Issues in Brief

Update on the SEC Office of the Whistleblower

Senior Attorney
December 18, 2012

The Securities and Exchange Commission’s Office of the Whistleblower (OWB) recently issued a report reviewing the activities of its initial year of operations. In addition, OWB Chief Sean McKessy has made public remarks indicating that the SEC has been tracking the conduct of employers whose employees have filed whistleblower complaints with the OWB. The OWB’s activities should be of significant interest to companies that are subject to the jurisdiction of the SEC, because the office may often be processing whistleblower complaints of securities violations that companies have not become aware of through their internal reporting processes, especially hotlines.

Background
As amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), Section 21F of the Securities Exchange Act of 1934 directs the SEC to make monetary awards to whistleblowers who provide original information that leads the agency to successful enforcement actions for violations of the securities laws and regulations where monetary sanctions greater than $1,000,000 are obtained. The whistleblower awards, in turn, are required to range from 10 percent to 30 percent of the monetary sanctions collected. Section 21F also directed the SEC to establish a separate office within the agency to administer the whistleblower program and to report to Congress annually on the OWB’s activities, whistleblower complaints, and the SEC’s response to such complaints. The SEC established the OWB in early 2011 and named Mr. McKessy as its chief.[1]

Annual Report
The OWB’s annual report gives an overview of its various activities during fiscal year 2012 (which ended on September 30, 2012), the tips it received, how those tips are processed, the incentive awards made during the year, and the status of the fund created for the award program. In addition to internal activities such as hiring and training staff and working with Enforcement Division staff to identify and track cases potentially involving a whistleblower, the OWB communicates with whistleblowers that have sent tips, additional information, claims for awards, and other correspondence. The OWB maintains a publicly available hotline for the public to call with questions about the program.[2] It also meets with current and potential whistleblowers and their counsel to provide guidance concerning expectations and follow-up and processes applications for awards. The OWB maintains a website to inform the public about the program and includes two videos by Mr. McKessy that present an overview of the program and information about how tips, complaints, and referrals are handled.

The report further quantifies the tips the OWB received during the year. The most common complaint categories were corporate disclosures and financials, offering fraud, and stock market manipulation. Indeed, as corporate disclosures and financials had the largest proportion of complaints, employees of companies that are securities issuers are certainly frequent participants in the whistleblower program. Perhaps most surprising about the submissions is the breadth of their geographic origin. In addition to receiving submissions from all 50 states, the District of Columbia, and Puerto Rico, submissions came from persons in 49 countries. A sizable number originated in the United Kingdom, Canada, Australia, China, and India.

One other key area addressed in the report concerns the incentive awards made to whistleblowers. Only one incentive award was made during the 2012 fiscal year, but the OWB also posted 143 Notices of Covered Action. These notices are issued for each SEC enforcement action where a final judgment or order has been entered subsequent to the enactment date of Dodd-Frank that resulted in monetary sanctions exceeding $1 million. Whistleblowers can apply for the 10-30 percent awards upon issuance of the notices. The time frame for filing award claims and review by SEC staff and commissioners can be fairly lengthy. Consequently, it is likely that many of the 143 notices will culminate in awards during the current fiscal year.

OWB Chief’s Remarks on Employer Conduct
In October, Mr. McKessy spoke during a webcast for another organization, and remarked that the SEC is focused on and tracking corporate behavior against employees that might constitute retaliation in response to their whistleblowing. He also indicated that the agency is aware that it now has the authority to bring anti-retaliation cases and that it is “actively on the lookout . . . for some of the more aggressive” treatment of whistleblowers. Mr. McKessy has asked enforcement and examination staff to watch for potentially retaliatory conduct by companies, and to include questions about retaliation in exams and investigations. Firms might receive questions from SEC staff about whether employees have complained internally about the alleged wrongdoing that is the subject of whistleblower complaints to the agency. They could also receive requests to provide the personnel files of employees who submitted internal complaints.

Mr. McKessy further indicated that the SEC is paying attention to employment and severance agreements he characterized as “aggressive.” The agency is concerned with those agreements because its whistleblower rules prohibit actions—including employer enforcement of a confidentiality provision in an employment or severance agreement—that could discourage potential informants from approaching the SEC. Likewise, the SEC would not find acceptable any language in such agreements that might suggest that internal reporting is the exclusive means for reporting wrongdoing, rather than reporting externally to a regulatory agency.

Concluding Comment
The OWB’s report, in combination with Mr. McKessy’s remarks, provides important and cautionary information for companies that are subject to the jurisdiction of the SEC. Moreover, the complaints have originated not only in the United States, but also around the world. Mr. McKessy’s remarks reveal an effort on the part of the SEC to ensure that whistleblowers are neither discouraged from submitting complaints to the agency nor subject to retaliation after they have done so. Therefore, companies need to recognize their obligation to disseminate employee policies in which the process for internally reporting wrongdoing is not seen by employees as inconsistent with—or a deterrent to—making complaints to the OWB, and ensure there is no credible fear of retaliation.


Footnotes

[1] In September 2011, MAPI hosted a webinar in which Mr. McKessy described the early activities of the OWB. The webinar recording can be accessed at http://www.youtube.com/watch?v=GICX8ZiZk7I&feature=youtu.be.

[2] The hotline was established in May 2011, and the OWB returned approximately 3,700 calls through the end of fiscal year 2012.


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