The U.S. Securities and Exchange Commission (the “Commission”) has reported to Congress that its Whistleblower Incentives and Protections program continues grow, not only in terms of the number of tips received and the number of significant awards granted per year, but also in terms of the number of actions brought to protect whistleblowers. In its newly-released 2016 Annual Report to Congress on the Dodd-Frank Whistleblower Program (the “Report”), the Commission is sending a clear message that its Office of the Whistleblower (the “OWB”) welcomes whistleblower tips from around the world about potential violations of the federal securities laws, that the Commission will vigorously protect whistleblowers from retaliation, and that the OWB will grant substantial awards to whistleblowers who provide the Commission with information and cooperation that enables the Commission to aid harmed investors and obtain sanctions through enforcement actions.
Background
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), Congress amended the Securities Exchange Act of 1934 (“Exchange Act”), adopting Section 21F, entitled Securities Whistleblower Incentives and Protections.1 To implement Section 21F, the Commission adopted rules under the Exchange Act that became effective on August 12, 2011.2 In 2011, the Commission also established the OWB as a separate office within the Division of Enforcement to administer and enforce the provisions of the Securities Whistleblower Incentives and Protections program (the “Program”). Pursuant to Section 924 of Dodd-Frank and Section 21F(g)(5) of the Exchange Act, the OWB issued its annual report for FY 2016 on November 15, 2016.
Increase In Number of Tips
According to the Commission, in Fiscal Year (FY) 2016, the OWB received more than 4,200 tips from whistleblowers, representing an increase of approximately 40% over the number of tips received in FY 2012 (the first year for which the Commission has data for a full year). 938 tips of the tips received in FY 2016, or 22% of them, concerned corporate disclosures and financials. The Commission received tips from individuals throughout the United States, as well as from 67 foreign countries.
The increase in the number of tips generally is likely a function of several factors. First, the size of the OWB has more than doubled since it was created in FY 2011. Currently, the Office has eleven staff attorneys and six other staff members in addition to the head of the office. Second, the number of enforcement actions resulting in sanctions exceeding US$1 million, which is the minimum recovery required to support a whistleblower award, has also increased. In FY, 2016, the OWB issued 178 notices of enforcement actions resulting in monetary sanctions exceeding US$1 million, whereas the OWB issued only 139 such notices in FY 2015. As discussed further below, the increase in the number of tips is also likely attributable to the number and size of recent incentive awards and to the OWB’s demonstrated commitment to protecting whistleblowers against retaliation.
Increase in Number of Significant Awards
Six of the OWB’s highest awards since inception of the Program were made in FY 2016. The six highest awards made in FY 2016 were for US$2 million, US$3.5 million, US$5 million to US$6 million, US$17 million and US$22 million. The US$17 million award and the US$22 million award were the second and third highest awards made under the Program, with the highest award of US$30 million having been made in FY 2014.
The Report states that the whistleblowers who have obtained awards have generally provided specific information about individuals or transactions involved and have provided or identified specific documents substantiating their allegations. The orders and press releases issued by the Commission about the largest awards indicate that they have been granted generally where the information provided allowed the Commission to discover substantial, ongoing and complex frauds that otherwise would have been very difficult to detect, where the whistleblowers provided meaningful assistance to the enforcement staff that enabled the staff to conserve time and resources, where there were important law enforcement interests at stake and where the Commission has been able to recover significant sanctions.
Increase in Whistleblower Protection
The Commission took action throughout FY 2016 to protect whistleblowers against retaliation and to redress efforts to impede whistleblowers from reporting securities law violations to the Commission and obtaining incentive awards. In September 2016, the Commission brought its first stand-alone action to address whistleblower retaliation. (The Commission had previously charged a company with retaliation as part of a broader enforcement action.) In addition, the Commission took actions to address several alleged violations of Exchange Act Rule 21F-17(a), which provides that “[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.” The focus of those actions has been on companies’ use of confidentiality and separation agreements that inhibit employees from communicating voluntarily with the Commission or that require employees to waive their ability to obtain monetary awards.
While the Commission seeks to foster an environment in which potential whistleblowers feel comfortable disclosing information about potential violations of the securities laws, there is a risk that by doing so the Commission may be undermining companies’ efforts to comply with their obligations under the Sarbanes-Oxley Act of 2002 (“SOX”). Prior to the adoption of Dodd-Frank, Congress enacted legislation that essentially requires companies to maintain effective internal reporting systems. In response, companies invested tremendous resources to ensure they had robust processes and controls for the internal reporting of potential violations of law. With the Commission focused on the possibility that companies might discourage employees from exercising their rights under Dodd-Frank, a delicate balance will need to be struck between encouraging the sort of internal reporting required under SOX and allowing the kind of reporting out required under Dodd-Frank.
Conclusion
As the OWB’s 2016 Annual Report to Congress indicates, there is a continuing trend of increasing numbers of tips per year and increasing numbers of large awards granted per year. The Commission has also demonstrated its commitment to protecting whistleblowers against retaliation and has reiterated that the Commission is committed to focusing on the use of confidentiality, severance and other agreements that may impede voluntary disclosures to the Commission or collection of incentive awards for qualifying whistleblowing activity.
In light of the foregoing, companies should continue to ensure that individuals involved with enforcing compliance with federal securities laws are well versed in the applicable requirements, that internal reporting processes are functioning in compliance with both SOX and Dodd-Frank, and that robust cultures of compliance are fostered so employees and others are encouraged to report suspected wrongdoing in a timely manner without fear of retaliation. Companies would also be well advised to review their use of confidentiality, severance and other agreements to ensure they do not contain provisions that limit the rights of potential whistleblowers to disclose information to the Commission or to receive incentive awards.
