The Securities and Exchange Commission (SEC) recently issued its 2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program.
Per our prior posts, the SEC whistleblower program, which was first launched in 2011, incentivizes the reporting of high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million. Whistleblower awards can range from 10 percent to 30 percent of the money collected by the agency.
This year’s report reveals several interesting trends that can help businesses improve their securities compliance strategies. Below is a brief summary:
Whistleblower Tips and Awards Broke Records
While still in its infancy, the SEC’s whistleblower program appears to be going strong. In fiscal year 2014, the SEC issued whistleblower awards to more individuals than in all previous years combined. In addition, the Office of the Whistleblower received 3,620 whistleblower tips in FY 2014, which represents a more than 20 percent increase in the number of whistleblower tips in just two years.
Monetary awards to whistleblowers are also on the rise. On September 22, 2014, the Commission authorized its largest payout to date, an award of more than $30 million to a whistleblower who provided key original information that led to a successful enforcement action. According to the report, the whistleblower, who resides outside of the United States, provided a tip regarding an ongoing fraud that otherwise would have been very difficult to detect.
Businesses Are Missing Opportunities to Resolve Complaints In-House
The SEC report highlights that more than 40 percent of the individuals who received awards were current or former company employees. Of those, most whistleblowers first raised their complaints internally. They ultimately brought the information to the SEC only after the company failed to take corrective action.
For instance, on August 29, 2014, the Office of the Whistleblower announced its first award to a company employee with audit and compliance responsibilities. According to the SEC, the employee reported the securities violation internally and then reported the violation to the SEC after the company failed to take action within 120 days, which is the required waiting period.
Retaliation Is a Growing Compliance Concern
The SEC brought its first enforcement action under the anti-retaliation provisions of the Dodd-Frank Act in FY 2014. The suit against Paradigm Capital Management alleged that the firm engaged in a series of retaliatory actions after learning that its head trader reported prohibited transactions to the SEC. The Commission ordered the firm to pay $2.2 million to settle the case.
In addition, the SEC has taken a very active role in Dodd-Frank anti-retaliation suits brought by whistleblowers. The agency filed amicus curiae briefs in several suits, arguing against a narrow interpretation of the anti-retaliation employment protections established by the Dodd-Frank Act. The SEC maintains that the anti-retaliation protections should not be interpreted to apply only to individuals who make disclosures directly to the Commission.
The SEC Is Monitoring Confidentiality Provisions
The report notes that the Office of the Whistleblower has been “working to identify employee confidentiality, severance, and other kinds of agreements that may interfere with an employee’s ability to report potential wrongdoing to the SEC.” It specifically cites Rule 21F-17(a) under the Exchange Act which says: “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.” In light of the Financial Industry
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