SEC Adopts New Whistleblower Rules

Mary Schapiro

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On a 3-2 party-line vote, today the SEC approved new rules aimed at encouraging whistleblowers to report fraud and other critical information to the Commission. SEC Chairman Mary Schapiro said it was “critical” for agencies with “limited resources” to “leverage the resources of people who may have first-hand information about potential violations.” She said the new whistleblower rules “are intended to break the silence of those who see a wrong” and will help protect investors.

The Commission received 240 comments and over 1,300 form letters weighing in on the proposed whistleblower rules.  One particular point of contention was a suggestion that whistleblowers be required to report potential violations through internal corporate channels before taking them to the SEC.  While the SEC did not go that far, the Commission did amend its original rules by adding language that requires the SEC to consider how much a whistleblower worked with internal compliance officers when determining the amount of a cash reward, if any.

Commissioners Casey and Paredes, the two Republicans on the Commission, voted against the final rules and argued that, despite this change, the regulations would diminish the effectiveness of internal compliance programs. Commissioner Casey predicted the SEC would be flooded with tips and that companies would face significant cost increases for legal fees required to respond. Schapiro said, however, that the final rules “expand upon the incentives for whistleblowers to report internally where appropriate to do so.”

See also NYSE Euronext's Judy McLevey's post on what these rules mean for companies.

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