Sustained Ethical Corporate Culture at Risk From Proposed SEC Whistleblower Rules

NACD details chilling effect in comment letter to the SEC; Internal compliance systems undermined by Dodd-Frank Provision

Dec 20, 2010, 08:49 ET from National Association of Corporate Directors

WASHINGTON, Dec. 20, 2010 /PRNewswire/ -- On Friday the National Association of Corporate Directors (NACD) told the Securities and Exchange Commission (SEC) that unless the whistleblower provisions in the Dodd-Frank Act are substantially altered, the collateral damage to corporate internal compliance programs – and ultimately the ethical culture that companies strive to obtain – could be harmed.

In a formal comment letter submitted on behalf of its more than 10,000 members regarding the SEC's Proposed Rules for Implementing the Whistleblower Provisions, NACD makes clear that as currently drafted, these provisions offer too many incentives for a wide range of potential whistleblowers to ignore a company's existing internal reporting system and instead go directly to the SEC.  Indeed, the enticement to bypass existing corporate compliance infrastructure will substantially damage the very systems that serve as the backbone for ethical corporate culture in companies today.

Given that the proposed rules emphasize rewarding whistleblowers with sizeable bounties, it is likely that a flood of irrelevant complaints will be made directly to the SEC, wasting significant tax dollars in the process.

Specifically, NACD said that rules should clearly exclude all of the following from the definition of "independent knowledge" that would qualify them to receive bounties:

  • Government employees (the proposed rules do not specify exclusions)
  • External and internal counsel (under attorney-client privilege)
  • Independent and internal auditors and company employees working with or for them
  • Any other independent professional advisors retained by a company's board of directors, and anyone providing information to them.

NACD urged that individuals who possess "independent knowledge" must first report allegations or violations via the existing internal compliance system prior to submitting them to the SEC.

"We understand the need to identify violations that are not being detected and addressed within the company; however, the rules as currently proposed may actually undermine the company's ability to address issues," said Ken Daly, president and CEO of NACD.

Importantly, NACD also told the SEC that employers should have the ability to use existing disciplinary measures to respond to employees who circumvent the compliance systems or make false allegations against a company. As the proposed rules are currently written, it may be possible for whistleblowers to enjoy retaliation protections even if their submissions do not qualify under the conditions for a bounty. In turn, this provision opens the door for those who want to make false allegations and cause reputational harm to the company and/or unfairly embarrass corporate employees and leadership.

"There should be more incentive for employees to use their company's internal system first," Daly said. "After all, there is little motivation or reason for a company to build an effective internal compliance system if the corporate employees are not expected to use it and can bypass it at anytime."

About NACD

The National Association of Corporate Directors (NACD) is the only membership organization delivering the information and insights that corporate board members need to confidently navigate complex business challenges and enhance shareowner value. With more than 10,000 members, NACD advances exemplary board leadership. NACD is focused on creating more effective and efficient boards through director-led education and peer forums to share ideas and leading practices based on more than 30 years of primary research. NACD is shaping the future of board leadership. To learn more about NACD, visit

SOURCE National Association of Corporate Directors