In our previous post, we began looking generally at the new SEC whistleblower reward program. We left off with a few comments about the reaction to the new program among corporations.
As we mentioned, corporations had expressed-during the rulemaking process-the concern that internal compliance programs would face the risk of being bypassed and undermined if whistleblowers had the opportunity to cash out big by providing inside information directly to the SEC.
Corporations had wanted the SEC to require employees to first report concerns internally before going to the SEC, but the SEC ended up siding with whistleblower advocates, who said that internal compliance programs faced more risk of being undermined if employees always faced the risk of retaliation every time they reported a violation. Ultimately, the SEC felt this approach struck a better balance between encouraging companies to maintain strong internal compliance programs and allowing the SEC to enforce securities laws.
For employees with inside information of securities violations, prudence needs to be exercised when determining who to report violations to first. As we noted, whistleblowers should always be mindful of the risk of retaliation. On the other hand, reporting a violation to an internal compliance program first will be considered by the SEC in determining the size of the reward. If the whistleblower goes this route, he or she will also be able to use information the corporation self-reports to the SEC in his or her own filing, if it should get to that point. There are various factors, involved in the decision of who to report to first. The program's rules give the whistleblower flexibility, since he or she knows best whether reporting internally is an effective first step to take.
Source: National Law Journal, "SEC whistleblowers will protect investors and earn their awards," David J. Marshall, 28 July 2011.