SEC Begins Collecting Whistleblower Tips

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On Wednesday, the Wall Street Journal reported on the first submitted claims following the Securities and Exchange Commission (SEC)’s final rule on whistleblowers. From August 12, 2011, when the rule became effective, through the end of the government’s fiscal year on September 30, 2011, the SEC has received 334 whistleblower tips. Of those tips, the most common complaints allege market manipulation (54 tips), fraud in securities offering (52 tips), and fraud in corporate disclosures and financials (51 tips).

To date, due to the specifics of the rule, the SEC has not paid any whistleblower awards. However, this will soon change as more cases are resolved and awards are able to be processed. By the end of fiscal 2012 (October 1, 2011 through September 30, 2012), the SEC will no doubt distribute some awards.

The full impact of this new rule is currently unclear. Some governance experts have argued that the rule will weaken corporate ethics and compliance programs by allowing whistleblowers to bypass these very systems. Others see the rule as a critical tool in stopping fraud. Directors of public companies have maintained a neutral outlook on the rule. According to the NACD’s 2011 Public Company Governance Survey, 52.1 percent of respondents indicated that the SEC’s whistleblower rule will have no significant effect on their company’s overall ethical climate. A small percentage of respondents (29.4 percent) do not know how the rule will play out, and an even smaller number (13.6 percent) believe it will weaken their ethical climate. Only 4.9 percent think the rule will strengthen their ethical climate.

Only time will tell how this rule will affect corporations and their compliance programs. For now, boards of directors should reinforce an ethical tone-at-the-top and continue to review the activity of internal ethics hotlines and/or other means of assessing risks to the organization.

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