Purpose and Incentives
The Securities and Exchange Commission (SEC) whistleblower program grew out of provisions of the Dodd-Frank Act designed to protect whistleblowers from retaliation and give them incentives to come forward. Companies and individuals cannot legally take any measures against those who bring information to the SEC regarding possible violations of securities laws.
Furthermore, whistleblowers who provide information leading to SEC actions resulting in sanctions of over one million dollars are eligible for awards. The amount of the award depends on the case, and it could be anywhere between 10% and 30% of the total sanctions.
What Types of Tips Does the Program Cover?
Although the SEC whistleblower program covers many different areas, the largest number of tips concern corporate disclosures and financials. The next most common types of tips involve offering fraud and manipulation. Although cryptocurrency only became a specific allegation category in 2018, it is already one of the leading areas for complaints.
Much better established offenses involving insider trading or trading and pricing are next on the list. The Foreign Corrupt Practices Act, unregistered offerings, market events, and tips related to municipal securities and public pensions are also significant areas for complaints.
However, potential whistleblowers with tips that do not fit in any of these categories should not despair. "Other" is larger than any specific category, including corporate disclosures and financials.
How Does the SEC Program Protect Whistleblowers?
The most important protections come from Section 21F(h)(1) of the Dodd-Frank Act. According to Exchange Act Rule 21F-17(a), no person can take actions to prevent another individual from communicating with the SEC regarding possible violations of securities laws. Furthermore, businesses cannot use confidentiality agreements to prevent or penalize this communication with the SEC.
Whistleblowers must report potential violations to the SEC to ensure that they enjoy these protections. Court decisions have held that the Exchange Act's whistleblower protections do not apply when an employee makes complaints within the company instead of filing them with the SEC. In general, we recommend that potential whistleblowers seek outside counsel before initiating any complaints.
What Steps Are Taken to Evaluate Tips?
The Office of Market Intelligence (OMI) considers the merits of tips, complaints, and referrals (TCRs) and sends those that meet its criteria to the SEC. It is important to note that individuals submitting information regarding possible violations of securities laws to the SEC enjoy the whistleblower program's protections even if the OMI does not pass on the information. In order to meet the OMI's criteria, the tip must be sufficiently detailed, come from a credible source, and give the SEC enough time to act within applicable statutes of limitations. Moreover, the OMI must assign the complaint to a specific SEC regional office or enforcement group.
Once the SEC gets the tip, it may decide to open a new investigation. That can take longer when the SEC needs to examine the situation before actually starting the investigation. In other cases, the SEC might use the information provided by the whistleblower in an ongoing investigation. The SEC sometimes has over 1,000 active investigations in progress at once, but many of them will not result in significant awards.
How Does the Whistleblower Award Process Work?
The award process begins when the Office of the Whistleblower (OWB) posts notices of covered actions (NoCAs) for judgments for actions resulting in total awards of over one million dollars. In its fiscal year 2019, the OWB posted 151 such NoCAs. Whistleblowers then have 90 days to file their claims. Next, the OWB reviews claims, and then the Claims Review Staff issues preliminary determinations.
Claimants then have 30 days to request copies of records used to reach the preliminary determination and 60 days to ask for a reconsideration by the OWB. If claimants ask for a reconsideration, additional analysis may be necessary. The process ends with the resolution of appeals and a Final Order on the award by the SEC.