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New Whistleblower Law: No Internal Reporting Needed for Reward

By Cynthia Hsu, Esq. on June 01, 2011 | Last updated on March 21, 2019

A new whistleblower law has corporations on high alert. The new SEC rule, part of the Dodd-Frank Act, gives whistleblowers the ability to collect up to 10-30% of penalties over $1 million that the SEC fines their company, even if they decide to bypass a company's internal reporting system.

The SEC voted 3-2 to pass this new rule. The rule specifically does not require a whistleblower to go through an internal reporting system, which many corporations had pushed for, reports Reuters.

The SEC, however, made the rule so that the whistleblower is still eligible for the monetary reward if they make an internal report, and if the company then reports to the SEC.

There is also another incentive that would give the whistleblower a higher reward if they report internally, but the whistleblower would only be protected from retaliation if they also make a report to the SEC, reports Reuters.

For many corporations - and corporate in-house attorneys - this new rule is not necessarily good news. While it rewards whistleblowers for doing the right thing by reporting suspected fraud or activity, it also seems to go against the internal reporting systems that many companies have put in place.

"Not informing the company of a potential fraud and waiting for the SEC to act is the equivalent of not calling the firefighters down the street to put out a raging fire," said David Hirschmann, president and CEO of the U.S. Chamber of Commerce's Center for Capital Markets Cooperativeness, in a statement to The Wall Street Journal.

For attorneys and corporations concerned about this new rule, enhancing or adding incentives to internal reporting mechanisms may be needed. Though, it will be difficult for companies to compete with the multi-million dollar rewards that the SEC will be dishing out to potential whistleblowers.

The new whistleblower law will go into effect about 60 days after it is published in the Federal Register, according to Reuters.

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