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Businesses Beware: New SEC Rule Lets Whistleblower Report Violations Directly to SEC

above-the-bar-logo-no12.jpgA new whistleblower law, Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, has many corporations worried as it goes into effect August 12, 2011. The new rule increases whistleblower protection for individuals who provide original information about violations of federal securities regulations. The rule allows whistleblowers to collect up to 10-30% of penalties over a million dollars that the SEC fines their company, even if the whistleblower bypasses the company’s internal reporting system. The SEC passed this new rule by a vote of 3 to 2. Many corporations, of course, were against this rule.

In order for an individual to receive an award, he or she must submit information which leads to a successful enforcement of an SEC action resulting in monetary sanctions against a company for more than $1 million. Depending on the information provided and various factors, a whistleblower award can range anywhere from 10% to 30% of the sanctions. If you have observed a federal securities violation or any other type of fraud being committed against the government, our firm can help you evaluate your information and bring it to the proper authority.

Pros & Cons Of Bypassing Corporate Controls

One of the hotly debated points of this new rule was that it allows employees who observe violations to directly report them to federal authorities without first exhausting their companies internal complaint mechanisms. Hal Garyn, vice president of North American Services with the Institute of Internal Auditors has stated that “you want to leave corporate governance as much as possible within the organization” and that “many internal whistleblower programs never make the news because they work effectively and quietly.” Opponents of the new law have also asserted that the new law in fact encourages whistleblowers to bypass their company’s internal reporting procedure which many corporations have implemented carefully and at great expense.

However, the push behind the new rule stems from the reasoning that whistleblowers do need more protection since they will most likely be retaliated against for complaining. In fact, they may be forced to report their allegations of wrongdoing to the very individuals who are committing the violations. The SEC wants and needs people to come forward and persist in their complaints even if there is corporate retaliation. Former Senator Chris Dodd, who co-authored the law, has stated that by having this type of protection, it will “minimize the kind of frauds that will occur from growing so large that by the time we discover them too many people have been hurt.” In hindsight, maybe Bernard Madoff’s Ponzi scheme could have been stopped or avoided early on if we had whistleblowers determined and persistent enough to follow through with their complaints.

Corporations Need to be on Alert

This new law is wake up call to companies who don’t take their internal complaints seriously. Although many corporations have an internal reporting system which they have invested thousands of dollars in, complaints are either brushed to the side and not taken seriously or the complainant is retaliated against. Given the financial consequences to your company, it is imperative that you have an internal reporting system that your employees can trust. If an employee files an internal complaint of wrongdoing, promptly investigate the matter and determine if there is any merit to the employee’s charges. Do not “blow off” the employee’s complaints and retaliate against him or her. It is imperative that your employees trust your company’s internal system so that you have an opportunity to correct any wrongs before the government steps in and hits you with millions in fines and penalties.

Recent Increase in Whistleblower Complaints Reported to SEC

The National Whistleblower Center conducted a study of cases filed under the False Claims Act between 2007 and 2010 and found that about 90% of employees who filed a qui tam case first reported their complaints internally. The SEC has recently reported that the number of frauds being reported has risen since the Dodd-Frank rule passed. Before the law, the SEC used to get about a “couple dozen” high quality tips a year but are now getting “one or two high quality tips a day.” If you know of or have observed any fraudulent practices in your workplace, call our experienced Whistleblower Attorneys at Villanueva & Sanchala at (800) 893-9645 to learn how to report a fraud.


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