whistleblowers who provide original information with between 10% and 30% of the amount recovered by the SEC.

The rules do not require whistleblowers to report fraudulent or illegal activity internally to their employer as a prerequisite to eligibility for an award – a position advocated by many corporations – but instead allow whistleblowers to blow the whistle directly to the SEC.  Allowing employees to report information directly to the SEC will not diminish the strong incentive for employees to blow the whistle internally because employees can still be rewarded for reporting internally so long as the employee also provides the same information to the SEC within 120 days.

The SEC wisely chose not to require all employees to report fraud internally.  Internal compliance programs failed miserably to avert the financial crisis.  Where fraud is pervasive in upper management, it would be futile for an employee to blow the whistle internally, and it is in the best interest of shareholders for the whistleblower to disclose fraud directly to the SEC.  But where companies have implemented effective programs that are not merely a tool of management to cover-up violations, employees will want to use those internal compliance programs.

For more information on reporting fraud, click here.

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