A Beacon Press and Dominick Sartorio Bulletin: SEC Proposed Whistleblower Rules May Create Conflict

FOR IMMEDIATE RELEASE
D.C., Washington, United States of America (Free-Press-Release.com) April 29, 2011 --

“The SEC’s proposed rules subject hedge fund compliance, legal and audit employees to a Catch-22 of being required to internally report wrongdoing without a legal remedy for retaliation.” stated Dominick Sartorio. Two recent developments have bolstered hedge fund internal compliance programs despite the Dodd-Frank Act Congress passed in July 2010. First, as a result of a recent case, Sullivan v. Harnisch, hedge funds can require compliance personnel to report fraud internally, with no state law remedy if they are fired in retaliation. Second, proposed SEC rules would make compliance, legal and audit employees effectively ineligible for a whistleblower award unless they first report internally and their employer fails to respond, without specifying a federal retaliation remedy. Funds should now adapt a more comprehensive internal compliance programs to incorporate these recent developments, which now add additional pressure on compliance personnel reporting fraud internally. “As a result of this, these employees will now have a strong incentive to downplay an internal report of wrongdoing, or investigate less diligently, to avoid posing a threat to an employer.” Mr. Sartorio also stated.

This unfortunately will also discourage these employees from collecting key information of wrongdoing, when they are best able to collect the information most valuable to an internal investigation or SEC whistleblower case. Furthermore, the lack of a retaliation remedy will empower hedge funds engaged in wrongdoing to fire key employees upon any early internal discovery and report of wrongdoing, both to potentially obstruct an investigation and to further preempt an employee from providing reasonable notice of a whistleblower claim.

Needless to say these two developments leave such employees in a Catch-22 of having to report wrongdoing internally without any clear defined state or federal remedy for retaliation. Over the long run, this will harm internal compliance programs by discouraging employees from providing any meaningful internal reports or investigations of wrongdoing to avoid being fired in retaliation with no remedy. Perhaps by clarifying that these employees have a meaningful remedy against any such retaliation, the SEC would certainly further bolster internal compliance programs and empower these employees to do their jobs more diligently and effectively.


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