Speech by SEC Commissioner:
Statement at Open Meeting to Propose Rules for Implementing the Whistleblower Provisions of Section 21F of the
Securities Exchange Act of 1934
Commissioner Troy A. Paredes
U.S. Securities and Exchange Commission
November 3, 2010
Thank you, Chairman Schapiro.
Section 922 of the Dodd-Frank Act amends the Securities Exchange Act to provide for a new whistleblower program. Under the program, the SEC is to pay considerable "bounties" — between 10 and 30 percent of the monetary sanctions awarded — to eligible whistleblowers who provide the Commission with useful information concerning a securities law violation that leads to a successful enforcement action.
Establishing the infrastructure to implement the Dodd-Frank whistleblower program is a big challenge. How do we encourage high-quality tips without incentivizing an avalanche of lower-quality submissions that distract the Commission from more productive investigations? How do we efficiently filter out unfounded allegations that seem credible at first glance? How can we best ensure that the information whistleblowers provide us is meaningful, fulsome, and truthful without creating so many procedural hurdles that people do not tip the SEC because it takes too much work or because the forms a person has to complete to submit a tip are too intimidating or confusing? Should a whistleblower who has participated in the alleged securities law violation be eligible for a bounty? Should a person who passes a privileged communication along to the Commission be excluded from receiving an award? How should the Commission ensure that the government's whistleblower program does not undermine the internal compliance programs that companies have set up, particularly post-Sarbanes-Oxley — recognizing that although many corporate compliance programs are very well-designed, some are not?
Within the confines of Dodd-Frank's statutory language, the recommendation before us — which I support — seeks to strike appropriate balances in wrestling with these and other difficult tradeoffs.
As always, I look forward to considering the comments we will receive. Adding to the questions I just posed, the proposing release asks a number of important questions. I would like to underscore two topics that I especially hope commenters will address.
First, I am concerned that the Commission's proposal might not do enough to preserve the important role that corporate compliance programs serve. It would be unfortunate if, as result of the Dodd-Frank whistleblower program, effective corporate compliance programs were thwarted.
What will be the net impact on corporate conduct and legal compliance if individuals bypass a corporation's internal procedures for identifying, investigating, and sanctioning unlawful activity in favor of reporting alleged violations to the SEC to earn a sizable bounty? How might we encourage individuals to take full advantage of a company's compliance procedures so that the company itself is well-positioned to respond to the tip? Indeed, the company may be able to respond in a more timely manner — thus acting more quickly to remedy any misbehavior — than the Commission could given the SEC's many other responsibilities.
Second, I am concerned that the SEC will be inundated with allegations, not all of which will be fruitful for us to pursue. Without question, because of tips we will receive, the Commission will be able to uncover otherwise undetected misconduct. But at least some of the tips that come in will not be of the highest quality because, say, the complained-of conduct is not a securities law violation, even if the behavior is untoward. Further, some allegations may be spurious. However, even such tips demand at least some staff attention because it is difficult to distinguish strong leads from background noise without some follow up. Given the Commission's limited resources, separating the wheat from the chaff when faced with thousands upon thousands of complaints is very challenging.
The Commission is best able to protect investors and promote the integrity of our markets when our enforcement resources are allocated efficiently and we can give proper attention to our well-considered priorities. To rephrase this point as a question: How can the Commission increase the chance that the tips we receive from whistleblowers are limited to the kinds of high-quality leads that are worthy of being actively pursued? We have to be mindful of the opportunity cost of the agency's time and effort.
In conclusion, I would like to join my colleagues in thanking the many members of the staff for your hard work on this difficult rulemaking.