The SEC recently announced that a compliance professional has been awarded $1.4 to $1.6 million for reporting misconduct inside his firm to the SEC. The previous award to a compliance officer whistleblower was $300,000. In both instances, the compliance officer made a report to management, concluded that no appropriate action was taken, and then took the matter up with the SEC. In addition, the SEC has vigorously responded in connection with a retaliation case – awarding $600,00 to a whistleblower victim of employer retaliation.
Key Take Away: A compliance program that effectively results in prompt action being taken to address wrongdoing or missteps is the best protection. The fund’s board should continue to interface with the fund’s chief compliance officer on a regular basis to ensure the compliance officer believes management is responsive to compliance personnel and compliance issues that are brought to management’s attention, and that management fully supports the compliance department.
Summary: The award related to the compliance officer involved a compliance officer who had a reasonable basis to believe that disclosure to the SEC was necessary to prevent imminent misconduct from causing substantial financial harm to the company or investors. When investors or the market could suffer substantial financial harm, the SEC rules permit compliance officers to receive an award for reporting misconduct to the SEC. The compliance officer in questions reported misconduct after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it.
The whistleblower award for retaliation stemmed from a June 2014 enforcement action with $2.2 million in fines. In the matter of Paradigm Capital Management, the SEC found that a hedge fund portfolio manager caused a hedge fund to trade with a broker-dealer (acting as principal) that was under common control with the hedge fund, by virtue of the fact that the portfolio manager was a control person of both the fund and the broker-dealer, absent the requisite client disclosure and consent mandated by Section 206(3) of the Investment Advisers Act. The SEC also found the adviser’s Form ADV to be misleading, for failure to disclose the improper principal transactions. The then head trader of the adviser who placed the inappropriate trades on the portfolio manager’s instructions reported the adviser’s misconduct to the SEC and then informed his employer of his whistleblowing, setting in motion a series of retaliatory actions by the employer. The SEC found that the employer’s retaliation violated Section 21(F) of the Securities Exchange Act, which prohibits any form of discrimination against a whistleblower, as well as Sections 206(3) of the Investment Advisers Act (principal trades without valid client consent) and Section 207 of the Investment Advisers Act (misleading Form ADV disclosure).
By way of reminder, the SEC operates an Office of the Whistleblower. Under the SEC’s whistleblower policies, compliance and internal audit professionals are seen to be on the front lines of addressing compliance matters, but can and (evidently) do become whistleblowers if management’s response proves inadequate.
Officers and directors of firms that have engaged in misconduct are generally not considered eligible for whistleblower awards. However, if a corporate officer (such as the head trader) or director reports information to the SEC 120 days after other responsible officers (particularly compliance officers) fail to take appropriate action, then the SEC is prepared to reward officer/director whistleblowers. By law, the SEC must protect the confidentiality of whistleblowers and cannot disclose any information that might directly or indirectly reveal a whistleblower’s identity.