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Whistleblowers can report directly to SEC

Jason J. Kane

Employees who want to blow the whistle on their employer’s possible violations of federal securities laws will soon be able to bypass their company’s internal compliance and reporting programs.

Under new rules, adopted May 25 by the Securities and Exchange Commission, tipsters may report directly to the SEC. They will also be eligible to reap huge rewards if their original tips pan out.

“I think the major concern is just the SEC being overwhelmed with additional whistleblower complaints,” said Jason J. Kane, an associate at The Pearl Law Firm P.A., which has an office in Rochester. “Ultimately, I think it’s a good problem to have.”

He said whistleblowers will be among the first to identify potential investment problems and that any incentives they might have to make a report on are going to help the SEC.

The new SEC whistleblower program, implemented under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is primarily intended to reward individuals who act early to expose violations and provide significant evidence that helps the SEC bring successful cases, according the SEC’s website at

It expands upon the Sarbanes-Oxley Act. SEC Chairman Mary Schapiro, in a May 25 speech in Washington, said too many people were still remaining silent.

“The new whistleblower program is part of our effort to enhance the agency’s capacity to detect and prevent fraud,” she said. “[They] are intended to break the silence of those who see a wrong.”

The final rules define a whistleblower as a person who provides information to the SEC relating to a possible violation of the securities laws that has occurred, is ongoing or about to occur.

The rules, slated to go into effect 60 days after being submitted to Congress, also increase the bounty and expand who can collect. Tipsters will be eligible to receive 10 to 30 percent of any amount SEC recovers. Prior to the act, the agency’s bounty program was limited to insider trading cases and awards were capped at 10 percent.

To collect, a whistleblower must voluntarily provide the SEC with original information that leads to the successful enforcement of a federal court or administrative action in which the SEC is granted sanctions of more than $1 million.

While employees will not be required to first report alleged wrongdoing to their employers, there are incentives for them to start internally.

Carolyn G. Nussbaum

“The main area of controversy is whether the rules ought to require employees to report internally and give the company time to investigate,” said Carolyn G. Nussbaum, a partner in Nixon Peabody LLP’s Financial Services and Litigation Group specializing in securities, litigation and corporate governance and compliance.

“Unless the company has got its house in order, the first time it may hear of any issue may be from the SEC.”

She said the SEC decided to offer incentives to employees who initiate complaints internally instead of requiring them to start with their company. Rewards may be increased for employees who do not bypass their employers and may be decreased for those who interfere with an internal process or make false claims.

Nussbaum said complaints may be innocent, frivolous or in fact be an issue, but outside the purview of the SEC, which doesn’t deal with employment issues. She said previously, a company may have had an opportunity to rectify a problem.

“This way, they don’t get that opportunity until much later and it may be too late in some circumstances,” she said.

In addition, any information the company provides to the SEC will be credited to the whistleblower making an internal report, allowing him or her to receive credit for information the company gathered during its own investigation in response to an internal report.

Nussbaum said there are also some new time limits so if a company does receive a complaint, it has to act very quickly to be prepared for when the SEC does come calling. The “lookback” period has also been extended from 90 days to 120 days which means a whistleblower who started with an internal report and then went to the SEC within that time frame, may be credited with giving information to the SEC as early as the first internal report even if someone else reports to the SEC in the meantime.

Nussbaum believes the new rules may increase the number of complaints that will not be as helpful to the SEC or as detailed. She said high-quality information from a whistleblower certainly assists the SEC, but questions whether the quality of the information will drop under the new incentives.

Nussbaum is one of four partners who will speak June 15 during a free Nixon Peabody webinar to review the rules and the impact they may have on internal compliance programs and employment practices.

Other speakers are Karl D. Belgum, Financial Services and Securities Litigation Group; David A. Feldman, Government Investigations and White Collar Group; and Andrew B. Prescott, Labor and Employment Group.

Kane, whose firm primarily represents investors defrauded by financial advisors, believes the law will benefit the general investing public.

“Any additional incentive that can bring financial fraud to the public limelight is a good thing,” he said. “I think it makes the investing public more aware of their rights as investors and that there is recourse.”

There are several exceptions to the law. For instance, the people whose job it is to report information to the SEC will not be eligible for rewards. Nor will company personnel who receive the initial tip should the whistleblower first go to an employer. Convicted wrongdoers will also not be able to benefit from their actions by tipping off the SEC.

The final rules also make it clear that lawyers will not be eligible to receive incentive payments if they have divulged confidential information from clients while professionally representing them.

Stephen N. Zack, president of the American Bar Association, called the decision not to encourage lawyers to turn in clients “a welcome recognition” of the importance of attorney-client privilege.

“The integrity of the lawyer-client relationship is sacred,” Zack said in a release. “The erosion of a lawyer’s duty of confidentiality, either by weakening its provision or by creating incentives for lawyers to disregard their professional obligations, would undermine the quality of the lawyer-client relationship and the effectiveness of the privilege, deny the client its right to effective counsel and reduce, rather than increase, compliance with the law.”

The act also called for the creation of an Office of the Whistleblower, which is being led by Sean McKessy who works with whistleblowers, handles their tips and complaints and helps the commission determine awards.

The Nixon Peabody program, “How to Protect Your Company When You Can’t Hear the Whistle Blowing,” is from noon to 1:30 p.m. June 15. Register at by clicking on “events.”