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On March 30, 2020 the SEC announced an award of $450,000 to a compliance official turned whistleblower whose information led to a successful enforcement action.
What makes this award significant is that the whistleblower learned of the misconduct while handling compliance matters for their employer. The official followed the chain of command and reported the matter to their direct supervisor. But the report fell on deaf ears. More than four months passed. When the company failed to take action, the compliance official reported the misconduct to the SEC.
The SEC used the information provided by the compliance official to focus its ongoing investigation. In the end, the SEC imposed substantial monetary penalties against the company. And then the SEC provided a whistleblower award of $450,000 to the compliance official.
The position of a compliance officer has been described as “the most thankless job on Wall Street.” Compliance officers are expected to make sure that traders, brokers, bankers, and other financial professionals follow the rules and stay on the right side of the law. In the fast moving and ultra-competitive financial sector, compliance officers and their lists of dos and don’ts are not always welcome voices. Some companies choose to ignore those voices altogether.
Both the SEC and the CFTC work to support the mission of compliance officers. They encourage employees in the financial sector to seek those officials out to report any potential misconduct. As we reported previously, the SEC and the CFTC have actually increased awards to employees who report misconduct internally via their company’s compliance program before filing a whistleblower complaint with an outside agency.
Christopher Ehrman, the Director of the CFTC’s increasingly active Whistleblower Office, made this point when announcing a $1.5 million whistleblower award in May of 2019. As Mr. Ehrman made clear, “While there is no requirement that a whistleblower report internally before approaching the Commission, today’s award demonstrates that the Commission may pay enhanced awards to those that do.”
Both the SEC and the CFTC reward individuals who come forward with “original information” concerning securities fraud and similar misconduct. Under the relevant rules, neither agency considers information that a person learns of through their job as a compliance official to be “original information.” But both agencies recognize an important exception to that rule.
For example, the SEC rules creates a specific carve out for compliance officials who fully report misconduct to their supervisor, or to other high–level company managers such as the chief legal officer or the members of the audit committee. Once 120 days have passed after the compliance officer makes such a report, he or she can report the same misconduct to the SEC as “original information.” And if the SEC uses the information as the basis for a significant enforcement action, the compliance officer qualifies for a whistleblower award. Similar rules apply to individuals who learn of financial misconduct via their jobs as internal auditors.
In practical terms, the 120-day period is intended to allow companies to investigate, self-correct, and self-report. Companies that follow such a course of action can expect to be treated far more leniently by the SEC or the CFTC. Those companies may be let off with no penalties at all.
Companies that sweep the problems under the rug. Or look the other way. Or turn a deaf ear to their own compliance officials can expect to face much harsher treatment. Those companies can face substantial monetary penalties. And compliance officials who report the misconduct can qualify for substantial whistleblower awards.
If you are considering submitting a tip, complaint, or referral to the SEC or to the CFTC, we urge you to contact us for a free, confidential, consultation.