Will you be ready when the whistle blows? Boards should begin to consider new ways of keeping their internal reporting systems relevant.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

FOLLOWING THE PASSAGE of the Sarbanes-Oxley Act of 2002, corporate boards made great efforts to update their internal compliance reporting systems to more efficiently promote corporate accountability and protect employees who reported corporate misconduct. Last summer's Dodd-Frank Act, together with the SEC's recently proposed framework of whistleblower incentives and protections, changes the landscape and will require boards to rethink their internal compliance and whistle-blower programs. If the new regulations adopted are similar to those proposed, boards will need to develop creative solutions to ensure that they retain an effective role in preventing and detecting misconduct.

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New Incentives for Whistleblowers: The Dodd-Frank Act expanded the existing SEC rules for whistle blowing--previously limited to insider trading complaints--to include all types of securities and commodity law violations. Under the previous regulations, a whistleblower could receive up to 10% of the monetary penalties collected from a successful insider trading enforcement action. In a change designed to encourage whistleblowers to report wrongdoing to the government, 10% is now the minimum bounty, and a whistleblower may collect as much as 30% of any penalties over $1 million related to the wrongdoing that are levied by the SEC and other agencies. To collect this bounty, a whistleblower must have no obligation to provide the SEC with information, and the information cannot already be known to the SEC or publicly available. Under the SEC's proposed rules, the whistleblower has no obligation to first report corporate misconduct through internal corporate reporting procedures, but will be considered the original source if the information is reported internally but is nonetheless also reported to the SEC within 90 days after the internal disclosure. Under the Dodd-Frank Act, whistleblowers are also granted expanded rights of private action and double back pay in the event of retaliation by the company.

The SEC's proposal, if adopted, will give potential whistleblowers a powerful financial incentive to circumvent a corporation's existing compliance programs and take their allegations directly to the SEC.

How to Respond: While the SEC's regulations are not yet finalized, the whistleblower provisions of the Dodd-Frank Act are now a reality. Boards should begin to consider new ways of keeping their internal reporting systems relevant, so that...