The SEC launched its new Office of the Whistleblower Web site on the August 12, 2011 effective date of the whistleblower regulations. The first chief of the Office of the Whistleblower, Sean McKessy, said that the SEC’s whistleblower program embodies a balanced approach designed to aid the Commission by encouraging those aware of misconduct to come forward while at the same time incentivizing those individuals to report their suspicions of misconduct to their companies first so that the companies can take appropriate action to remedy it.

The SEC’s new Web page at www.sec.gov/whistleblower allows people to report a violation of the federal securities laws and apply for a financial award. It includes information on eligibility requirements, directions on how to submit a tip or complaint, instructions on how to apply for an award, and answers to frequently asked questions. McKessy said that securities fraud is not a victimless crime. That is why it is important for people to step forward when they witness an ongoing securities fraud or learn about one that has taken place or is about to occur. The SEC’s new whistleblower award program makes it easier for people to take that step, he said.

In remarks at Georgetown University, McKessy assured the corporate community that the new whistleblower program would bolster, not hamper, the internal compliance systems of companies across the country. The whistleblower program is the first and only such program in the country that makes available a monetary award from the government to an individual who reports possible wrongdoing internally. The SEC’s program extends significant benefits to individuals who report internally, enhancing the opportunity for a whistleblower award, and possibly an award at the higher end of the allowable range.

Under the SEC’s rules, employees who report wrongdoing internally first and then report the wrongdoing to the SEC within 120 days benefit in two significant ways. First, they will be deemed to have reported the information to the SEC on the date they reported internally. This preserves their place in line in terms of when information was provided to the SEC. Second, the employees who report internally first receive the benefit of all the information uncovered by the company in connection with its own internal investigation of the alleged wrongdoing.

McKessy emphasized that these are not hypothetical or inconsequential benefits because an employee who reports information internally that might not have warranted an SEC investigation could become eligible for an award if the internal investigation uncovers information that leads to an investigation. He described a scenario in which, based on an employee’s experience, he or she knows but does not have sufficient proof to substantiate that something is amiss with the company’s accounting for a certain matter. That gut feeling may not be sufficiently timely, specific and credible to cause the SEC to open an investigation, McKessy noted, but if the employee were to report that gut feeling internally, and the company’s subsequent investigation were to uncover specific, timely and credible information that is reported to the SEC, the reporting employee would then be eligible for an award.

The employee gets the benefit of all of the facts and details uncovered and reported to the SEC by the company in connection with its internal investigation of the issue. The percentage of the award to the employee could be increased based on the enhanced quality and value of the information uncovered by the company’s internal investigation. The rules also require that cooperation with internal compliance programs be considered as a positive factor that could increase a whistleblower award, while interference with such programs are a negative factor that could decrease an award.

In McKessy’s view, the benefits to those who first report internally offer a great opportunity for companies and their compliance officers. Far from undermining internal compliance programs, he said, the SEC’s whistleblower program should empower internal compliance personnel to advocate for stronger and more transparent internal compliance programs.

The SEC rules leave it to the employee to decide whether to first report internally or to contact the SEC. Those companies that ensure that their employees view internal reporting as a viable and credible option to address possible securities law violations are more likely to have the wrongdoing reported internally first, he said.

McKessy also addressed the concern that by failing to adopt an absolute exclusion on attorneys, auditors and compliance officials, the SEC rules encourage these individuals to abandon their professional responsibilities in favor of a potential bounty award. The purpose of the whistleblower award program is to add a tool to the SEC’s arsenal to identify wrongdoing, prevent or stop it and, if appropriate, punish those responsible. By providing for the possibility of a whistleblower award to attorneys, compliance officials and auditors, he said, SEC regulations recognize that the Commission may in some narrow circumstances need these individuals to come forward in order to accomplish that goal. In these narrow circumstances, these individuals can and should be eligible for an award, he said.

A monetary incentive is provided to attorneys, auditors and compliance officials to report to the Commission only when it is necessary to prevent imminent or ongoing misconduct or the misconduct has been identified and reported, but not remediated in a timely fashion, McKessy noted. With regard to external auditors, their eligibility is limited to the narrow circumstance when they have a reasonable basis to believe that their employer (the audit firm) failed to make the required disclosures of the audit client’s wrongdoing under Section 10A of the 1934 Act. In these rare instances, the eligibility for an award is limited to the reporting of misconduct that has been detected but not reported to the SEC.