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SEC approves creation of whistleblower program

The Business Insider reports that the Securities and Exchange Commission announced last week that it would be proposing rules to create a whistleblower program designed to repay those tip off the agency to violations and allow for successful enforcement actions.

Whistleblowers will only be eligible for repayment if they voluntarily provide original information to the SEC concerning the violation, and if the information leads to a successful federal or administrative enforcement action in which an excess of $1 million is recovered.

According to SEC chairwoman Mary Schapiro the SEC has a history of receiving numerous tips and complaints, but the quality of tips has increased since the passage of Dodd-Frank last July.

The proposal has public company management and directors wondering how the incentives for compensation will affect the financial industry. Some say the whistleblower program could undermine compliance and reporting programs which have been carefully developed and implemented by many companies since Sarbanes-Oxley. The incentives of gaining a private reward may, it is felt, cause those with inside information to circumvent internal compliance programs and prevent companies from quickly addressing fraudulent conduct. Such incentives may also motivate insiders to delay internal reporting in order that the financial penalty grows in size and results in a larger payout.

The SEC voted by a 3-2 majority to adopt the rule, despite these concerns, and said the rules provide enough incentive for employees to abide by internal reporting rules. The agency also said it would also look favorably upon whistleblower attempts to report the issue internally prior to reporting to the SEC.

Sources said the rules will take effect 60 days after their submission to Congress.

Source: Business Insider, "SEC whistleblower rules cause alarm," Brendan Sheehan, 1 Jun 2011.

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