The SEC recently awarded $1.5 million to an internal compliance employee for reporting violations of the federal securities laws. The award was made under the whistleblower provisions of Dodd-Frank Wall Street Reform and Consumer Protection Act.
Under the Act, whistleblowers collect 10%-30% of SEC fines above $1 million resulting from original information they provided. The submission can be made anonymously, and the whistleblower’s identity remains confidential even after an award, as was the case with the recent award -- even the company’s name is not disclosed in the award order.
In the debate leading up to the passage of the Act, corporations strongly opposed the whistleblower provisions because, they said, it would encourage employees to ignore wrongs so they can collect whistleblower awards, and who has better information than compliance officers? While this argument has theoretical merit, every corporation has a compliance program, even ones that engaged in massive frauds, from Enron to the countless banks and other companies pursued by the government or sued privately for wrongdoing exposed during the financial crisis. For reasons too obvious to belabor, internal compliance programs are inherently conflicted, and the Dodd-Frank whistleblower rules are a long-overdue recognition of this reality.
Although anyone can be a whistleblower, special rules apply to compliance personnel. This is because the rules seek to attract whistleblowers without undermining the purpose of a compliance department -- to allow the company itself to uncover and correct problems.
In short, the rules say that compliance personnel, and anyone learning of a violation through a company’s process for uncovering and investigating violations, and independent accountants, are not considered whistleblowers.
There are, however, important exceptions, and these exceptions arise often. Indeed, the exceptions will usually be met automatically under the same facts that makes for a good whistleblower submission to begin with. The exceptions are: (i) if the whistleblower has a reasonable basis to believe that disclosure to the SEC is necessary to prevent conduct likely to cause substantial injury to the financial interest of the entity or investors; or (ii) if the whistleblower has a reasonable basis to believe that the entity is doing things that will impede an investigation of the misconduct, such as, for example, covering up or destroying evidence.
Even if these exceptions are not met, the SEC wants to hear from a compliance employee if they reported the issue to relevant supervisors or other compliance/audit/law personnel and 120 days passed, or before 120 days if the employee thinks the higher-ups already knew.
In the recent award, the SEC found that the first exception applied to the compliance employee. The $1.5 million award sends a strong message to corporations: your compliance program must do more than go through the motions.
Andrei Rado, Esq.
One Pennsylvania Plaza, 49th Fl.
New York, NY 10119
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