History and Approach
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which introduced sweeping financial regulatory reforms. Included in the Dodd-Frank Act are new whistleblower provisions and proposed rules that create powerful incentives for whistleblowers to discover and report potential and actual violations of the federal securities laws.
After months of anticipation on Wall Street, the Securities and Exchange Commission released the final Dodd-Frank Whistleblower Rules on May 25, 2011. The final rules were adopted by a narrow 3-2 vote, with the two dissenting Commissioners echoing comments from the corporate community that objected to the lack of an internal reporting requirement that might encourage employees to “completely bypass” company compliance procedures. However, the rules allow the whistleblower’s voluntary participation in a company’s internal compliance program to be considered as a factor that could increase the amount of the reward.
Both public and private companies need to familiarize themselves with the new rules, consider the positive and negative implications of the whistleblower incentives, and possibly prepare to defend against potential litigation. We recommend that companies review their current legal, compliance and audit systems to ensure that they are reasonably designed, among other things, to encourage appropriate and timely inquiry into and reporting of potential and actual securities law violations. In addition, companies would be well-advised to develop or reconsider policies and procedures relating to management and board of director responses to potential or actual violations and to have anti-retaliation policies in place.