BoardAndFraud

Tipsters – SEC Adds Clarity, Efficiency and Transparency to Its Whistleblower Award Program

Background

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 21F to the Securities Exchange Act of 1934 (the “Exchange Act”), establishing the Commission’s whistleblower program.  Among other things, Section 21F authorizes the SEC to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions over $1 million.

Awards must be made in an amount equal to not less than 10 percent, and not more than 30 percent of the monetary sanctions collected in the covered SEC action and certain related actions.  The amendments clarify that the form of an action—e.g., settlement agreements, deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs)—will not affect whether the action is a covered action or a related action.  The amendments also codify the Commission’s historical approach to determining whether an action is a related action, including clarifying that a law-enforcement or separate regulatory action does not qualify as a “related action” if the Commission determines that there is a separate award scheme that more appropriately applies to such law-enforcement or separate regularly action.    

The SEC’s whistleblower program was created to incentivize individuals to report high-quality tips to the Commission and assist the agency in its efforts to combat wrongdoing and, as a result, better protect investors and the marketplace. Since the program’s inception ten years ago, whistleblowers have significantly impacted the Commission’s enforcement efforts and protection of investors. Original information provided by whistleblowers has led to enforcement actions in which the Commission has obtained over $2.5 billion in financial remedies, most of which has been, or is scheduled to be, returned to harmed investors.

The SEC has awarded approximately $523 million to 97 individuals since the program began, and it has worked over the years to improve the program’s efficiency and increase incentives for whistleblowers. In the past three and a half years, the agency has made the five top largest awards in the program’s history – two at $50 million, and one each at $39 million, $37 million, and $33 million. It has also increased the pace at which it has been processing claims and making awards.

This year, even with the challenges presented by COVID-19, the Commission has processed more claims than in any previous year.

Tips and Hotlines

As the 2020 ACFE Report to Nations chart shows, most occupational fraud is detected by tip. How are tips received? Many that I talk to believe most tips come through an ethics hotline. Surprise! The 2019 Global Business Ethics Survey found that more reports of misconduct were made to direct supervisors (a median of 51 percent) than hotlines (6 percent). So are we training those supervisors on how to deal with a tipster or whistleblower? Do you have a culture where Tipsters don’t trust the reporting system? Read how to win them back.

Thwarting fraud is a never-ending battle and requires a good fraud risk management program that is continuously evaluated. The table below is from the ACFE’s 2020 Report to the Nations and represents how occupational fraud is initially detected.

Updates

On Wednesday, September 23. 2020, the SEC voted to adopt amendments to the rules governing its whistleblower program.

According to the SEC, the amendments are meant to “provide greater transparency, efficiency and clarity, and to strengthen and bolster the program.” The amendments were proposed for public comment in June 2018 and have been adopted with some changes.

Highlights

Award Determinations

The amendments (i) add Exchange Act Rule 21F-6(c), which provides a presumption that meritorious claimants will receive the statutory maximum amount, for awards $5 million or less, where none of the negative award criteria specified in Rule 21F-6(b) are present, with certain exceptions; (ii) amend the definition of “action” to allow awards based on deferred prosecution agreements and non-prosecution agreements entered into by the DOJ or a state attorney general in a criminal case, or settlement agreements entered into by the SEC outside of a judicial or administrative proceeding that address securities law violations; and (iii) codify that a law-enforcement or separate regulatory action does not qualify as a “related action,” if there is a separate award scheme that more appropriately applies. Additional details can be found in the SEC Office of the Whistleblower’s concurrently released staff guidance regarding the process for determining award amounts for eligible whistleblowers.

Definition of Whistleblower

The amendments establish a uniform definition of “whistleblower” that will apply to all aspects of Exchange Act Section 21F, in response to the Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers (details here).

Amendments

The amendments (i) allow for a permanent bar of any applicant from seeking an award after that applicant has submitted three frivolous award applications; and (ii) allow for a summary disposition procedure for certain common denials.

The amendments also clarify and enhance certain policies, practices, and procedures in implementing the program, including allowing the waiver of Tip, Complaint or Referral (TCR) filing requirements if a whistleblower complies with the requirements within 30 days of (i) first providing the information; or (ii) first obtaining notice of the TCR filing requirements. 

The amendments are effective 30 days after publication in the Federal Register.

UK

Soon all public and private organizations in the EU with more than fifty (50) employees will soon be required to comply with a new EU Whistleblower Protection law. Are you ready? Read more here.

Closing

Although many are required to have a hotline, they may not be as effective as you think. They may even give the board and senior management a false sense of security.

Triaging an allegation of fraud is critical. This is where most fall short. The process that go along with a hotline are necessary in order to have a successful program. To learn more, click here.

I welcome your thoughts, comments, and suggestions.

Stay safe!

Jonathan T. Marks, CPA, CFF, CFE

Trust is a professional hazard. Verify!

Attribution:

ACFE, Buckley, SEC

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