(Bloomberg News) The U.S. Securities and Exchange Commission will let corporate whistle-blowers collect as much as 30 percent of penalties when they report financial wrongdoing, even when they bypass companies' internal complaint systems.
SEC commissioners voted 3-2 today in Washington to establish a whistle-blower program to "reward individuals who provide the agency with high-quality tips that lead to successful enforcement actions." The program, part of the SEC's rulemaking under the Dodd-Frank Act, expands a bounty system that was previously limited to insider-trading cases.
In setting the rules, the SEC rejected appeals to require that whistle-blowers make reports through companies' internal compliance programs before going to the agency. Instead, the regulator increased incentives for internal complaints by permitting bounties for people whose tips are passed along on to the agency and expanding the time whistle-blowers can maintain their place in line at the SEC while reporting to the company.
"Incentivizing -- rather than requiring -- internal reporting is more likely to encourage a strong internal compliance culture," SEC Chairman Mary Schapiro said in prepared remarks before the vote.
Commissioner Kathleen Casey, who joined fellow Republican Troy Paredes in opposing the final rule in today's vote, said it "significantly underestimates the negative impact on internal compliance systems" and could lead to a flood of complaints the agency would be unprepared to handle.
Dodd-Frank called for the SEC to establish the expanded bounty system after the agency was faulted by lawmakers for fumbling tips about Bernard Madoff's multibillion-dollar fraud. Commissioners voted unanimously on Nov. 3 to seek comment on the program, which will cover whistle-blower complaints dating from the enactment of the regulatory overhaul last July.
The rule approved today allows the SEC to consider awards for whistle-blowers ranging from 10 percent to 30 percent of penalties collected in case where sanctions exceed $1 million. To qualify, tipsters must voluntarily provide information based on their own independent knowledge before it is requested by the SEC or other regulators.
SEC commissioners and staff members received 1,210 comment letters through yesterday and held more than 50 face-to-face meetings trying in vain to assuage concerns that the program would undermine internal systems that were mandated by the Sarbanes-Oxley Act of 2002.
'In the Dark'