New whistleblower rules encourage but do not require internal reporting.

New whistleblower rules encourage but do not require internal reporting. The AP (5/25) reported in at 3-2 vote, the Securities and Exchange Commission approved whistleblower rules on Wednesday under which informants can receive up to 30 percent of recouped funds if the tip “leads to an enforcement action resulting in more than $1 million in penalties.” The rules aim to encourage employees to first report wrongdoing via companies’ internal channels, after which the SEC deems them whistleblowers if they report the same information to the agency “within 120 days.” The SEC will also “credit whistleblowers whose companies pass their information to the agency, even if the whistleblowers themselves do not. That way, whistleblowers could receive awards by reporting wrongdoing internally to their companies.” Bloomberg News (5/25, Hamilton) reported prior to the vote, SEC Chairman Mary Schapiro said, “Incentivizing — rather than requiring — internal reporting is more likely to encourage a strong internal compliance culture.” Republican commissioners Kathleen Casey and Troy Paredes disagreed, saying the rule “‘significantly underestimates the negative impact on internal compliance systems’ and could lead to a flood of complaints the agency would be unprepared to handle.” The commissioners were joined in their criticism of the rules by the US Chamber of Commerce, which said, “Armed with trial lawyers and new large financial incentives to bypass these programs, whistle-blowers will go straight to the SEC with allegations of wrongdoing and keep companies in the dark.” Reuters (5/25, Lynch) reported JPMorgan Chase and Google Inc. are among companies objecting to the rules because they will undercut companies’ internal reporting procedures. The whistleblower rule was a requirement of the Dodd-Frank financial reform law. Informants who provided information following the law’s passage last year can qualify for rewards under the rule. It is slated to take effect 60 days after being published in the Federal Register. Rule may change employer, whistleblower relationship. Noting reaction to the rule, the Blog of Legal Times (5/25, Greene) reported Randall Fons of Morrison & Foerster’s “securities litigation” said the rule would compel companies to reassess their reporting programs and their relationships with whistleblowers who report problems internally. Noting that companies do not typically report back to whistleblowers regarding changes, Fons said “now, companies are on notice that if the person feels the issue hasn’t been addressed within 120 days, he or she could still go to the SEC.” Perkins Coie partner T. Markus Funk suggested the rule would lead to more self-reporting, as widespread knowledge of a problem is an incentive “to come forward rather than wait for the ax to drop.” The Wall Street Journal (5/25, Rubenfeld) reported that law firms are divided over the rule’s effectiveness. Steve Fagell of Covington & Burling LLP said the SEC took a middle-of-the-road approach that almost fully endorses internal reporting programs. The Association of Corporate Counsel‘s Susan Hackett said the rule will likely give rise to unforeseen issues before it encourages improved reporting.