SEC Whistleblower Program

What is the SEC Whistleblower Program?

In 2010, after a series of corporate scandals had shuttered companies and devastated countless individual investors, the country debated how to break the cycle of fraud and corruption. Financial watchdogs agreed on two fundamental truths: the investor protection status quo was failing and law enforcement could not effectively and efficiently police the marketplace without the help of individuals with actionable intelligence.

In response, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, one of the most sweeping financial reforms since the Great Depression. Under the statute, the SEC developed a revolutionary bounty program, now known as the SEC whistleblower program, through which eligible whistleblowers receive significant monetary awards, employment protections, and have the ability to report anonymously.

Knowing the Eligibility Rules for the SEC Whistleblower Program is Critical

The SEC receives thousands of whistleblower tips each year and many are denied outright because the submissions fail to meet the eligibility requirements of the SEC whistleblower program. It really is mission critical to understand the eligibility provisions and their nuances.

For the most part, qualifications are pretty straightforward. Any individual or group of individuals, regardless of citizenship, can participate in the SEC whistleblower program, potentially earning significant SEC whistleblower awards. It doesn’t matter whether a whistleblower is a corporate insider or outsider.

Key Eligibility Factors:

The information must be original, something not known to the SEC.
The tip must be provided voluntarily, before the agency has reported the information.
The whistleblower’s submission must lead to a successful enforcement action resulting in monetary sanctions exceeding $1 million.

SEC whistleblowers may learn about wrongdoing through their business relationships or social interactions. This information can be derived from whistleblowers’ independent knowledge or their independent analysis of publicly available information. While being an eyewitness or having evidence of a securities violation is ideal, it is not required.

Can You Report Anonymously?

The SEC Whistleblower Program allows all whistleblowers to protect their identify and remain anonymous.

To report anonymously, a whistleblower must be represented by an attorney, and needs to provide the attorney a copy of the whistleblower submission signed under the penalty of perjury.

Learn more about Anonymous Whistleblower and how to protect your identity.

Who Can Be A Whistleblower?

Pretty much anyone.

While most of our clients are in senior roles at financial firms and public companies, this is certainly not a requirement. Does a whistleblower need to be an employee of the company engaged in securities fraud? Absolutely not. As we addressed in an article on ZeroHedge, “Even Bartenders and Personal Trainers Can Receive Whistleblower Awards From The SEC.”

Gatekeepers, attorneys, accountants, internal compliance and risk executives, even culpable individuals can participate in the SEC whistleblower program. In many cases, these insiders may have high level information on wrongdoing that is causing serious harm to investors. While certain individuals, employees and outside contractors may be excluded from participation, of course, there are exceptions.

For instance, a generally ineligible whistleblower may be eligible to participate in the SEC whistleblower program if the individual reported internally and the company failed to appropriately address the problem after 120 days; if the misconduct the whistleblower reports is so significant that it would cause serious harm to the company or investors; or if the whistleblower is aware that the company is interfering with an internal or government investigation.

Helping gatekeepers and other whistleblowers can be tricky. We know this because we represented the first corporate officer to receive an SEC whistleblower award. In these and other complex areas of eligibility, such as when a whistleblower has potential culpability, it is always a good idea to consult with a whistleblower attorney.

Remember, by design, the SEC whistleblower program deputizes virtually every company employee, outside vendor, customer and citizen to serve as the Commission’s eyes and ears.

Examples of Eligibility for the SEC Whistleblower Program

Do you live in London or work in Iceland or did you pick up some concerning information on a recent vacation in Morocco? You can reside in, or be a citizen of, any country in the world and be an SEC whistleblower. In fact, in 2014, the Commission paid out more than $30 million to a whistleblower living in a foreign country. And, every year, more than 10% of SEC tips come from foreign nationals.
Do you know of an SEC violation that hasn’t happened yet, but the scheme will be rolled out soon? Report it. If you have a good faith belief that a violation of the securities laws is about to occur, that qualifies.
Is the SEC already in the know? This is tricky. The SEC whistleblower program is designed to encourage prompt reporting and, as such, rewards whistleblowers who report original information. Bottom line, if possible, report early and report valuable information that supplements an ongoing investigation. We have had clients supplement existing whistleblower reports and they received monetary awards. This can happen when subsequent whistleblowers provide information that significantly contributes to the success of the enforcement action.

Eligibility Calculator

To help potential whistleblowers understand the gating principles surrounding their ability to participate in the program, we’ve created a confidential and personalized eligibility calculator. Individuals may find this is a comfortable way to learn more about the program without having to provide potentially identifying information. As this tool is illustrative and every case is unique, it’s a good idea to consult with a lawyer for a definitive understanding of eligibility.

Surveys say that while most professionals would report wrongdoing with protections and monetary incentives, many don’t know about the SEC Whistleblower Program or if they are eligible to participate. Do you?

FAQs

Does a person qualify for the SEC Whistleblower Program if they uncover securities violations while working in a compliance department?

Usually, people working in a compliance department or persons with legal or compliance responsibilities are not eligible for a whistleblower award, if the information they wish to report was obtained in the course of their work. However, there are three exceptions to this rule: 1) if reporting 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; 2) if the relevant entity is engaged in conduct to impede an investigation of the misconduct; or 3) if the whistleblower reported the possible securities violations internally and the company didn't take appropriate action within 120 days. If you are a compliance professional, contact our specialized attorneys to determine whether one of the eligibility exception applies in your case or watch our related Thomsen Reuters webinar series.

What happens to SEC whistleblower eligibility if an individual reports information protected by the attorney-client privilege?

Information obtained through attorney-client privileged communications generally cannot be used to support a whistleblower award, and disclosure of such privileged information to the SEC may also violate professional ethics rules. However, there are exceptions to this rule, including: 1) if disclosure of the information is permitted under SEC attorney conduct rules; 2) if disclosure of the information would prevent substantial harm, ongoing fraud, or rectify misconduct involving use of attorney services; or 3) the asserted privilege does not apply or no longer applies. Since the SEC Whistleblower Program is designed to encourage reporting, but not to undermine core legal protections, like the attorney-client privilege, the Commission will want compelling evidence that an exception to the rule applies. Otherwise, the Commission will not use privileged information and deny any future application for award.

Due to the complexity of this rule and high stakes, before reporting to the Commission, attorney whistleblowers are encouraged to review our articles in Corporate Counsel, "Balancing Conscience and Confidentiality for Attorney Whistleblowers" and Law360, "Approaching Attorney Whistleblowing Post-Dodd-Frank."

Will an internal whistleblower receive an SEC whistleblower award if the company's internal compliance systems already started an investigation?

Yes, an internal whistleblower remains eligible if they report the possible securities law violations to the company first and then provide the same information to the SEC within 120 days. If the SEC's successful enforcement action based on that report results in monetary sanctions collected above $1 million, the original internal reporting date counts as the filing date for the sec program. And, as a bonus, internal whistleblowers will get credit for any information learned during the investigation and reported by the company to the Commission.

How does a successful enforcement action by other law enforcement authorities affect a whistleblower award?

Under the Dodd-Frank Act, eligible whistleblowers may receive monetary awards for SEC and related actions. If the information leads to a successful proceeding by other government agencies or regulatory entities, the Commission can grant an award based on the monetary sanctions collected in those cases as well. The key prerequisite is that the Commission's enforcement action exceed $1 million. The monetary sanctions in the qualifying related actions can be of any amount.

Will the Commission deny a whistleblower submission if the person unreasonably delayed reporting the securities fraud?

While the exchange commission incentivizes early reporting and penalizes delayed reporting, it doesn't deny applications for award based upon unreasonable delay. However, it does consider timing a key factor in determining the award percentage based on the specific facts. If a person saw possible securities violations and waited years to act, the SEC determines if the delay was a negative factor that should reduce the final whistleblower award. In practice, unreasonable reporting delays are among the most common reasons the SEC reduces whistleblowers' awards.

Another important reason not to delay reporting possible securities violations to the SEC is that only the first whistleblower to report to the SEC will be eligible to receive an award, unless subsequent whistleblowers are found to have significantly contributed to the success of the enforcement action. Even if cases where whistleblowers meet this higher standard, the Commission regularly grants smaller awards to later whistleblowers.

Equally important, while SEC whistleblowers can report possible violations regardless of when they occurred, it is rare for the SEC to investigate misconduct that is more than 5 years old. In these older cases, evidence tends to have dissipated, and the applicable Statute of Limitations prevents the Commission from bringing an enforcement action seeking civil penalties.

So, delayed reporting can be very costly.

What occurs during the awards claims process if a whistleblower wants to appeal the SEC's award decision?

If the Claims Review Staff issues a Preliminary Determination that a whistleblower disagrees with, they can file a request for reconsideration with the Commission. Then, if a whistleblower disagrees with the Commission's final order, they can file an appeal in the United States Court of Appeals for the District of Columbia or in their local federal appellate court. When whistleblowers consider challenging the SEC's award decision in federal court, they should remember that the process can take several years and will involve additional legal expenses. In the end, whistleblowers always have the right to challenge SEC award decisions in federal court and obtain judicial review of the agency's final orders.

Is a whistleblower award possible for a previously closed investigation if new original information is provided?

Yes, if a whistleblower reveals information that causes the Commission to re-open an ongoing examination or a previously closed investigation, they may qualify for a whistleblower award. The SEC Whistleblower Program values original information, based upon independent knowledge or independent analysis, that leads to a successful SEC action or a covered action settlement.

How does the SEC Whistleblower Program work to keep the whistleblower's identity confidential?

The whistleblower program allows individuals to report anonymously, as long as an attorney represents them. The attorney serves as an intermediary between the whistleblower and the Commission. As a result, since the Commission doesn't know the identity of these whistleblowers, it can't disclose their identities during the investigation or when the Commission must produce documents during an administrative or court proceeding.

As an additional layer of protection, we take extra measures to further protect our clients' anonymity, including carefully considering where to file their whistleblower submissions, strategically limiting the information and materials provided to the SEC, and establishing secure, encrypted channels through which they can communicate with the Commission and the legal team.

What are the consequences of making false statements during the whistleblower process?

The Dodd-Frank Act does not protect individuals who provide false statements or documents. Making false statements to the SEC, other federal law enforcement, or self-regulatory organizations during an investigation or related litigation may lead to criminal charges and the denial of a whistleblower award.

Resources

SEC Whistleblower Program – Requirements & Eligibility

With few exclusions or qualifications, any individual or group of individuals, regardless of citizenship, can participate in the SEC whistleblower program, potentially earning significant SEC whistleblower awards.