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Whistleblower rule clears divided SEC

Corporate tipsters could get multimillion-dollar rewards for reporting financial wrongdoing under a new program.

May 25, 2011|Reuters

Corporate whistleblowers could score multimillion-dollar payouts for reporting financial wrongdoing under a new program approved by U.S. securities regulators Wednesday.

A divided U.S. Securities and Exchange Commission voted 3 to 2 to finalize the measure that has grown into one of the most contentious requirements of last year's Dodd-Frank Wall Street overhaul law.

Tipsters would be paid 10% to 30% of sanctions of $1 million or more for original and useful information.

Companies from Google Inc. to JPMorgan Chase & Co. have expressed fears the whistleblower rule will undermine internal compliance programs at public companies by encouraging employees to go directly to the SEC.

The rule does not require whistleblowers to first, or simultaneously, report problems internally, as companies had sought.

In a concession to companies, the final SEC version would let a whistleblower remain eligible for a reward if he or she reports wrongdoing to the company, and the company, in turn, reports it to the SEC.

A whistleblower can also improve the chances of receiving a higher-percentage award by internal reporting, but the rule protects the whistleblower from retaliation only if the employee also reports wrongdoing to the SEC.

Business interests such as the U.S. Chamber of Commerce remain deeply unhappy about the rule and could appeal in court. The SEC had put "trial lawyer profits ahead of effective compliance," the chamber said in a statement.

Rewarding whistleblowers has a long history in the United States.

Last year the U.S. Justice Department gave former GlaxoSmithKline employee Cheryl Eckard a $96-million reward under the U.S. False Claims Act, a Civil War-era law designed to uncover efforts to defraud government programs.

The SEC rule greatly expands the agency's authority to reward whistleblowers. Before Dodd-Frank the SEC could reward whistleblowers only for tips on insider-trading cases.

"Today's rules are intended to the break the silence of those who see a wrong," said SEC Chairman Mary Schapiro.

She said the final measure struck the correct balance between encouraging whistleblowers to report problems internally when appropriate and providing the option of heading directly to the SEC.

The rule was already encouraging people to come forward, SEC enforcement chief Robert Khuzami said at the SEC's public meeting Wednesday. People who provided tips after Dodd-Frank was signed into law in July could be eligible for a reward.

The SEC's two Republican commissioners voted against the rule and raised numerous concerns, from its effect on internal compliance to fears it may inundate the SEC with complaints that do not prove fruitful.

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