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Final SEC Whistleblower Ruling Won’t Do Away with Internal Programs: New Whistleblower Provisions

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Final SEC Whistleblower Ruling Won’t Do Away with Internal Programs: New Whistleblower Provisions

It’s been a few days since the SEC’s 3-2 decision to accept the proposed rules concerning Dodd-Frank’s whistleblower provisions. As many of us feared, the rules will not require employees to report internally before going to the regulators and there is significant concern that the practical effect of this ruling will be to undermine internal compliance reporting programs. In fact, many observers fear that this ruling might not just undermine, but might actually neuter internal reporting programs. These fears are reasonable, but I believe the risks can be mitigated.

Shortly after the rules became final, I read an interesting article in Miller-McCune that looked at the factors which motivate whistleblowers. Two studies were referenced:

In the first, conducted in 2010 by the New England Journal of Medicine, researchers found that not one of the 26 whistleblowers involved in litigation against pharmaceutical companies who were interviewed for the study said he or she was motivated by a financial bounty. Generally, the whistleblowers tried to address their concerns internally and only became litigants either accidentally or “as a last resort.

The second study, conducted last December by the National Whistleblowers Center, found that the existence of a whistleblower “qui tam” rewards program does not impact the willingness of employees to use internal corporate compliance programs or report potential violations to their managers. Based on False Claims Act (FCA) cases filed in the previous three years, the overwhelming majority of employees voluntarily utilized internal reporting processes, despite the fact that they were potentially eligible for large rewards. Almost nine out of ten employees who would eventually file a “qui tam” case initially reported their concerns internally, either to supervisors or to compliance departments.

These findings are very significant. They show that notwithstanding a financial motive to report to the government, employees are still willing (and in fact, prefer) to report via internal mechanisms.

But if employees want to report internally, why do they end up going to the regulators? Well, it seems two key reasons explain this phenomenon: employees are either unaware of the internal mechanisms, or they initially report internally but become frustrated by the perceived inaction from the organization.

So what can organizations do to make sure they hear issues BEFORE the SEC? Simply stated, make sure that your employees really understand your internal reporting process and make sure that you have procedures for investigating, resolving and communicating your actions so employees feel that their concerns are taken seriously.

Go on the offensive and seize this opportunity to strengthen and re-communicate your compliance initiatives. You can wait to see how these rules impact you, or you can work to ensure that your fraud reporting mechanisms are working at their peak efficiency to put out any fires (and prevent them outright) before they blaze up. People are willing to report internally when they see unethical behavior, regardless of any bounties to be had, but you have to make sure they know how to report to you and have confidence in the process.

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