The Securities and Exchange Commission has once again shown it will not hesitate to reward compliance officers who report securities law violations—provided they follow the rules.
The Commission awarded a compliance executive $450,000 last month for blowing the whistle, bringing the total amount of whistleblower awards to compliance personnel to more than $2.1 million. The first award given to a compliance employee was in 2014 for $300,000, which was followed by an award of more than $1.4 million given to a compliance professional in 2015.
Compliance officials are on the front lines in the battle against fraud and corruption, and it can be a lonely fight. When they have specific information about significant wrongdoing by their employer, they may be rebuffed, ignored, sidelined, or even fired when they try to do their jobs and stop the violations through internal channels.
Like many whistleblowers, however, they often are the type of people who can’t keep quiet when they see something that’s wrong—which was certainly the case for each of the three compliance officials mentioned above. And while the Dodd-Frank Act requires the SEC and the Commodity Futures Trading Commission (CFTC) to protect whistleblower identities, some details can be gleaned from public documents to help gain insights—and important lessons—from those tipsters who hail from compliance.
- All three compliance officials who received SEC whistleblower awards went to the SEC only after their employers failed to take action to correct, stop, or prevent the wrongdoing.
- Two whistleblowers waited more than 120 days after reporting internally before going to the SEC, as the whistleblower program rules require for a compliance official to be eligible for a reward.
- The whistleblower who received the 2015 award met the exception allowing compliance officials to receive an award if they have a reasonable basis to believe that disclosure to the SEC is necessary to prevent imminent misconduct from causing substantial financial harm to an entity or investors.
- The whistleblower who received the March 30 award “suffered hardships” for making “reasonable efforts to work within the company’s compliance structure,” the SEC said. This likely means the employer retaliated against the whistleblower. When retaliation occurs, the Dodd-Frank Act entitles whistleblowers to reinstatement, back pay, and any other damages the whistleblower suffers as a result.
- The 2014 award to a compliance officer for $300,000 was approximately 20 percent of the amount collected in monetary sanctions. Under the Dodd-Frank Act, the SEC will award whistleblowers 10 percent to 30 percent of the amount collected when sanctions exceed $1 million. The SEC did not make public the percentage share the other two whistleblowers received.
When the SEC set up the whistleblower program mandated by the Dodd-Frank Act in 2010, the Commission recognized some employers may ignore concerns raised by their compliance departments.
For those instances, the SEC created rules—similar to those of the CFTC—that allow compliance personnel and others, such as in-house accountants, to notify the agency of securities law violations and qualify for protection and rewards.
Compliance officials may report allegations of imminent or ongoing wrongdoing to the SEC and qualify for whistleblower protection and rewards if any of the following conditions are satisfied:
- At least 120 days have elapsed since the compliance professional provided the information to the employer’s audit committee, chief legal officer, chief compliance officer (or their equivalents), or the compliance professional’s supervisor.
- The compliance professional becomes aware of wrongdoing that the entity’s audit committee, chief legal officer, chief compliance officer (or their equivalents), or the compliance official’s supervisor already know about and the compliance official waits 120 days after learning about the wrongdoing to report the violations to the SEC.
- The compliance official has a reasonable basis for believing that informing the SEC immediately is necessary to prevent the entity from causing substantial injury to the financial interest or property of the entity or investors.
- The compliance official has a reasonable basis to believe that the entity is engaging in conduct that will impede an investigation of the misconduct.
Compliance professionals, like all whistleblowers, must decide whether they want to keep quiet or speak out when they become aware of securities law violations and see corrections aren’t being made. If they want to stop the wrongdoing or have it investigated, the SEC whistleblower program is an avenue they should consider, but the path should be carefully navigated with the help of experienced counsel.
Erika A. Kelton, a partner at Phillips & Cohen LLP, has represented whistleblowers for more than 25 years. Her cases have set records and helped recover billions. She has been named “Whistleblower Lawyer of the Year” as well as one of the “500 Leading Lawyers in America.” As an expert in whistleblower enforcement approaches, Ms. Kelton has been called on to consult with Congress, federal agencies, and policymakers and legislators in Europe and Asia on the establishment and workings of whistleblower programs.