The SEC adopted final whistleblower rules (PDF) on May 25, 2011. The crux of the news here is that SEC decided not to require whistleblowers to report suspected law violations internally before reporting them to the SEC. Although the SEC staff knows, better than most, the wide variety of things that motivate employees to inform on their employers (and on one another), the desire to attract a good flow of “quality” reports to the SEC seems to have been a stronger driver than endorsing companies’ internal controls as a route of first resort.
Whistleblowers get retaliation protection and substantial monetary rewards for information leading to successful enforcement and monetary sanctions in excess of U.S.$1,000,000. The SEC did change the monetary rewards scheme to remove disadvantages to internal reporting, but did not remove the possibility of rewards even for employees who may have participated in the reported conduct or who had been previously asked to cooperate with an internal investigation relating to such conduct. Clearly, advisers still have much to be concerned about and have some planning to do.
Under Rule 204A-1 (PDF), an adviser’s Code of Ethics must require supervised persons to comply with U.S. federal securities laws and to report Code violations to the CCO. Employees should be reminded of this obligation. Do note, however, that the SEC release specifically warns employers that the new rules prohibit “any action to impede a whistleblower from communicating directly with the SEC about a possible securities law violation, including by enforcing or threatening to enforce a confidentiality agreement”. Presumably, therefore, enforcing the Code also cannot be used to impede whistleblowing. Nevertheless, advisers should educate personnel about their responsibilities to the firm and its clients and the considerable limitations of the whistleblower rule, including complex eligibility conditions, and that such reporting may provide anti-retaliation protection but does not preclude personal liability for involvement in underlying conduct, breaches of fiduciary duty, obstruction of internal investigations and other sources of exposure.
Finally, query whether advisers now have to disclose that the whistleblower rule creates a conflict of interest for eligible employees who have a financial incentive to report suspected problems to the SEC rather than seeking a potentially faster resolution via internal compliance enforcement?