On April 22, 2015, the U.S. Securities and Exchange Commission (SEC) issued its second whistleblower award to an employee with internal audit or compliance responsibilities. The recipient of the award is a compliance professional who stands to receive between $1.4 million and $1.6 million.1 According to the SEC, this compliance officer was eligible for the award, despite his or her role within the company, because he or she provided information that thwarted imminent and substantial injury.
The SEC’s Whistleblower Program was created under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act2 (“Dodd-Frank Whistleblower Act”) and provides monetary awards to persons who provide original information related to violations of securities laws if the information leads to an enforcement action resulting in more than $1 million in monetary sanctions. “Original information” is defined as information “derived from the independent knowledge or analysis of a whistleblower”3 but generally excludes any information obtained by an “a[n] employee whose principal duties involve compliance or internal audit responsibilities.”4 The whistleblower in this matter was a compliance officer of the company, but the information he or she provided came within an exception to Rule 21F, the rule under the Dodd-Frank Whistleblower Act that provides incentives and protections for whistleblowers.
The pertinent exception allows a complainant’s information to be treated as original information if he or she has “a reasonable basis to believe that disclosure of the information to the Commission is necessary to prevent the relevant entity from engaging in conduct that is likely to cause substantial injury to the financial interest or property of the entity or investors.”5 The compliance officer involved the SEC after he or she became aware that “responsible management” of the company knew of the misconduct and potential harm to investors yet failed to take action to prevent the harm. The Director of the SEC’s Division of Enforcement, Andrew Ceresney, explained that, in this type of situation, a compliance officer is eligible to receive a whistleblower award for reporting misconduct.6
SEC investigations, once initiated, are conducted privately. Facts are developed through inquiries, interviews, and examination of records, trading data and other information. Witnesses may be compelled, by subpoena, to testify and produce books, records and other relevant documents. Common violations leading to investigations include misrepresentation or omission of important information about securities, manipulating market prices of securities, stealing customers’ funds or securities, violating broker-dealers’ responsibilities to treat customers fairly, insider trading, or selling unregistered securities, to name a few.7
Under the Whistleblower Program, the SEC is authorized to award between 10% and 30% of the total monetary sanctions collected as a result of a successful enforcement action.8 The percentage awarded in this action was undisclosed, but the amount of the award ranged from $1.4 million to $1.6 million, indicating just how substantial the sanctions imposed on the whistleblower’s employer may have been.9
This award signals a continued trend by the SEC to aggressively investigate and enforce U.S. securities law. Companies, therefore, should closely examine compliance policies and procedures and ensure proper training of responsible management personnel to stave off costly consequences. Most importantly, companies need to closely examine their reasons for not self-reporting significant issues to the SEC and/or taking prompt, visible remedial action that assuages concerns on the part of compliance staff regarding the company’s response to the issue.