Since the Whistleblower Rules (Section 21F of the Securities Exchange Act of 1934) went into effect on August 12, 2011, the Securities and Exchange Commission (SEC) has awarded 15 whistleblowers. Payouts have totaled nearly $50 million out of an investor protection fund established by Congress in Section 922 of the Dodd-Frank Act.
Under Section 21F, whistleblowers can only be individuals- including employees, officers or directors of a corporation. Whistleblowers are protected from retaliation whether or not an individual satisfies the requirements, procedures and conditions to qualify for a reward. Organizations may not retaliate against an employee and must state that in their procedures. Employers should provide a method as to whereby an individual can report a potential violation of federal securities laws anonymously. Implementing best practices should include providing a copy of the organization’s whistleblower procedures to all new employees, disseminating the procedures annually to all employees, including officers and directors, posting the procedures to the organization’s intranet site and providing specific instruction on how to report violation of federal securities laws directly to the SEC.
Payment of Awards is generally subject to the following four criteria:
1. Voluntary submission of information
2. Original information
3. Information that leads to successful enforcement
4. The SEC obtains monetary sanctions totaling more than $1 million
Organizations that do not have the appropriate controls in place to identify exceptions and/or do not address and report violations will only place the organization at reputational risk and subject themselves to sanctions. Both the SEC and FINRA require firms to have stringent procedures in place for reporting internal violations and escalating exceptions to compliance officers and senior managers. In addition, employees and officers that carry FINRA licenses may be subject to individual sanctions and could be disbarred from the industry for violations of the federal securities laws. CCOs should review actual cases involving disciplinary actions, as part of the employee training. As a CCO, I saw first-hand how the details of these actions that involved sanctions and/or employees being disbarred from the industry resonated with employees.
If you are considering submitting information to the SEC that could lead to an investigation of your organization, please refer to the Whistleblower Rules in detail at https://www.sec.gov/whistleblower.