Trade Concerned SEC Whistleblowing Proposal Could Weaken Their FCPA Compliance Programs

This summary focuses on comments regarding the Foreign Corrupt Practices Act (FCPA) - related aspects of the proposed rule.

Proposed Rule Would Pay Awards to Whistleblowers Who Provide Original Info to SEC

The Dodd-Frank Act, enacted on July 21, 2010, adds a new Section 21F to the Securities Exchange Act. In November 2010, SEC issued a proposed rule to implement Section 21F. It directs the SEC to pay awards, subject to certain limitations and conditions, to whistleblowers who voluntarily provide the SEC with original information about a violation of securities laws (including FCPA violations) that leads to a successful enforcement of an action brought by the SEC that results in monetary sanctions exceeding $1,000,000, and of certain related actions.

Whistleblower Could Tell Firm & Wait 90 Days to Notify SEC, & Still Be Eligible for Award

The SEC states that its proposed regulations are intended “not to discourage” whistleblowers who work for companies that have robust compliance programs to first report the violation to appropriate company personnel, while at the same time preserving the whistleblower’s status as an original source of the information and eligibility for an award.

Therefore, the proposed rule would allow (but not require) a potential whistleblower to first provide information to legal or compliance personnel within their company, wait for up to 90 days to report the information to the SEC, and still have the information be considered original and eligible for an award under the Program.

(The SEC explains that this would allow a company a reasonable period of time (90 days) to investigate and respond to potential securities laws violations (or at least begin an investigation) prior to reporting them to the SEC or an appropriate regulator. SEC believes this approach is consistent with its efforts to encourage companies to create and implement strong corporate compliance programs.)

Trade Says Telling Firms First Should be Required, Not Optional

Virtually all of the comments that discussed FCPA whistleblowing, criticized the proposed rule for not explicitly requiring whistleblowers to first report possible violations to their own company before reporting them to the SEC.

The comments state that by simply “not discouraging” internal reporting, the proposed rule contradicts the SEC’s goal of implementing Section 21F in a way that encourages strong company compliance programs. This is because it would encourage employees to circumvent internal processes and deprive companies of the ability to promptly identify and investigate instances of potential misconduct in order to self-report potential problems to the SEC. In addition, it would be inconsistent with many companies’ codes of conduct which require employees to report internally any potential or actual violations of law or company policy.

Say Internal FCPA Company Investigations Take Time, 90 Days Insufficient

According to several companies’ comments, internal FCPA investigations take time because they often involve complicated cross-border issues and employee interviews in other countries. Therefore, they do not believe that the 90 day period for companies to investigate the whistleblower’s claims is sufficient for FCPA purposes.

Concerned that Possibility of Award Could Lead to More Complaints of Lower Quality

Some of the commenters were also concerned that the possibility of receiving an award for whistleblowing would increase the number of employee complaints and decrease their accuracy.

(See ITT’s Online Archives or 11/04/10 news, 10110411, for BP summary of an SEC press release on the proposed rule.)