Although Not Required, The Final Rules Encourage And Reward Internal Reporting
Although the Final Rules do not make internal reporting mandatory, the SEC also plainly states, in several places throughout the regulations, its interest in promoting strong internal compliance and reporting systems rather than undermining them. The SEC believes that, even without requiring whistleblowers to report internally first, most are likely to do so anyway. The SEC cites sources as varied as the National Whistleblower Center and the New England Journal of Medicine for the proposition that the vast majority of whistleblowers first present their problems to management before consulting counsel or communicating with a government agency. The SEC supports this limited empirical data by pointing out that whistleblowers are frequently motivated by non-monetary incentives, including “cleansing the conscience,” punishing wrong-doers, simply doing the right thing for the sake of a general increase in social welfare, or self-preservation. Whistleblowers are frequently motivated by concern about their continued employment or personality conflicts with superiors or other employees. They blow the whistle as a weapon in the workplace battle and only later recognize the possibility of financial gain. Another obvious reason for employees to continue to raise their complaints internally is because Dodd-Frank whistleblower retaliation protection only attaches if the employer knows that the employee has engaged in protected activity. Internal reporting aids in that respect.
More significantly, the SEC has included provisions in the Final Rules that it believes create “strong incentives for employees to continue to use their employer’s internal compliance systems.” Noting that “the federal securities laws [are] promoted when companies have effective programs for identifying, correcting, and self-reporting unlawful conduct by company officers or employees,” the SEC emphasizes its goal is “to support, not undermine, the effective functioning of company compliance and related systems by allowing employees to take their concerns about possible violations to appropriate company officials first while still preserving their rights under the Commission’s whistleblower program.”
The Final Rules encourage internal reporting in the following ways:
• Probably the most favorable provision is Rule 21F-6 which provides for “credit in the calculation of award amounts to whistleblowers who utilize established internal procedures” to report misconduct. That provision also makes it clear that an award may be decreased if a whistleblower is found to have intentionally interfered with internal compliance or reporting systems.
• The rules further incentivize internal reporting by making a whistleblower eligible for an award based on “information that the whistleblower reports through the company’s internal reporting system.” The award is available whether the company first reports the information to the SEC, or someone else (another employee) first reports to the SEC. In this way, the SEC explains, it is not rewarding the first employee to report a violation and penalizing the person who uses an internal reporting system to advise the company of a potential violation. In such a circumstance, “the whistleblower who had first reported internally will be considered the first whistleblower.”
• The SEC states that in “appropriate cases” – and being careful to protect the identity of the whistleblower – it may contact a company, describe the allegations and “give the company an opportunity to investigate the matter and report back.” Id. at 92. Thus, it explains, “we do not expect our receipt of whistleblower complaints to minimize the importance of effective company processes for addressing allegations of wrongful conduct.” In addition, a company will be rewarded for self-reporting a violation even after an SEC investigation has begun.
Hat tip: An outstanding article that covers the law and final regulations in comprehensive fashion is Dodd-Frank and the SEC Final Rule: From Protected Employee To Bounty Hunter, ST001 ALI-ABA 1487 (July 28-30, 2011), which was written by Littler Mendelson, P.C. lawyers John S. Adler, Edward T. Ellis, Barbara E. Hoey, Gregory C. Keating, Kevin M. Kraham, Amy E. Mendenhall, Kenneth R. O’Brian, and Carole F. Wilder. This post is partially derived from that article.