Opening the Floodgates:The SEC’s Proposed Whistleblower Rules

Nina (Nicki) LockerSteven Guggenheim

Michael Winograd

Whistleblower Statute - Background

• The Genesis of the new rules – SEC’s lack of response to warnings re Madoff– Ineffective SEC bounty program before Dodd-Frank

Insider trading 10% awards $160,000 to 5 claimants since 1989

– Lack of robust internal corporate reporting processes SOX 301

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Whistleblower Statute - Highlights

• Increased bounty payments– 10 to 30 % of monetary sanctions collected by SEC

• Voluntary submission of original information– Derived from independent knowledge/analysis – Must not be legally obligated to provide information

• Broad eligibility for bounty– Employees, analysts, suppliers, customers

• Certain individuals not eligible for bounty– Attorneys, accountants, compliance personnel

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Whistleblower Statute- Highlights

• No requirement to report internally• Highly controversial

• Protections for whistleblowers– Confidentiality – Prohibits discrimination – Retaliation claims

Automatic remedies

• SEC can share whistleblower information with foreign governmental agencies

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Impact on Publicly Traded Companies

• Significant increase in SEC enforcement activity – FCPA: where the real money is

2010: 12 FCPA investigations with a total of more than $500 million in monetary penalties

Increased due diligence in M&A context

• Employees will bypass internal compliance processes

– No concrete incentive for reporting internally firstSEC “may” consider internal reporting in setting

reward– Investigation, remediation and self-reporting might

eliminate any monetary sanctions

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How to Preserve the Role of Internal Corporate Reporting

• Acknowledgments and certifications – Acknowledge obligations in whistleblower policy– Periodically certify that known misconduct has been

reported

• Incentivize reporting of potential violations– Establish and communicate whistleblower policies

Provide for confidentialityProtect whistleblowers

– Expand communication channels for internal reportingEmails, mail, hotline

• Seek feedback on communication channels

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