With recent enforcement actions focused on foreign construction projects and seeking criminal and civil penalties against A/E/C firms and executives, the SEC’s recently adopted rules implementing Dodd-Franks Whistleblower provisions are of growing importance.
Peter V. B. Unger and Eugene R. Scheiman
With recent enforcement actions focused on foreign construction projects and seeking criminal and civil penalties against A/E/C firms and executives, the SEC’s recently adopted rules implementing Dodd-Franks Whistleblower provisions are of growing importance. The financial awards and anti-retaliation protections given to whistleblowers raise new challenges for A/E/C firms subject to the SEC’s oversight. Although SEC rules do not specifically apply to firms not subject to SEC oversight, they are illustrative of the government’s interest in pursuing Foreign Corrupt Practices Act violations. Following is an example of internal and external risks that need to be managed as firms pursue and perform work on a global scale.
On May 25, 2011, the SEC adopted final rules that significantly impact the role of internal corporate compliance programs. The rules implement the whistleblower provisions in Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Section 922 of Dodd-Frank requires the SEC to pay rewards of 10 percent to 30 percent of monetary sanctions obtained, as long as total sanctions exceed $1 million, to individuals who voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to a successful SEC action.
This provision creates a strong incentive for employee whistleblowers to bypass a corporation’s internal reporting system and bring claims directly to the SEC. Accordingly, it will undermine the internal controls corporations have established in response to the Sarbanes-Oxley Act of 2002, which were designed to serve as a front-line defense to address potential corporate wrongdoing.
Since the SEC announced its proposed rules in November 2010, numerous commentators, including Arent Fox LLP, encouraged the SEC to implement Section 922 in a manner consistent with Sarbanes-Oxley. (Read Arendt Fox letters to the SEC.) The final rules, however, continue to encourage employees to bypass their own company’s internal compliance programs and report directly to the SEC.
The final rules will be effective 60 days after they are submitted to Congress or published in the Federal Register. To read the SEC’s final rules, click here. To read Arent Fox’s Oct. 25 and Dec. 15, 2010 letters to the SEC, click here.
Internal Compliance Programs
The SEC’s final rules treat an employee as a whistleblower as of the date the employee reports the information internally to the company as long as the employee provides the same information to the SEC within 120 days.
Accordingly, employees are allowed to report their information internally first without losing their “place in line” for a possible award from the SEC but are offered no real incentive to do so. The final rules state only that the SEC “may” (not “must”) consider higher percentage awards for whistleblowers who first report their information through effective company compliance programs.
Excluding Individuals from Awards
The final rules clarify that individuals with certain legal obligations, such as lawyers, auditors, and internal compliance personnel, cannot use their positions to front-run internal programs and reap benefits. The rules do this by excluding the following individuals from consideration for whistleblower awards:
- People with a pre-existing legal or contractual duty to report their information
- Attorneys who attempt to use information obtained from client engagements to make whistleblower claims for themselves (unless disclosure of the information is permitted under SEC rules or state bar rules)
- Independent public accountants who obtain information through an engagement required under the federal securities laws
- Foreign government officials
- People who learn about violations through a company’s internal compliance program or who are in positions of responsibility for an entity and the information is reported to them in the expectation that they will take appropriate steps to respond to the violation
Unfortunately, senior management, internal audit personnel, and legal personnel are not specifically excluded from eligibility to receive rewards under the final rules. We continue to believe that such individuals, with direct fiduciary duties to address potential federal securities laws violations, should be barred from eligibility under the program.
Excluding Wrongdoers from Awards
The final rules clarify that the SEC will not pay awards to individuals who are directly responsible for the securities law violations they report. Specifically, the SEC will not pay culpable whistleblowers awards that are based either on the monetary sanctions that such individuals themselves pay in the resulting SEC action or the sanctions paid by entities whose liability is based substantially on conduct that the whistleblower directed, planned, or initiated. However, co-conspirators whose conduct is actionable but who are determined to be less than “substantially” responsible for the entity’s wrongdoing remain eligible to receive “bounty” payments.
These whistleblower rules have serious implications for all public companies subject to the SEC’s jurisdiction. As adopted, the final rules may be subject to legal challenges from, among others, the U.S. Chamber of Commerce. In addition, legislation recently introduced by U.S. Rep. Michael Grimm (R-N.Y.), if adopted, would among other things, exclude compliance officers from recovery under Dodd-Frank, make employee internal reporting a required pre-condition of any bounty payment, eliminate the minimum 10 percent award requirement, exclude whistleblowers with any culpability, and prohibit contingency fee arrangements with attorneys representing whistleblowers. Accordingly, the SEC’s final whistleblower rules may turn out not to be so final after all.
Eugene R. Scheiman is a senior partner in the Construction Group of the law firm Arent Fox. In his 40 years of practice, Scheiman has provided a wide range of litigation, alternate dispute resolution, and business advisory services to clients with interests in the construction industry. He has lectured and written on FCPA and related topics for the A/E/C community and has been recognized by Super Lawyers for the last seven years for his construction litigation work.
Peter Unger is a partner in Arent Fox’s litigation group. He concentrates on defending clients in governmental investigations, including actions before the SEC, DOJ, Congress, FINRA (former NASD/NYSE) and state securities regulators. He conducts and defends internal investigations and independent reviews, defends securities litigation, and advises on compliance, crisis management, and corporate governance.
Mark S. Radke, a litigation and white-collar partner of Arent Fox, also contributed to this article.