On 18 November 2014, the US Securities and Exchange Commission (“SEC”) published its 2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program (“Report”)– a program designed under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) to encourage the submission of information about violations of the securities law to the SEC. In 2014, the SEC received 3620 whistleblower tips– an increase of more than 20% in just two years.
1. OBJECTIVES OF THE WHISTLEBLOWER PROGRAM
The whistleblower program has three main objectives:
- monetary awards (Section 21F) on the basis of a Notice of Covered Action (“NoCA”) to incentivize corporate insiders to reveal sensitive information on possible law violations,
- retaliation protection (“Final Rules”) to prevent a whistleblower from facing retaliation, such as changing of his or her job function, and
- confidentiality protection involving cooperation with other SEC staff to ensure that those who work with whistleblowers understand their confidentiality obligations.
2. RECORD YEAR FOR WHISTLEBLOWER AWARDS
In 2014, the SEC said it made significant progress was made in all of these areas, leading to a dramatic success of the whistleblower program in 2014, especially in the monetary awards section:
- The Commission issued awards to more individuals than in all previous years combined (9 out of 14 overall). The whistleblowers had all provided original information which led or significantly contributed to a successful enforcement action.
- One key whistleblower received an award of 30 million dollars – the Commission’s largest award to date.
The Report emphasizes that companies need to have internal reporting mechanisms in place and that companies must act upon credible allegations of potential wrongdoing when voiced by their employees. Under certain limitations, even internal audit and compliance-related functions may be eligible under the program. They must report the securities law violation internally and then wait 120 days before reporting the information to the Commission.
On June 16, 2014, the Commission brought its first enforcement action under the anti-retaliation provisions of the Dodd-Frank Act, which led to a USD $2.2 million dollar payment to settle the retaliation and other charges. The company was charged with a violation of the anti-retaliation provisions, because after the company had learned that one of its employees had reported potential misconduct to the SEC, the firm engaged in a series of retaliatory actions, including changing the whistleblower’s job function, stripping the whistleblower of supervisory responsibilities, and otherwise marginalizing the whistleblower.
4. EMPHASIS ON INTERNAL REPORTING
In its Report, the SEC emphasizes that the Whistleblower Program was not meant to replace or undercut corporate compliance programs. Instead, the whistleblower program was designed to encourage employees to report internally instances of potential securities violations. By Douglas Tween and Dr. Nicolai Behr (Baker & McKenzie New York)