While it's good to encourage people to report violations of the securities code, providing cash incentives may end up simply burying the SEC in bad tips from those looking for a reward.
The new whistleblower rules allow tipsters to bypass internal reporting process to go straight to the SEC. If a tip results in more than $1 million in fines, the SEC writes the tipster a check for a bit of that money.
The Financial Services Roundtable and the ABA have come out against the arrangement because they want their members to have the chance to address any whistleblower concerns internally before the regulators hear about them.
And the regulators themselves warn that their work of filtering out the good alerts from the junk is going to get a lot harder.
Regardless, for principals of firms, the new rules mean they have to be on their guard now for surprise enforcement actions generated by self-reported tips.
That changes the whole world of compliance. Now activist internal oversight is key. The lawyers helping a firm stay inside the regulations have to be as ruthless about hunting down violations as would-be whistleblowers are greedy for the cash reward.