The US Securities and Exchange Commission Whistleblower Program: A Q&A primer on how it works

The United States Securities and Exchange Commission’s Office of the Whistleblower raised eyebrows in the financial sector on June 12 when it announced it was issuing its second monetary award to three persons whose tips prompted an investigation into a sham hedge fund called Locust Offshore Management LLC and its chief executive, Andrey C. Hicks.
The SEC order entitles the three whistleblowers to a small initial payment of 5% each of the roughly $800,000 collected in a US Department of Justice enforcement actions against Hicks. Their reward will increase if the SEC succeeds in disgorging the $7.5 million in penalties that Locust and Hicks have been ordered to pay.

The SEC’s action is a welcome development for proponents of Wall Street reform and may be a signal that the agency will soon pursue more whistleblower actions. Sean McKessy, director of the SEC Whistleblower Office, recently said onlookers are “likely to see more awards at a faster pace now that the program has been up and running and the tips we have gotten are leading to successful cases.”

With whistleblower payouts a growing possibility in coming months, a review of the ins and outs of the SEC whistleblower program, which was created by the Dodd-Frank Act of 2010, is in order. The program opened its doors in August 2011.

Who can ‘blow the whistle’ to the SEC and what information does the SEC want?

The SEC’s whistleblower program seeks high-quality, original information about violations of US federal securities laws. Whistleblowers may be anyone with original knowledge about violations – not just employees of the subject organizations and not just US citizens.

Whistleblowers may submit tips to the SEC if they are certain that securities violations have occurred or only with information on possible corporate or corporate officer misconduct.

How many tips does the SEC receive?

The whistleblower program received 3,001 tips in Fiscal Year 2012, according to the most recent SEC annual report. The US government’s fiscal year runs from October 1 to September 30.

If the SEC receives so much information about securities violations, why has it issued only two whistleblower awards?

The SEC has strict rules governing whistleblower bounties or rewards. Information provided by a whistleblower must

  1. be original,
  2. lead to a successful SEC enforcement action, and
  3. result in sanctions or penalties totaling more than $1 million.

The SEC has denied claims for whistleblower awards due to timing issues (information submitted before the law’s enactment in July 2010), redundancy of information provided, or that a tip did not lead to an investigation or enforcement action. In addition, the SEC is believed to be running behind in processing tips because so many arrive each week.

SEC Whistleblower director McKessy’s statement indicates that many of the high-quality tips received in the past two years have led to cases that are just now maturing in court. Given the complexity of SEC enforcement actions and the vigor with which they are fought, delays in whistleblower award distributions are unsurprising.

How does the SEC determine the amount of a monetary whistleblower award? 

The first whistleblower bounty, which was issued in August 2012, was modest: approximately $50,000, according to the SEC. But the program’s guidelines, which award whistleblowers by percentage, could potentially range in the millions for high-penalty cases.

Whistleblower awards range from 10 to 30 percent of the sum collected by the SEC, or by other federal agencies in the enforcement actions that resulted from the information that the whistleblower provided. If multiple whistleblowers receive an award for the same action, as was the case in the SEC June 12 order, each whistleblower receives an individual percentage of the total amount determined to be the full award.

The SEC has full discretion over the award determination. It considers these factors in its whistleblower award decisions:

  • the nature and significance of the information provided,
  • the assistance provided by the whistleblower,
  • the interest of law enforcement agencies in the wrongdoing,
  • whether the whistleblower, if an employee of the subject organization, first reported the information internally,
  • the whistleblower’s culpability in any violation, and
  • the timeliness of the submission of information.

Must employees of the subject organization report information internally before submitting a whistleblower tip to the SEC?

It is not required. When making award determinations, however, the SEC looks favorably on whistleblowers who complied with their company’s policies by reporting the matter internally before notifying the SEC.

Whistleblowers who first report internally must submit the same information to the SEC within 120 days to be eligible for a whistleblower award.

How does the SEC whistleblower program protect whistleblowers from retaliation?

The SEC whistleblower program contains provisions protecting whistleblowers from retaliation. They make it illegal for employers to “discharge, demote, suspend, harass, or in any way discriminate against” whistleblowers who report information to the SEC under the reporting guidelines of the program.

These protections apply whether the whistleblower’s information proved to be factual or not, so long as the employee had “reasonable belief” that the reported information was an actual violation and was not submitted frivolously or maliciously.

The SEC program permits whistleblowers to take their employers to federal court for retaliation.

I have knowledge about potential securities violations. Where can I submit a whistleblower tip?

Whistleblowers must submit information in writing. Telephone tips are not permitted. They may go to sec.gov/whistleblower and use the ‘Tip, Complaint or Referral Portal’ or obtain the mailing address or fax number where the ‘Form TCR’ may be submitted.