* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.
By Roger M. Witten, Kimberly A. Parker, Jay Holtmeier and Lillian Howard Potter of Wilmer Cutler Pickering Hale and Dorr LLP
THE LAW
On Wednesday, July 21, 2010, President Obama signed into law the Wall Street Reform and Consumer Protection Act. The final version of the bill contains a provision providing for remuneration to whistleblowers who report information to the Securities and Exchange Commission (SEC).
In order to qualify for the payment, the whistleblower’s information must lead to the imposition of “monetary sanctions" in any "covered judicial or administrative action,” meaning any judicial or administrative action brought by the SEC under the securities laws that results in monetary sanctions exceeding $1 million.
Whistleblowers will receive “not less than 10 percent” but “not more than 30 percent” of the monetary sanctions. The new law directs the SEC to publicize regulations fleshing out how the award is calculated and what other relevant factors should be taken into consideration in doing so.
Whistleblowers cannot be rewarded, however, unless the information they provide is “original” information, meaning that the information must be “derived from the independent knowledge or analysis of a whistleblower” that is not known to the SEC from any other source.
Whistleblowers also cannot be rewarded if they are convicted of criminal violations related to the matter that they report. Likewise, individuals are prohibited from qualifying as whistleblowers if the information they uncover is gained “through the performance of an audit of financial statements” meaning that most external auditors cannot serve as SEC whistleblowers.
Whistleblowers may disclose information anonymously if they wish to and may also make a claim for an award anonymously. However, prior to the payment of any award, the whistleblower must disclose their identity and provide such other information as the Commission may require, directly or through their counsel.
IMPLICATIONS
The law contains protections for SEC whistleblowers. Employers cannot retaliate (“discharge, demote, suspect, threaten, harass, directly or indirectly, or in any other manner discriminate”) against whistleblowers because of any lawful act done by the whistleblower in providing information to the SEC or assisting in the SEC’s investigation. A whistleblower who has been discriminated against may sue in federal court and may receive reinstatement, double back pay, and attorneys' fees. Thus, as with other whistleblower statutes, it will be important for employers to ensure that managers and other employees do not take inappropriate steps if they become aware that an employee has provided information as a whistleblower.
The immediate practical effect of the financial incentives in the new law is likely to be an uptick in FCPA whistleblowing as employees see opportunities for financial gain by reporting potential issues. In addition, because the law specifically permits (and in some cases, requires) whistleblowers to be represented by counsel, lawyers seeking what may be substantial fees from representing whistleblowers will have incentives to encourage clients to make whistleblowing claims. Because most SEC settlements exceed the $1 million minimum recovery required by the statute, it is likely that most significant FCPA issues would be eligible for a payout to an employee.
Another consequence of the legislation is that employees will now be incentivized to report possible FCPA misconduct directly to the SEC instead of to the company’s own compliance department. While Congressional lawmakers have pointed to the societal benefits of encouraging whistleblowing, one detriment is that it can to some extent undermine companies’ internal compliance programs – by reporting an issue to the SEC and not to a company’s compliance department, the result can be that improper conduct persists for months or years while the government secretly investigates, rather than allowing the company to intervene and stop the bad conduct immediately.
All of these factors leading to a likely increase in whistleblowing claims may change the calculus for companies weighing the decision whether or not to voluntarily disclose possible FCPA violations; in some cases, it may perhaps tip the balance towards self-reporting for fear of losing the opportunity to get credit for voluntary disclosure if a whistleblower later discloses the conduct.
