In August and September 2011, TheCorporateCounsel.net surveyed the impact of the SEC Whistleblower Program and how companies are responding to the whistleblower provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Contrary to the significant concerns expressed by the corporate community during the legislative and regulatory process, more than a year after the enactment of Dodd-Frank, only 6% of respondents believed that fewer whistleblowers claims were reported internally as a result of the new program and 3% believed that more whistleblower claims were reported internally because of the program.  
 
According to the survey results, almost 40% of respondents indicated that, in response to the SEC Whistleblower Program, their company had or was planning to change existing policies to address the new rules.  This is a positive sign.  Responsible organizations should regularly evaluate existing compliance policies and must take every step to ensure that internal reporting of misconduct is encouraged at every level.  Nevertheless, a surprising 87% of respondents indicated that their organization hadn’t yet, were not sure that it would, or had decided not to create a system to alert employees of the benefits of reporting internally.  For these organizations, the lack of such a system represents a fundamental compliance weakness and is likely to lead to a higher number of securities violations and increased external reporting. 
 
To learn more about how to establish a culture of integrity and the price of failing to do so, see this New York Law Journal article.

An October 2011survey by law firm Littler Mendelson indicated that 96% of executives surveyed are at least moderately concerned about potential whistleblower claims against their companies in light of the Securities and Exchange Commission’s (SEC) new whistleblower program. The firm’s survey of senior legal, compliance and human resources executives at publicly traded or highly-regulated companies also found that 45% of respondents’ companies had already experienced a whistleblower claim in the last 12 to 24 months. In addition, 67% anticipated whistleblower claims to increase within the next year or two.

There were some positive signs in the Littler Mendelson survey. While only 65% of respondents characterized their companies as being “moderately prepared” to handle whistleblower claims, 84% have taken steps to protect against unlawful retaliation claims and another 86% have either scheduled or are considering scheduling whistleblower and/or retaliation-related training in the next 12 months. These are good first steps. Establishing a strong ethical culture is mission critical for every commercial entity. As I emphasized in my recent article in the New York Law Journal, to remain successful and scandal-free in this era of increased regulation and law enforcement scrutiny, organizations must be more forward-looking and establish a culture of integrity that deters wrongdoing and promotes early, internal reporting of wrongdoing when it occurs.

The tide is changing. Crucial reforms are now in place to protect and encourage whistleblowers to come forward and early signs from the SEC indicate that whistleblowers are breaking their silence and taking a stand against misconduct. Given the results of the Littler Mendelson survey, it is crucial that organizations wholly commit to fostering a workplace characterized by integrity and transparency. The stakes are too high for anything less.

The Securities and Exchange Commission (SEC), having faced significant criticism in recent years, was dealt another PR blow in a recent Wall Street Journal article reporting the agency’s “inadvertent” outing of an SEC whistleblower. According to the article, the disclosure occurred during an investigation of Pipeline Trading Systems LLC, when an SEC lawyer shared the whistleblower’s notebook with an executive who was being questioned. The executive recognized the whistleblower’s handwriting. The article, and the widespread follow-on reporting, raises legitimate questions about protecting whistleblowers’ identities and what assurances of confidentiality a whistleblower can reasonably expect.

As a former Assistant Director and Assistant Chief Litigation Counsel in the Enforcement Division of the SEC, I can assure whistleblowers that all SEC staffers are extensively trained to conduct investigations in a confidential and non-public manner. After the enactment of Dodd-Frank, which expressly required the SEC and other law enforcement organizations to attempt to protect the identities of whistleblowers, the staff received additional training from the SEC Whistleblower Office on the proper handling of whistleblower information. Practically, during an investigation, as a matter of practice, the SEC will neither admit nor deny whether a whistleblower reported possible securities violations. Among other techniques, SEC staffers attempt to request and use materials in their investigations in a manner that protects the identity of whistleblowers. Additionally, in their initial submission to the SEC, whistleblowers and their counsel are asked if any of the materials provided to the Commission are likely to reveal the whistleblower’s identity so that the staff can handle those documents with particular care. These important policies and procedures and practices are deeply ingrained into the SEC’s practice and culture. As a result, the risk of accidental disclosure of whistleblower information by the agency’s staff is remote.

Nevertheless, despite the agency’s best efforts, there is always some risk that the individuals or entities involved in the possible securities violations will learn the whistleblower’s identity. With respect to the Pipeline matter, the Director of the New York Regional Office, George Canellos, wrote a letter to the editor of the Wall Street Journal, which set forth the SEC staff’s efforts to protect the identity of the whistleblower in the Pipeline investigation. While it is unfortunate that the whistleblower’s identity was discovered, all publicly available information suggests that the SEC did nothing inappropriate and its conduct was consistent with agency best practices.

An important takeaway is that the risk that a whistleblower’s identity will be discovered is substantially reduced if he or she works with counsel to file a submission anonymously pursuant to the program rules. Working through counsel, even the SEC is unaware of the whistleblower’s identity (until the individual elected to accept a monetary award); and sophisticated counsel would never share with the agency any documents that might compromise a whistleblower’s anonymity.

In the end, potential whistleblowers should not be discouraged from reporting possible securities violations because of this apparently unwarranted criticism but should carefully consider their options in reporting potential violations to the SEC.