Whistleblower Bounty Provision is the Securities Law "Sleeper" in the Financial Reform Bill

As I have reported previously, Dodd Bill, the Restoring American Financial Stability Act of 2010 (1,600 page PDF), includes extensive governance and compensation reforms that apply to all public companies (or, in some cases, all listed companies), not just financial institutions. However, a lesser-known provision in the Dodd Bill could also have a significant impact on public companies: a program that would pay whistleblowers a bounty for reporting violations of securities law.

Under Section 922 of the Dodd Bill (starting on page 974), if a whistleblower provides information on a securities law violation that leads to monetary sanctions of more than $1 million, the SEC will be required to pay the whistleblower an amount ranging from ten percent to 30 percent of what has been collected. This bounty would apply to a wide range of securities law violations, including violations of the Foreign Corrupt Practices Act. The Frank Bill, which is being reconciled with the Dodd Bill in conference committee, contains a similar provision, without the ten percent minimum. Because the Senate and House versions are similar, it seems likely that the provision will be part of the final bill, expected to be passed this summer.

I view this provision as the “sleeper” in the Dodd Bill for public companies. It’s received less publicity than other provisions such as mandatory Say-on-Pay and a majority voting requirement for directors in listed companies. However, its impact on public companies could be even greater than those other provisions. The bounty provision may encourage employees to report perceived violations in a greater number of cases than before. Considering the recent increases in SEC enforcement staffing and activity, public companies will also be at greater risk of SEC investigations and enforcement proceedings.

In preparation for the likely passage of the bill, public companies should ensure that their whistleblower policies are up to date and that they are prepared to process a possible increase in whistleblower reports. The policies should provide clear procedures for employees to report possible violations within the company. Careful preparation may help reduce the chances of an expensive and time-consuming problem in the future.
 

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