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SEC Endorses Doing the Right Thing…Eventually

By Andrew B. Cripe

Publicly traded companies operate in a challenging climate: vast and complex business operations can strain the resources of even the most vigorous compliance programs.  No compliance officer can be in all places at all times.  Effective compliance programs must rely on the willingness and courage of individual employees to step forward in a timely manner with information about potential compliance issues. Unfortunately, this does not always happen.  Employees may withhold information – either for fear of retaliation or fear of exposing their own involvement or culpability or otherwise. As a result, significant compliance issues may only come to light at a time and in a forum that is convenient to the individual reporter but which may frustrate an employer’s ability to take prompt and appropriate corrective action.  

A November 4, 2015 announcement from the SEC further highlights the challenges employers face when encouraging timely internal reports. In that press release, the agency announced that it had awarded “more than $325,000 for a former investment firm employee who tipped the [SEC] with specific information that enabled enforcement staff to open an investigation and uncover the extent of the fraudulent activity.”  What is remarkable about this payment is that it was made to an individual who took his time before reporting the fraud: he waited until after he left the firm before speaking up.  Perhaps recognizing that paying “more than $325,000” to a “corporate insider” who knowingly withheld information about “fraudulent activity” could be perceived as creating a perverse incentive, the agency noted that “the award could have been higher had this whistleblower not hesitated.”  Thus, the agency reasoned that the payment “recognizes the value of the information and assistance provided by the whistleblower while underscoring the need for whistleblowers to report information to the agency expeditiously.

Employers should be ever mindful of the fact that the SEC’s whistleblower or “bounty” program may effectively incentivize employees to withhold information from internal compliance programs, notwithstanding that the SEC may apply a discount to any bounty to a whistleblower who fails to speak up in a timely manner.  Awards can range from 10 percent to 30 percent of any money sanctions collected when those sanctions exceed $1 million. Moreover, the SEC’s recent attack on employee confidentiality agreements, makes clear that an employer cannot require employees to first report potential misconduct internally before reporting to the SEC or other federal agencies.  

Thus, employers face an increasingly challenging task: how to encourage timely internal reporting of potential issues (i.e., before they result in significant enforcement actions or sanctions) when such reporting cannot be mandated and when whistleblowers may actually be financially rewarded for both delay and bypassing internal compliance programs?  The answer will invariably involve a multi-dimensional approach: where employers proactively reach out to solicit employee concerns, monitor employee engagement and satisfaction, regularly and vigorously audit and investigate known risk areas and attempt to align individual employee incentives (e.g., stock grants, options, incentive plan payments, etc.) with the overall goal of ensuring ethical conduct.