On November 15, 2018, the Securities and Exchange Commission (“SEC”) released its annual report to Congress (“Report”) on the Dodd-Frank Whistleblower Program (the “Program”), under which eligible whistleblowers may receive awards of between 10% and 30% of the sanctions collected in actions brought by the SEC and related actions brought by other authorities. The past year has been historic for the Program, both in terms of the number of whistleblower tips and the dollar value of whistleblower awards. In Fiscal Year 2018, the SEC awarded more than $168 million to 13 whistleblowers, more money than it had awarded in all prior years of the Program combined. This FY2018 total included the SEC’s largest awards to date, including an $83 million award shared by three individuals, and a nearly $54 million award shared by two individuals.
Citing whistleblower confidentiality, “an integral component” of the Program, the SEC refrains from disclosing any information that could reasonably be expected to reveal the identity of a whistleblower. Nonetheless, the Report reveals certain trends that can be instructive to companies seeking to prevent and detect potential violations of the securities laws and to mitigate penalties that may result from inadvertent violations.
- Since the Program was created in 2011, whistleblower tips have generated more than $1.7 billion in total monetary sanctions, including disgorgement of more than $901 million of ill-gotten gains and interest
- Since 2011, the SEC has awarded more than $326 million to 59 whistleblowers.
- FY2018 included the three largest awards ever and half of the ten largest awards ever granted
- Approximately 69% of FY2018 award recipients were current or former insiders, an increase over last year.
- Highlighting the importance of internal compliance programs, of those who were current or former employees, nearly 83% represented that they had filed internal reports or understood that their supervisors or relevant compliance personnel were aware of the alleged wrongdoing before submitting a tip to the SEC.
- The remaining whistleblowers receiving awards were investors, professionals working in the same or similar industries, individuals with specific market expertise, or individuals with personal relationships with the defendants.
- Given the objective of Dodd-Frank to encourage reporting to the Commission, the Court found that reserving retaliation protection under that law for individuals who so report would be consistent with Congress’s aim while not disrupting protections that may be available under other laws, including Sarbanes-Oxley.
- The SEC will continue to target companies and individuals who retaliate against whistleblowers or attempt to impede whistleblowers from communicating with the Commission.
- To date, the Commission has brought 12 anti-retaliation actions, including three under Section 21F(h)(1), which provides protections for whistleblowers against retaliation, and nine under Exchange Act Rule 21F-17, which prohibits any person from taking any action to prevent an individual from contacting the SEC directly to report a possible securities law violation.
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- In the past year, the SEC received more than 5,200 whistleblower tips, continuing its streak of receiving more complaints each year since the Program began in 2011. This represents a nearly 20 percent increase over 2017 and more than a 76 percent increase in the number of tips it received in 2012. Over the course of the Program, the SEC has received more than 28,000 tips.
- The SEC noted an uptick in tips received in the months following the Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers.
- In FY 2018, the SEC received tips from whistleblowers in 72 foreign countries across six continents. As in FY 2017, the largest number of tips from whistleblowers outside the United States came from Canada, the United Kingdom, and Australia.
- Over the duration of the Program, the SEC has received tips from individuals in 119 foreign countries and has issued 12 awards to individuals who were foreign nationals or living outside the United States.
Proposed Rule Changes
- On July 20, 2018, the SEC released proposed amendments to the Whistleblower Rules, including:
- Prohibiting individuals who submit “false, fictitious, or fraudulent statements” to the SEC or who make repeated frivolous award claims from receiving awards;
- Providing a procedure for summarily disposing of certain categories of claims likely to be denied, such as untimely applications or those for tips that were never used by the Commission;
- Allowing awards based on non-prosecution agreements, deferred prosecution agreements, and settlements;
- Permitting adjustments to particularly large or small awards, though these would still be governed by the 10-30 percent range prescribed by Dodd-Frank;
- Clarifying the definition of “related actions” to prevent potential double recoveries; and
- Modifying Rule 21F-2 to comport with the Supreme Court’s ruling in Digital Realty Trust, Inc. v. Somers.
- The comment period for the proposed rule changes ended on September 18, 2018, and the Commission staff is currently reviewing the comments
As described in the report, whistleblower tips are carefully reviewed and investigated, so the time between an individual submitting a tip and receiving an award may be several years. All indicators suggest that more and more whistleblowers will continue to submit complaints under the Program, particularly as the SEC publicly touts massive awards and legal protections from retaliation for whistleblowers who voluntarily provide original information that leads to successful Commission and related enforcement actions resulting in monetary sanctions over $1 million.
Companies should ensure they have compliance programs in place to prevent and detect potential violations of the securities laws, and to mitigate penalties that may result from inadvertent violations. This can include incentivizing employees to report through internal channels, which allows covered entities the opportunity to investigate and mitigate existing violations, as well as to prevent future violations. In light of the focus on anti-retaliation measures, companies also should assure employees that they will not suffer from retaliation, confirm they have appropriate policies prohibiting whistleblower retaliation, and provide a complaint procedure for any employee who believes he or she has suffered from retaliation. It also remains critical for companies to encourage a culture of compliance and to engage in strong self-policing.