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What you need to know about the SEC’s whistle-blower rules

3 min read

Modern Money

The Securities and Exchange Commission’s decision Wednesday to create a $300 million whistle-blower program is expected to alter the way some individuals report — and the SEC polices — suspected corporate wrongdoing. To learn more about what the rules mean, SmartBrief asked Cadwalader, Wickersham & Taft partners Brad Bondi, a former enforcement counsel to two SEC commissioners, and Steven Lofchie, co-chairman of the firm’s Financial Services Department, for their insight.

1. Who will be affected by these rules?

These SEC rules apply to every publicly traded company. Compliance officers, lawyers, general counsels and individuals with supervisory or governance responsibilities, and, of course, the C-suite, should be aware of these regulations and preparing to make the necessary changes to their compliance programs.

2. Previous whistle-blower rules for public companies were established via the Sarbanes-Oxley Act. What are the specifics of those rules, and what have companies been doing to ensure compliance?

Sarbanes-Oxley regulations encouraged firms to implement internal procedures for whistle-blowers to report suspected misconduct, using tools such as anonymous hotlines. Companies were then expected to conduct an examination, address or correct problems and, where appropriate, self-report to the proper authorities.

3. How does the SEC’s action Wednesday change the whistle-blower guidelines?

The SEC is providing cash bounties to whistle-blowers when their actions result in a significant fine and a recovery of funds. Some of these whistle-blower rewards could number in the millions of dollars. As a result, firms have to be prepared for potential whistle-blowers to circumvent their internal systems and take their claims to the SEC or other authorities.

4. Shouldn’t investors or customers welcome the SEC guidelines because they provide whistle-blowers with more options, internally and externally, for reporting possible wrongdoing?

The substantial economic incentives to report directly to the government could result is a deluge of false positives. Under this scenario, the SEC is likely to spend more time sorting through irrelevant and frivolous claims, instead of swiftly enforcing the rules and punishing companies at which actual wrongdoing has occurred.

5. What are the next steps legal and compliance divisions at public companies must take to prepare for the SEC whistle-blower rules?

Legal and compliance teams will have to reassess their compliance controls, training and response plans. Companies should consider additional steps to encourage internal reporting and prepare plans for cases in which whistle-blowers report directly to the government.

You can learn more by attending a free webinar at 3 p.m. Eastern today, co-hosted by Cadwalader and Compliance11. The webinar will also be archived. Or read more about the issue in the next Cadwalader’s Clients & Friends memo.