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Alarm sounded on new SEC bounty payments

|Written By Julius Melnitzer

In a move that could have serious implications for Canadian companies doing business in the United States, the U.S. Securities and Exchange Commission is implementing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that authorize what amount to large bounty payments to whistleblowers for information about violations of securities laws.

“Anyone who thinks Dodd-Frank is just a U.S. phenomenon should think again,” says Susan Hackett, the Association of Corporate Counsel’s general counsel.

Adopted on May 31, the rules allow whistleblowers to bypass internal compliance systems through the direct submission of tips to the SEC in exchange for payments of up to 30 per cent of any penalty imposed.

The ACC issued a strongly worded statement impugning the program.

“The SEC’s bounty rule is a Pandora’s box that, when opened, is likely to create new and even unanticipated harms rather than promoting better reporting of internal problems,” says Hackett.

Indeed, when the rules were first proposed in late 2010, the ACC responded with a brief signed by general counsel from 250 of the largest U.S. companies. Significantly, Canadian corporations, including Bell Canada Enterprises, BMO Financial Group, Royal Bank of Canada, and TD Bank Financial Group, were also signatories.

But it’s not just Canadian multinationals or other companies subject to U.S. securities laws that will feel the effects. “Any Canadian company that does business in the U.S. or partners with a U.S.-listed company is exposed,” says Amar Sarwal, the ACC’s associate general counsel.

What’s significant here is that the whistleblower rules apply to any individual, not just employees of U.S.-listed companies or U.S. citizens.

“For example, an employee of a private Canadian company who becomes aware of a violation through the company’s relationship or partnership with a U.S.-listed company is eligible for bounty payments,” Sarwal notes.

Under U.S. law, preventing anyone from communicating with the SEC is a violation. The upshot is that Canadian companies risk prosecution should they attempt to stop their employees from passing on tips about the conduct of an American partner.

The issue isn’t just theoretical. Since 2002, when the U.S. Congress extended protection to whistleblowers in the Sarbanes-Oxley Act, regulators have welcomed them enthusiastically.

“Having been directed by Congress to put the Dodd-Frank program in place, the SEC will be under a great deal of pressure to ensure that whistleblower complaints are fully investigated,” says Cornell Wright of Torys LLP.

The ACC’s primary suggestion for modification of the proposals was that the SEC require an individual who had information on corporate misconduct to first use existing internal compliance and reporting systems and then give the company a reasonable time to resolve the issue before turning to the regulator.

The argument resounds with Canadian companies that in the years following the Enron debacle have been no less vigilant than their U.S. counterparts in focusing on internal reporting.

“Canadian companies generally have very good internal compliance systems,” says Wright. “But in the end, the existence of a financial reward for going to the SEC is a significant incentive for whistleblowers to bypass internal systems.”

  • Luke H.
    A few things: (1) SOX failed to get whistleblowers to come forward, (2) SOX failed to protect those whistleblowers who did come forward from retaliation; (3) The SEC is not capable of detecting fraud as well as employees; (4) when upper management participates in fraud, compliance systems cannot be relied upon.

    The bottom line is that companies implement compliance programs as a "cover your ass" mechanism. True compliance is about stopping wrongdoing from happening in the first place. It is not about punishing people who break rules. If a company commits wrong doing, the compliance system is broken. At that point, regulators need to know so they can take action.

    Here is an article I am publishing:

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