SEC Delays Final Whistleblower Rules

Robert Khuzami, the director of the SEC's enforcement divisionThe date for the SEC to adopt final rules for the Whistleblower Incentives & Protection Program under Dodd-Frank is slipping.

By law, the final rules were supposed to be in place "no later than April 21, 2011 (9 months from enactment)." The SEC went even further, saying the rules would be in place early.

That didn't happen. Now, according to the SEC's calendar, adoption of the final rules will be in the "May - July 2011" time slot.

What's the delay mean?

Well, for whistleblowers, not much, at least for now. The way the law was written and the temporary rules applied, whistleblowers who came forward after July 22, 2010 were already protected from retaliation, and entitled to rewards of ten to thirty percent of any "successful enforcement action yielding monetary sanctions over $1 million."

But for the SEC and issuers, the delay may mean something more. Since the whistleblower program was first announced, businesses and their advisors have been pushing back. The main complaint is that whistleblowers have no obligations to first report compliance issues inside their companies. Instead, they're allowed to complain directly to the SEC. Bypassing existing compliance programs, commenters have argued, is already diverting corporate resources and weakening existing compliance programs.

Is the SEC listening?

Just last month, Robert Khuzami, the director of the SEC's enforcement division, said the final rules would happen on schedule. He told a gathering of compliance professionals in Phoenix that the SEC had "received and studied many comments to the proposed rule, and adoption of the rule is set for April."

As we said then, Mr. Khuzami gave issuers and their compliance officers little to cheer about.

And yet, the SEC's April deadline has now come and gone.

Let's hope that means common sense may prevail after all.

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Our thanks to Michael H. Huneke at Hughes Hubbard & Reed LLP's Washington, D.C. office for the heads up about the SEC's delay in adopting the final whistleblower rules. 

More Heat Coming

The head of the SEC's Division of Enforcement, Robert Khuzamii, said last week the agency will put more attention on the Foreign Corrupt Practices Act. Among five specialized enforcement units to be created will be one devoted to the FCPA. He said:

The Foreign Corrupt Practices Act unit will focus on new and proactive approaches to identifying violations of the Foreign Corrupt Practice Act, which prohibits U.S. companies from bribing foreign officials for government contracts and other business. While we have been active in this area, more needs to be done, including being more proactive in investigations, working more closely with our foreign counterparts, and taking a more global approach to these violations.

His agency, he said, will be coming up with new standards to evaluate cooperation by companies and individuals. And to encourage cooperation, the SEC will expedite processing of witness-immunity requests and start using DOJ-like deferred prosecution agreements -- subject to full cooperation, a waiver of statutes of limitations, and compliance with ongoing undertakings. It all points to more FCPA enforcement pressure on public companies.

On a historical note, the SEC hasn't said much about cooperation standards since its so-called Seaboard Report in 2001. That release identified these measures of a company’s compliance:

· Self-policing prior to the discovery of the misconduct, including establishing effective compliance procedures and an appropriate tone at the top;

· Self-reporting of misconduct when it is discovered, including conducting a thorough review of the nature, extent, origins and consequences of the misconduct, and promptly, completely, and effectively disclosing the misconduct to the public, to regulators, and to self- regulators;

· Remediation, including dismissing or appropriately disciplining wrongdoers, modifying and improving internal controls and procedures to prevent recurrence of the misconduct, and appropriately compensating those adversely affected; and

· Cooperation with law enforcement authorities, including providing the SEC with all information relevant to the underlying violations and the company’s remedial efforts.

View the August 5, 2009 speech by Robert Khuzamii, the SEC's Director of the Division of Enforcement, to the New York City Bar: "My First 100 Days as Director of Enforcement" here.

View the SEC's "Seaboard Report," Release No. 44969 and Accounting and Auditing Enforcement Release No. 1470 (both dated October 23, 2001) Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions here.
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