The SEC adopted rules to implement the new whistleblower program authorized by the Dodd-Frank financial reform bill.  In a 3-2 vote, following party lines, the SEC adopted the rules over a vigorous defense that the new program will undermine corporate compliance programs by financially rewarding whistleblowers who circumvent existing compliance program reporting requirements.

The whistleblower office receives about 1-2 credible reports every day, according to SEC Enforcement Director Robert Khuzami.  Five staff attorneys have been assigned to the new office, and the new regulations will breathe even more life into this program.  Paying financial rewards to whistleblowers is certainly going to increase complaints, fanned by lawyers seeking to represent whistleblwoers with credible claims.

Even more surprising, the SEC rules authorize compliance officers, lawyers and auditors to report violations and secure financial rewards.  The rationale behind this broad eligibility requirement is contrary to corporate government principles — why create conflicting incentives for performance?

The SEC’s rules require that whistleblowers wait at least 4 months after reporting a complaint internally before they become eligible for a financial reward from the SEC program.  This cooling off period is intended to give the corporation time to examine and respond to the information before it can be reported to the SEC.

The new rules are bound to have a dramatic impact on business operations, internal reporting, remediation steps and internal investigations — navigating this mine filed is just one more significant obstacle in the continuing compliance effort.