What is the SEC Whistleblower Reward Program?
The Dodd-Frank Wall Street Reform and Consumer Protection Act enhanced the Securities Exchange Act by creating the SEC Whistleblower Program. The SEC’s Whistleblower Program offers rewards to individuals who provide useful information to the SEC that helps in its enforcement action and leads to a total monetary sanction exceeding $1 million. It allows whistleblowers to submit tips anonymously if represented by their attorney. If the monetary sanction recovered by the SEC in an enforcement action exceeds this $1 million threshold, the whistleblower may receive an award of between 10% and 30% of the sanction collected in the action or related actions.
A whistleblower is defined as any individual who provides information to the SEC relating to a violation of the securities laws. An individual is considered an eligible whistleblower for purposes of the SEC Whistleblower Reward Program if that individual voluntarily provides the SEC with original information about a potential violation of the federal securities laws—whether that violation has occurred, is currently occurring, or is about to occur in the future. The information provided by the individual as a whistleblower must lead to a successful enforcement action with monetary sanctions in excess of $1 million. The SEC has noted that some of the conduct it is interested in targeting include the following: Ponzi and pyramid schemes, manipulation of securities prices, insider trading, bribery or corruption of foreign officials, misappropriation of funds, and false or misleading reports filed with the SEC, as some examples. The majority of the tips received relate to information involving corporate disclosures, fraud in offerings, and market manipulation.
In determining the amount of the award to provide to the whistleblower who assisted in providing the information, the SEC takes several factors into consideration. For instance, the SEC considers the significance of the information that the whistleblower provided relative to the success of the judicial action; the degree of assistance provided by the whistleblower; the interest of the SEC in deterring future violations of the securities laws by giving awards to whistleblowers who provide the useful information that lead to a successful enforcement action; and any other additional relevant factors that the SEC deems necessary.
Briefly summarized below, the whistleblower process used by the SEC consists of three phases:
- Phase 1: Intake/Triage: During this phase, the whistleblower submits a complaint to the SEC. This complaint is reviewed by SEC staff to determine if further action is warranted. If the complaint does not warrant further investigation, it will be designated as “no further action” (“NFA”). If the staff determines that further investigation is warranted, the complaint is assigned to one of the SEC’s regional offices, an Enforcement specialized unit, or an Enforcement Associate Director. The staff then communicates with the whistleblower by sending a letter—an acknowledgement or a letter regarding any deficiencies. The letter also details further guidance on how to resolve the issue.
- Phase 2: Tracking: During this stage, the staff monitors the submissions that are assigned to investigative staff. The whistleblower’s cooperation is tracked. The whistleblower’s potential award is also documented. While the enforcement policy of the SEC requires that it neither confirm nor deny that an investigation has been initiated in response to the whistleblower’s tip, the staff is permitted under limited circumstances to engage in discretionary communications with the whistleblower such as disclosing the status of the whistleblower’s complaint or whether the whistleblower’s complaint has been reviewed or assigned to Enforcement staff.
- Phase 3: Claim for an Award: During this stage, the whistleblower can claim a part of the award if the information provided to the SEC contributes to a successful SEC action of over $1 million in sanctions. The SEC staff handling the issue will post a “Notice of Covered Action” on its website for cases that result in monetary sanctions over this amount and will let the whistleblower know they the information they provided led to a successful action. The whistleblower then applies for the award, which is subsequently reviewed for completeness. Once all criteria are satisfied regarding eligibility, the staff arrives at an award between 10%-30% of the dollar amount collected. The staff makes an award recommendation and submits the recommendation to the Enforcement’s Claims Review Staff. If there are no objections, the proposed final determination becomes the final order, and the whistleblower receives their award.
The Whistleblower Reward Program is critical for uncovering corporate fraud and continues to be an important tool relied upon by the SEC to detect complex corporate fraud schemes. It has enabled the SEC to detect significant fraud schemes, prevent further frauds from devastating the nation’s capital markets and market integrity, and protect investors from financial ruin. To date, the SEC has received over 30,000 tips from whistleblowers reporting potential violations to the government. In turn, the SEC has led enforcement proceedings that have resulted in over $2 billion in monetary sanctions. The SEC has heavily relied on the inside assistance and knowledge from whistleblowers and has paid these successful whistleblowers more than $500 million in awards.