NACD Insight & Analysis: SEC Whistleblower Program

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In Thursday’s NACD Directors Daily, the Wall Street Journal reported on the actions large companies have taken in response to the SEC’s proposed whistleblower program. While the SEC has received hundreds of comment letters opposing various provisions of the proposed rules, the Journal reported on more than two dozen of the country’s largest companies that have asked the SEC to revise the proposed rules. One of the more contentious issues is the proposed “bounty” that would be rewarded to a whistleblower if the company receives a sanction of more than $1 million. That bounty could range between 10 and 30 percent of the penalty paid by the company.

The article covers both sides of the debate surrounding the new whistleblower program. Businesses fear that employees will bypass the internal compliance programs and whistleblowing hotlines mandated by Sarbanes-Oxley, and report directly to the SEC. On the other hand, attorneys defending whistleblowers argue that requiring the use of internal reporting channels prior to the SEC would discourage fraud reporters for fear of losing anonymity. The SEC has just weeks to issue final rules that balance the use of internal reporting systems with reporting fraud.

Since the SEC first proposed rules on the new program last fall, NACD has worked to amplify the voice of the director on this issue. In our comment letter, we voiced concerns similar to the reservations expressed by the companies in the Journal article. Our letter stressed that the SEC should work to enhance and strengthen the internal reporting channels already in place, rather than bypass those channels by going directly to the SEC with an issue. Encouraging internal reporting can help management address and solve issues in the early stages, which in many cases are best solved by internal human resources professionals.

In the past months, NACD has also met and discussed the possible consequences of the proposed whistleblower rules with key members of the regulatory and investor communities to discuss your concerns and suggestions as we heard them in our survey prior to submitting our comment letter. In addition, last week’s edition of NACD BoardVision features NACD’s Managing Director & CFO, Peter Gleason discussing the whistleblower provisions with PwC’s John Barry.

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