Proposed Changes to Whistle-Blower Awards Should Foster Compliance

 

Allen Smith, J.D. By Allen Smith, J.D. August 10, 2018
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​A Securities and Exchange Commission (SEC) proposal to strengthen its discretion to increase awards to whistle-blowers under the Dodd-Frank Act should prompt companies to bolster their ethics and compliance programs. That's despite the fact that the commission has simultaneously proposed decreasing the amount of its large awards because they are less common.

The proposal, made this summer, "sends the message to future whistle-blowers that it's worth their while to come forward," said Meg Campbell, an attorney with Ogletree Deakins in Atlanta. As a result, companies need to have a culture of compliance to avoid whistle-blowing at all.

SEC Has Recovered $1.4 Billion

The Dodd-Frank Act, which was enacted in 2010, provides protection from retaliation to whistle-blowers who report alleged securities law violations to the SEC.

[SHRM members-only toolkit: Introduction to the Human Resources Discipline of Ethics and Corporate Social Responsibility and Sustainability]

From the time the SEC's whistle-blower program was implemented in 2011 through the end of fiscal year 2017, the commission has received 22,000 tips leading to enforcement actions in which the SEC has obtained $1.4 billion in remedies. The commission has ordered $266 million in whistle-blower awards to 55 individuals whose cooperation helped bring about successful enforcement actions. But approximately $112 million of that amount was paid to just four individuals in connection with two commission enforcement actions and a related action.

Historically, more than 60 percent of the awards distributed in the SEC's whistle-blower program have been less than $2 million, the SEC noted in announcing its proposed rule. Under that proposal, the commission could, at its discretion, increase the award―subject to the 30 percent statutory maximum—to an amount up to $2 million.

The SEC would consider whether an increase helps to better achieve the program's objectives of rewarding whistle-blowers whose claims have merit and sufficiently incentivizing future whistle-blowers who might otherwise be concerned about the low dollar amount of a potential award.

To balance out this increase, the SEC also proposed having the discretion to lower unduly large awards. It noted that 40 percent of the total funds paid by the commission to whistle-blowers have been paid out in only three awards. If an award could yield sanctions of at least $100 million, the proposed rule would let the commission adjust the award percentage so that it would yield a payout—subject to the 10 percent statutory minimum—that does not exceed an amount reasonably necessary to reward the whistle-blower. But this award would not be below $30 million.

"This proposed amendment is intended to make sure that the commission is a responsible steward of the public trust while continuing to provide strong whistle-blower incentives," the commission stated.

While this latter change might chill high-stakes, plaintiff-side whistle-blower actions, the proposed increase in small awards to whistle-blowers "shows that the commission is committed to continued robust enforcement and incentivizing individuals to come forward," said Greg Keating, an attorney with Choate in Boston.

Edward Ellis, an attorney with Littler in Philadelphia, noted that the proposed rule also would make the definition of "whistle-blower" consistent with the U.S. Supreme Court's. The high court ruled in February that the whistle-blower protections under the Dodd-Frank Act do not cover a fired employee who reported alleged securities law violations to his employer but not to the SEC.

The decision may result in more individuals bypassing internal complaint procedures and going straight to the SEC, Keating said.

Culture of Compliance

Because of the incentive to report securities violations to the SEC, companies need to adopt a philosophy of continuous improvement, said Chip Jones, an attorney with Littler in Dallas.
Most organizations want employees to raise compliance concerns and report internally, regardless of the Supreme Court's definition of whistle-blower, he noted. But in some organizations, if an employee questions authority, he or she is branded as disloyal rather than as trying to improve the business, he observed.

Ethics and compliance should be top of mind all the time, Campbell said. More than buy-in from senior officers is needed. Executives need to explicitly state that the company believes in compliance and expects everyone to follow the rules, she noted.

Clarify that there are multiple avenues for raising concerns, including an anonymous employee hotline, and give a strong assurance that retaliation isn't permitted, she added.

Sometimes an employee with performance issues will raise a whistle-blowing complaint when he or she is disciplined. Be careful to thoroughly investigate such complaints, Jones recommended. Do not assume the complaint is invalid because of its timing.

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