On July 19th 2022, the SEC paid yet another multi-million dollar whistleblower award under its whistleblower program, bringing the total paid to whistleblowers over $1.3 billion.
When the program was introduced over a decade ago, some feared that the program would encourage compliance personnel and lawyers to abuse their positions and report the very clients they represented. However, it seems that these fears were never borne out given the relatively small amount that has been paid out to compliance whistleblowers over the history of the program.
When it comes to employees who work in compliance or internal audit, these individuals are only eligible for whistleblower awards if one of the following three circumstances apply:
- They have reported the information to the audit committee, chief legal officer, chief compliance officer or a supervisor, and 120 days has passed;
- The whistleblower reasonably believes immediate reporting is necessary to prevent ‘substantial injury’ to the entity of investors; or
- The whistleblower reasonably believes the company is engaging in conduct that will impede an investigation of the misconduct (e.g., destroying evidence).
Since the inception of the SEC whistleblower program, there have been only two notices of award that have mentioned the fact that the whistleblower was in a compliance role.
The first award to a person in a compliance role was in 2014. At the time, Sean McKessy, Chief of the SEC’s Office of the Whistleblower noted that it was the first time an individual in audit or compliance had been paid under the program. McKessy remarked that: “Individuals who perform internal audit, compliance, and legal functions for companies are on the front lines in the battle against fraud and corruption.”
The SEC noted that the whistleblower had qualified by reporting the violation to the appropriate person within the corporation, and subsequently reported the information to the SEC when the company failed to take action. McKessy remarked, “individuals may be eligible for an SEC whistleblower award if their companies fail to take appropriate, timely action on information they first reported internally.” While the award was important in marking a milestone, the award amount was only $300,000, which is far below the ~$5 million average award amount.
The second award to a compliance employee was in 2015. While the Office of the Whistleblower was slightly more cryptic when describing the reasons for the award, it appeared to hint that the exception in this instance was the one reserved for people who report securities violations to prevent “substantial injury’ to investors. Andrew Ceresney, Director of the SEC’s Division of Enforcement stated, “[w]hen investors or the market could suffer substantial financial harm, our rules permit compliance officers to receive an award for reporting misconduct to the SEC . . .This compliance officer reported misconduct after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it.” The whistleblower in this instance was awarded $1.5 million.
Since then, there has been a notable absence of awards mentioning compliance personnel. This may simply be an effort to better protect the identity of whistleblowers, or it may be that compliance personnel are reluctant to walk the tightrope of SEC rules for qualifying for an award.