In the pursuit of enforcement, the Securities and Exchange Commission is empowered to award whistleblower bonuses to compliance professionals. Our team of white-collar, government and internal investigations review a recent formal compliance award of over $ 1 million and offer practical advice on how to defend the interests of companies when the SEC has demonstrated its willingness to dismiss internal compliance staff.
- Compliance professionals only have to wait 120 days to reap the rewards
- The SEC has an appetite to take advantage of insiders
- Best Practices for Conducting Compliance Investigations in the Shadow of an Employee Suspicion
p> On August 27, 2021, the Securities and Exchange Commission (SEC) announced it would pay a collective reward of more than $ 1 million to three whistleblowers who provided information leading to successful enforcement action. All three whistleblowers held compliance roles at the relevant company.
Rule 21F-4 of the Securities Exchange Act of 1934 generally prohibits employees with compliance or internal audit responsibilities, or consultants who have been hired to perform such functions, from being eligible for whistleblower bonuses: ” The Commission will not consider the information to come from your independent knowledge or independent analysis … if you obtained the information because you were … [a]n employee whose main functions involve compliance or internal audit responsibilities. An exception exists, however, if more than 120 days have passed since the whistleblower first reported the information internally or since the employee learned that the information was already known within a company.
The three awards at issue in the SEC order of August 27 fell within this 120-day exception. The first two claimants reported the potential violations internally and then waited over 120 days before contacting the SEC. The third claimant reported the potential violations to the SEC more than 120 days after receiving information that senior management was aware of the alleged misconduct.
Although substantially worded, the SEC order explains why each plaintiff is entitled to payment of a percentage of the monetary penalties levied or to be collected in the covered action:
- Claimant 1 provided the most important and complete information about the alleged misconduct which was found to be vital to the success of the covered action. Applicant 1 also provided “extraordinary assistance” during the investigation.
- Claimant 2 was the first claimant to report to the SEC. The information provided by Requestor 2 served as a framework for the SEC to develop requests for information. Applicant 2 also provided ongoing assistance.
- The information provided by applicant 3 was useful but not as important to the overall success of the action covered as the information from applicants 1 and 2. Applicant 3 also provided ongoing assistance.
While only a handful of whistleblower bonuses have been awarded to compliance staff since the SEC first implemented its whistleblower program, the trend appears to be increasing in recent years. The SEC’s first assignment to a compliance whistleblower was in 2014, the second in 2015, and the third and fourth in 2020.
Key takeaways and best practices
Given compliance staff’s access to sensitive company information and the predominance of sophisticated whistleblower attorneys familiar with interacting with the SEC’s whistleblower office, recent staff whistleblower awards SEC compliance guidelines reflect an agency’s appetite to leverage these insiders as the most knowledgeable, effective, and effective enforcement enablers.
Indeed, the August 27 SEC order reflects that a requesting compliance employee provided extraordinary assistance to staff, presumably by sharing detailed information about the company’s compliance functions and the facts reflecting their violation. intentional. Another requesting compliance employee provided staff with a roadmap for law enforcement document requests.
This argues for the following best practices:
- Compliance programs and their personnel should be designed and executed to anticipate the likelihood that a compliance officer will provide non-privileged factual information to the SEC.
- While compliance employees are often trusted corporate advisers in performing their audit and oversight function in the space between a company and its regulators, it is important to remain vigilant that such personnel may seek, or could be called upon to seek, substantial SEC whistleblower bonuses for reporting suspected misconduct.
- Note, however, that express or implied restrictions on the ability of compliance personnel to share information with the SEC may themselves constitute a violation of securities law under Rule 21F-17 of the Exchange. Act: “No person can take action to prevent an individual from communicating directly with Commission staff about a possible violation of securities law. The SEC has since imposed civil monetary penalties based on confidentiality provisions in separation agreements that violated rule 21F-17 of the Exchange Act.
- Normal and corrective compliance activities should continue, even if a company and its advisers suspect that compliance staff may cooperate with an agency-led enforcement investigation. This is true for two reasons. First, pursuant to Rule 21F-17 of the Exchange Act, neither the SEC’s whistleblower’s office nor the SEC’s Enforcement Division will affirmatively (or even circumstantially) disclose the identity of a whistleblower to a subject of investigation. So, unless a whistleblower has self-identified (to ensure protection against retaliation, for example), a company is left to its compliance functions without necessarily adapting them to the concerns of whistleblowers. . Second, and related, the logic behind Exchange Act rule 21F-4 is to give businesses six months to fill suspected compliance gaps without SEC interference. If businesses interrupt or slow down compliance activities in search of a tip, this may have the unintended effect of encouraging a compliance whistleblower to come forward.
- Unless compliance communications are necessary to formulate the lawyer’s work product or to provide legal advice, compliance employees are generally excluded from a company’s solicitor-client privilege in the course of their work. The very real specter that SEC enforcement can arise from receiving advice from compliance staff makes the separation between compliance and legal / investigative functions even more critical.
- This includes when compliance reviews and remediation efforts run alongside privileged internal investigative activities and when internal and external company legal counsel seek information from compliance staff regarding a potential violation of the law. on securities.
- To defend SEC enforcement cases that are likely to arise from advice received from compliance staff, companies are well advised to retain the services of a lawyer accustomed to distinguishing between internal investigative work confidential (which can ultimately be shared with the SEC) and ongoing compliance activity which is structurally intended to be subject to regulatory oversight. And the lawyer should be prepared to notify the SEC when a compliance officer’s advice may be marred by the disclosure of inside information, which in turn could contaminate the SEC’s use of that information.
- It is also important that lawyers involved in these matters are experienced in exploring and establishing – again, within the confines of rule 21F-17 of the Exchange Act – a likely lack of first-hand knowledge and a potential bias associated with a tip received from a compliance professional, while at the same time anticipating that internal access by the compliance employee may result, and is likely to result, in greater deference from the part of the SEC.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.