The SEC launched its new Office of the
Whistleblower Web site on the August 12,
2011 effective date of the whistleblower
regulations. The first chief of the Office
of the Whistleblower, Sean McKessy, said
that the SEC’s whistleblower program
embodies a balanced approach designed to aid
the Commission by encouraging those aware of
misconduct to come forward while at the same
time incentivizing those individuals to
report their suspicions of misconduct to
their companies first so that the companies
can take appropriate action to remedy it.
The SEC’s new Web page
at
www.sec.gov/whistleblower allows people
to report a violation of the federal
securities laws and apply for a financial
award. It includes information on
eligibility requirements, directions on how
to submit a tip or complaint, instructions
on how to apply for an award, and answers to
frequently asked questions. McKessy said
that securities fraud is not a victimless
crime. That is why it is important for
people to step forward when they witness an
ongoing securities fraud or learn about one
that has taken place or is about to occur.
The SEC’s new whistleblower award program
makes it easier for people to take that
step, he said.
In
remarks at Georgetown University,
McKessy assured the corporate community that
the new whistleblower program would bolster,
not hamper, the internal compliance systems
of companies across the country. The
whistleblower program is the first and only
such program in the country that makes
available a monetary award from the
government to an individual who reports
possible wrongdoing internally. The SEC’s
program extends significant benefits to
individuals who report internally, enhancing
the opportunity for a whistleblower award,
and possibly an award at the higher end of
the allowable range.
Under the SEC’s rules,
employees who report wrongdoing internally
first and then report the wrongdoing to the
SEC within 120 days benefit in two
significant ways. First, they will be deemed
to have reported the information to the SEC
on the date they reported internally. This
preserves their place in line in terms of
when information was provided to the SEC.
Second, the employees who report internally
first receive the benefit of all the
information uncovered by the company in
connection with its own internal
investigation of the alleged wrongdoing.
McKessy emphasized that
these are not hypothetical or
inconsequential benefits because an employee
who reports information internally that
might not have warranted an SEC
investigation could become eligible for an
award if the internal investigation uncovers
information that leads to an investigation.
He described a scenario in which, based on
an employee’s experience, he or she knows
but does not have sufficient proof to
substantiate that something is amiss with
the company’s accounting for a certain
matter. That gut feeling may not be
sufficiently timely, specific and credible
to cause the SEC to open an investigation,
McKessy noted, but if the employee were to
report that gut feeling internally, and the
company’s subsequent investigation were to
uncover specific, timely and credible
information that is reported to the SEC, the
reporting employee would then be eligible
for an award.
The employee gets the
benefit of all of the facts and details
uncovered and reported to the SEC by the
company in connection with its internal
investigation of the issue. The percentage
of the award to the employee could be
increased based on the enhanced quality and
value of the information uncovered by the
company’s internal investigation. The rules
also require that cooperation with internal
compliance programs be considered as a
positive factor that could increase a
whistleblower award, while interference with
such programs are a negative factor that
could decrease an award.
In McKessy’s view, the
benefits to those who first report
internally offer a great opportunity for
companies and their compliance officers. Far
from undermining internal compliance
programs, he said, the SEC’s whistleblower
program should empower internal compliance
personnel to advocate for stronger and more
transparent internal compliance programs.
The SEC rules leave it
to the employee to decide whether to first
report internally or to contact the SEC.
Those companies that ensure that their
employees view internal reporting as a
viable and credible option to address
possible securities law violations are more
likely to have the wrongdoing reported
internally first, he said.
McKessy also addressed
the concern that by failing to adopt an
absolute exclusion on attorneys, auditors
and compliance officials, the SEC rules
encourage these individuals to abandon their
professional responsibilities in favor of a
potential bounty award. The purpose of the
whistleblower award program is to add a tool
to the SEC’s arsenal to identify wrongdoing,
prevent or stop it and, if appropriate,
punish those responsible. By providing for
the possibility of a whistleblower award to
attorneys, compliance officials and
auditors, he said, SEC regulations recognize
that the Commission may in some narrow
circumstances need these individuals to come
forward in order to accomplish that goal. In
these narrow circumstances, these
individuals can and should be eligible for
an award, he said.
A monetary incentive is
provided to attorneys, auditors and
compliance officials to report to the
Commission only when it is necessary to
prevent imminent or ongoing misconduct or
the misconduct has been identified and
reported, but not remediated in a timely
fashion, McKessy noted. With regard to
external auditors, their eligibility is
limited to the narrow circumstance when they
have a reasonable basis to believe that
their employer (the audit firm) failed to
make the required disclosures of the audit
client’s wrongdoing under Section 10A of the
1934 Act. In these rare instances, the
eligibility for an award is limited to the
reporting of misconduct that has been
detected but not reported to the SEC.