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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934


Commissioner Kathleen L. Casey

U.S. Securities and Exchange Commission

SEC Open Meeting
Washington, D.C.
November 3, 2010

Thank you, Madame Chairman, and I want to thank the staff as well, particularly the staff of the Division of Enforcement and the Office of the General Counsel for your excellent work on the release before us today.

This is a particularly challenging provision of the Dodd-Frank law to implement because of the important, sometimes conflicting, public policy interests and operational issues at play. It is also a highly significant provision because of the potentially large sums at stake. I think that you all have done a truly outstanding job of not only crafting a release that gives careful thought to the range of relevant legal, policy, and implementation considerations, but of course also doing so under a rather tight statutory timeline. But of course this is nothing new around here, but it’s rather sort of par for the course these days.

One of the substantial policy considerations at issue is the interaction between this new proposed whistleblower bounty program and existing public policy objectives in support of self-policing and self-reporting mechanisms that are important components of a company’s internal compliance regime. Throughout corporate America, companies have spent significant resources to establish internal mechanisms to identify and respond to potential legal violations, including securities law violations. And of course, as has already been mentioned, such efforts have been reinforced by whistleblower mechanisms established under the Sarbanes-Oxley Act of 2002.

Private self-policing mechanisms, like public law enforcement programs, rely to a great extent on the information provided by people with knowledge of potential violations. To the extent that corporate compliance efforts discover and respond to potential violations, public law enforcement resources are freed up to concentrate on the most serious offenses and also those violations that have evaded self-policing mechanisms.

The introduction of this new whistleblower program, if inartfully done, has the potential to reshape the corporate compliance landscape in undesirable ways. Given the amount of money that will be at stake, whistleblowers will have extremely strong financial incentives to circumvent corporate compliance programs in favor of bringing information directly to the Commission. Such incentives could threaten the viability of corporate self-policing and self-reporting mechanisms. If our whistleblower program inadvertently causes a wholesale diversion of information from these established internal corporate compliance channels to the Commission, the law’s broader enforcement objectives might be undermined. Further, the Commission’s Enforcement resources could be seriously taxed if carelessly shaped financial incentives trigger an avalanche of claims.

If most of the incoming tips are high in quality, then we will know that we have done a good job in standing up the new program. However, should many of them prove frivolous, made in bad faith, or simply erroneous, then we will have placed enormous pressure on the Division staff to triage the complaints skillfully.

As noted, the release seeks to highlight, balance, and address these various considerations in order to achieve the whistleblower program’s ultimate objective – facilitating high quality tips that lead to successful enforcement of securities law violations. Nonetheless, the release does continue to seek extensive comment on these and other issues.

In particular, I urge members of the public to share their views with the Commission and staff concerning how the proposed whistleblower program would affect existing legal, audit, corporate governance, supervisory, and compliance systems in order to help the Commission ensure that the adoption and operation of such a rule would not undermine these important functions.

In addition I would highlight just a few other important issues and questions that are in the release and that we seek further comment on to ensure that we have adequately addressed them.

  • Given the powerful financial incentives to file whistleblower complaints, how can we effectively prevent or deter fraudulent or abusive complaints?
  • Should whistleblowers who are civilly culpable in wrongdoing be eligible to receive financial compensation for whistleblowing? Should there be any difference in how such an award is calculated compared to a complaint filed by an innocent whistleblower?
  • How can we prevent the presence of powerful financial incentives from undermining existing relationships of trust, such as those relationships underlying the attorney-client or physician-patient privileges?
  • How should we balance the need to reward whistleblowers with the need to make injured investors whole? For example, if a whistleblower provides us with information about a securities fraud after investors have already lost 75% of their money, does it make sense to reward the whistleblower at the expense of injured investors?
  • Should certain classes of people be ineligible to receive awards under the whistleblower program, such as public officials or even members of the media?
  • And finally, what should be the scope of the anti-retaliation provisions? Are there certain types of whistleblowers who should not benefit from such protection?

Again, the proposing release seeks comment on all of these important questions and considerations. I do hope the public will take advantage of this opportunity to provide the Commission with the information that it needs to create a sensible and effective whistleblower program that will ultimately improve the quality of both private and public law enforcement efforts.

Once again, I’d like to thank the staff – really, again, exceptional job and, I know, a lot of personal sacrifice – in preparing the release. I have no questions.



Modified: 03/15/2011