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From Securities Regulation Daily, April 30, 2015

Chair White: “…past time to stop wringing our hands about whistleblowers”

By Mark S. Nelson, J.D.

SEC Chair Mary Jo White told an audience today that despite the still-evolving nature of the Commission’s whistleblower program and the “mixed feelings” the topic engenders among those in the corporate world, it is time for companies to come to grips with the SEC’s whistleblower program. She said companies and their boards should think about whether their internal compliance programs do enough to tolerate, and even encourage, whistleblowers.

White made her remarks, which she titled “The SEC as the Whistleblower's Advocate,” at the 35th Annual Ray Garrett, Jr. Corporate and Securities Law Institute held at Northwestern University Law School in Chicago. This was White’s first appearance at the Garrett Institute since becoming SEC Chair just over two years ago, a point David S. Ruder, himself a former SEC Chairman, made when he introduced White. Wolters Kluwer Law & Business is a program sponsor of this year’s Garrett Institute.

No rulemaking by enforcement. White focused on two areas in which the SEC recently made its first whistleblower awards—retaliatory acts by companies, and overreaching confidentiality agreements. White said that companies’ worries about the SEC undermining their internal compliance programs are misplaced. She noted that the SEC is guided by a variety of factors in making whistleblower awards, including raising the amount of an award if a whistleblower first reported to their company. According to White, 80 percent of whistleblowers already do this, which she said implies that the SEC’s program has struck the right balance.

In the context of retaliation, White reiterated that an employer cannot fire, demote, or take other adverse actions against a whistleblower who engages in lawful conduct. She noted that retaliation has a chilling effect on whistleblowers, but can be muted by the availability of private litigation, and the SEC’s power to bring an action against an employer. She noted that the SEC has intervened in a few private cases to make the point that a whistleblower need not just report to the SEC to be sheltered by the Dodd-Frank Act’s anti-retaliation provisions.

White said the SEC does take retaliation against whistleblowers “seriously” and that companies should too. She cited a recent $600,000 award to a person who blew the whistle on a hedge fund advisory firm's improper principal transactions.

White also acknowledged that a recent first-ever award involving a company’s confidentiality agreement that seemingly limited a whistleblower’s reporting options had produced “considerable discussion,” but she denied that the Commission’s award was an attempt to engage in “rulemaking by enforcement” or that it had otherwise called into question the validity of all confidentiality agreements.

Moreover, White emphasized that Exchange Act Rule 21F-17 is not a blanket ban on confidentiality agreements, nor is the SEC trying to dictate the terms of these agreements. She noted that a company still can give Upjohn warnings to employees (frequently non-attorneys) on the scope of attorney-client confidentiality, and it can review its own policies with an eye to meeting the SEC’s rule, but employees must know they can always go to the SEC with information about possible securities violations.

Administering the program. White said the SEC’s whistleblower program “overall” is a success. The agency has received tips that provide original information enabling new investigations, offering insight on companies’ inner workings, detailing technical data, and explaining key documents. Whistleblowers also may testify or identify additional witnesses.

According to White, the SEC received 3,600 tips in 2014. She said the agency has been getting a higher volume of tips, which have been of higher quality. Still, a few challenges remain, including dealing with serial submitters, whose tips bear no relation to any possible case. Another ongoing challenge is to deal with issues of first impression, such as cases that involve a company’s internal compliance and audit employees. These cases require that the whistleblower fit within several narrow exceptions to the rule that an award cannot be made to compliance personnel.

Lastly, White said other regulators have called for the revamping of their whistleblower programs to emulate the SEC’s framework. She noted that former U.S. Attorney General Eric Holder asked Congress to update the Financial Institutions Reform, Recovery, and Enforcement Act’s whistleblower cap. She also noted that New York Attorney General Eric T. Schneiderman has called on that state’s legislators to enact SEC-like whistleblower protections.

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