SEC Whistleblower Rules Have It Right: Report Shows Most Whistleblowers Report Internally First

When the SEC debated in 2011 requiring “internal” reporting within companies as a prerequisite to filing an SEC Whistleblower claim under Dodd-Frank, business interests howled that any other rule would “destroy” compliance programs.

Never mind that the vast majority of whistleblowers have always raised concerns about illegal conduct internally before reporting to the government. Whistleblower lawyers already knew that fact from twenty-five years of experience with the False Claims Act–the nation’s major qui tam whistleblower law that inspired the new SEC Whistleblower Program. The availability of rewards had not dissuaded whistleblowers from reporting their concerns internally for a quarter century.

When I met in 2011 with SEC Chairman Mary Schapiro and the other SEC Commissioners with other whistleblower advocates to discuss the proposed SEC Whistleblower rules, it was apparent–and shocking–that this false argument was being considered seriously. We urged the SEC to rely on these years of experience with the False Claims Act and to reject any such requirement.

A report just issued by the Ethics Resource Center confirms that the SEC wisely saw through this argument in not mandating internal reporting, but instead it treating it as a “plus” factor in making awards.

As summarized in the Wall Street Journal blog, “in 2011 only 2% of employees solely went outside the company and never reported the wrongdoing they observed to their employers. For those deciding whether or not to go outside the company, a potential monetary award was not a major driving factor-82% said they’d report externally if it was a big enough crime, but only 43% said they’d do so for a reward.”

When internal reporting fails to correct the illegality, or is futile because the fraud is directed from the top of the organization, only then do most whistleblowers consider reporting to law enforcement. The report confirms these basic facts, and demonstrates the wisdom of the SEC’s approach to its whistleblower rules.