SEC sets new rules for corporate tipsters

Whistleblowers could be cashing in on lump sum payouts for reporting financial fraud to the US government under new rules adopted by the federal regulator.

On Wednesday, a divided SEC voted 3-2 to adopt a new whistleblower program that will pay $1 million or more to those who provide high quality tips that uncover corruption and lead to successful enforcement. The new policy, which will take effect in July, was mandated last year by the Dodd-Frank Wall Street Reform Act and applies to all original information the SEC receives after July 22, 2010.

SEC chairman Mary Schapiro says the new whistleblower rules will help the agency’s enforcement efforts. ‘For an agency with limited resources like the SEC, it is critical to be able to leverage the resources of people who may have first-hand information about violations of the securities laws. While the SEC has a history of receiving a high volume of tips and complaints, the quality of the tips we have received has been better since Dodd-Frank became law.’

Some industry leaders supported the announcement as a step forward.

‘While we are still reviewing the text, we appreciate the SEC’s willingness to work with the industry and make important and necessary changes to the internal reporting provisions,’ says Ira Hammerman, senior managing director and general counsel of the Securities Industry and Financial Markets Association (SIFMA). ‘We now encourage the Commodity Futures Trading Commission (CFTC) to revise their proposed rule to come into greater alignment with the SEC’s final rules, to ensure regulatory consistency and clarity.’

As Corporate Secretary previously reported, experts disagree on the merits of the whistleblower provisions of Dodd-Frank, primarily because bounties could be quite hefty given enforcement settlements of the recent past. On July 15, 2010, for instance, the SEC announced that Goldman Sachs would pay a record $550 million for misleading investors about a subprime mortgage collateralized debt obligation that the firm marketed.

Industry observers further believe that the SEC will take this program seriously, given the public black eye it suffered over its mishandling of several recent scams and frauds. Harry Markopoulos, an independent fraud investigator, approached the SEC many times over several years to express concern about Bernie Madoff, but nothing was done. ‘The SEC cannot afford another Madoff,’ says David Childers, chief executive officer of Portland, Oregon-based EthicsPoint.

[Article by Aarti Maharaj, Corporate Secretary]