The Employees’ Dilemma: Balancing Internal Reporting, Whistleblowing, and Insider Trading Risks

The Essay examines how recent developments in insider trading regulations and whistleblower reward programs can lead to unintended and counterproductive results of discouraging employees from using internal reporting channels within corporate compliance programs. While the presence of a robust and well-functioning corporate compliance program is a critical factor both in mitigating the level of public enforcement actions against companies and in protecting corporate managers from liability in private litigation, these programs often provide little incentive for employees to report potential misconduct internally. Corporate compliance programs are designed to promote the upward information flow within the company, which is essential for early detection and regulation of corporate wrongdoing at an early stage. However, internal reporting typically offers no monetary rewards and can document an employee’s knowledge of corporate misconduct, increasing their risk of violating insider trading laws—particularly under internal insider trading policies that broadly define prohibited trading activities.

In contrast, employees’ failure to report—without engaging in wrongdoing themselves— are generally disciplined only in extreme circumstances where obvious red flags exist. This employees’ dilemma, where internal reporting may place them at a disadvantage in pursuing external whistleblowing and expose them to greater insider trading risks, calls for attention. Striking a balance between encouraging internal reporting and protecting employees’ interests is crucial for companies to effectively detect and prevent corporate wrongdoing, ultimately enhancing the function of compliance programs.