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Wednesday, March 18, 2015

How To Reduce SEC Whistleblower Risks

What whistleblower policies should a company have in place?

Since its creation in 2011, the SEC’s Office of the Whistleblower has received over 10,000 whistleblower tips (3,620 of them coming in 2014).  These tips have resulted in payouts of approximately $50 million.  The Whistleblower Program provides incentives for individuals to report violations of federal securities laws, and so privately owned broker-dealers, investment advisers and other financial services firms, not only public companies, are subject to the law.  Individuals who provide original information that leads to an SEC enforcement action of over $1,000,000 are eligible for awards of between 10% and 30% of the amount collected.  With these types of numbers and incentives in mind, below we have summarized areas in which financial services firms can be proactive in identifying and curing potential problems before it’s too late, even though a whistleblower can report a violation internally and still be eligible for an award.

One of the most important steps a company can take is to have a strong compliance culture, which must start at the top.  A company’s leadership should be knowledgeable about the company’s compliance responsibilities and should encourage their staff to do the same.  Compliance should be viewed as a tool to help the company achieve its goals, not as a hindrance to productivity.  Fewer compliance problems mean fewer opportunities for whistleblowing.

A company also should have clear policies and procedures in place. Establish a timeframe for when internal complaints will be addressed; it is less likely that a whistleblower will contact a government regulator if he or she feels confident that allegations are being adequately dealt with by the company.

It is crucial that whistleblowers are not made to fear retaliation for reporting misconduct, and SEC rules specifically prohibit retaliation. A key element in creating the right kind of company culture is allowing for anonymous whistleblowing. It also is important to protect a known whistleblower's identity to prevent a hostile work environment and claims of retaliation.

One proactive approach is separating the investigation of whistleblower complaints from the investigation of employee performance issues. For example, if a company's human resources department is looking into employment issues concerning a whistleblower, a different department in the company should investigate the misconduct being reported by the whistleblower. Keeping these matters separate can improve investigation results and rebut any claim of retaliation.

Another essential step is for companies to review their policies and any confidentiality, employment, severance, or other types of agreements to ensure they are free from provisions that prohibit or deter whistleblowing.  The SEC recently announced an enforcement action against a company for using improperly restrictive language in confidentiality agreements that employees and former employees were required to sign; the agreements required employees to obtain the prior approval of the legal department before they discussed matters related to internal investigations with outside parties (including the SEC).

The law firm of Lehman & Eilen LLP has advised numerous clients on securities regulatory matters for more than 20 years, and its senior lawyers each have more than 30 years of experience.  Our attorneys are uniquely qualified to advise companies on compliance issues, and we provide zealous and effective representation to clients facing regulatory investigations and enforcement actions. Contact us today at (516) 222-0888 to learn how our knowledge can be put to work for you.






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