The suspense over the final SEC whistleblower rules ended with the SEC’s release of its final whistleblower rules last week. The CFTC is to follow suit soon in announcing its own commodities whistleblower rules.
We have followed the SEC rules’ development, after being part of the small group of pro-whistleblower attorneys who met with the Commissioners and staff and urged changes to the draft rules to make them effective.
In January, I had the opportunity to visit with SEC Chairman Mary Schapiro, Director Khuzami, and SEC staff, and then separately with Commissioners Luis A. Aguilar, Kathleen L. Casey, Troy A. Paredes, and Elisse B. Walter, to discuss changes to the proposed rules for the new SEC Whistleblower program.
The SEC apparently recognized that its draft whistleblower rules already were too slanted toward protecting industry, at the expense of the public.
The Commission wisely rejected business’s attempt to require all whistleblowers first to commit likely career suicide by reporting the boss’s wrongdoing to the boss himself.
Industry’s approach would have made the Commission the laughing stock of law enforcement, since no rational person with a career and a mortgage would risk reporting even major fraud with that requirement.
Fortunately, the SEC put first its responsibility to protect investors, and is taking seriously its law enforcement duties by seeking to root out major frauds. Madoff, Stanford, and the other major frauds of the past decade prove that internal compliance programs cannot protect the public. That is why Congress in Dodd-Frank demanded the first meaningful SEC whistleblower program.
The SEC also seemed to realize that its initial rules had too many exclusions, which were often vague and complex. Its initial rules created too much uncertainty about rewards, and would have left many major frauds undetected while investors suffer.
The SEC’s announcement shows an effort to do what make sense by not excluding so many potentially valuable whistleblowers, who are essential to uncovering and understanding complex schemes.
With more than 300 pages, the SEC whistleblower rules still may be more complex than needed. All in all, however, the rules are an improvement over the first draft, and the SEC is to be commended for putting the public’s interest first.