The volume and quality of tips to the SEC whistleblower program is increasing. The frequency and size of rewards is expected to grow. And the SEC is concerned about severance agreements that require whistleblowers to forgo awards or represent that they have not previously reported misconduct.
These were among the remarks made by SEC Chair Mary Jo White in her introduction to the Corporate and Securities Law Institute at Northwestern University School of Law yesterday. Her complete remarks are available on the SEC website here.
The speech offers both an interesting history of incentives for securities whistleblowers – dating back to a Dutch law in 1610 prohibiting naked short selling that predates the Tulip bubble of 1636-1637 by more than 25 years – and insight into the Dodd-Frank whistleblower program, which White calls a “game changer.”
The speech primarily discusses four areas in relation to the SEC program:
The securities regulator has now received tips from all 50 states and sixty foreign countries. It has made 17 awards totaling approximately $50 million. White also gave us a quick look at the first quarter of FY2015. Apparently, the number of tips has increased by more than 20 percent over the first quarter in the last fiscal year. Even with the increase in tips, they have been of even higher quality and have helped put enforcement actions on a faster timetable.
Whistleblowers have alerted the government to highly technical fraudulent schemes, explained the meaning of documents to SEC staff, and testified at TRO or asset freeze proceedings to stop fraudulent schemes.
During the debate over the Dodd-Frank rules, the effect of the program on internal compliance programs was a key concern of many. White reports that internal compliance programs are vibrant and that most whistleblowers still report internally first. The program also incentivizes companies to investigate and self-report misconduct because of concerns that someone else will report them.
The SEC will continue to make enforcement of anti-retaliation protections a high priority, according to White. The speech recaps some of its efforts, including taking its first enforcement action against retaliation and intervening in several private cases to argue that individuals internally reporting violations are protected from retaliation in addition to those filing a Form TCR.
Open Channels of Communication
White spent a significant portion of her speech discussing the recent enforcement action against KBR under Rule 21F-17, without naming the company. She downplayed concerns regarding the use of confidentiality agreements to protect trade secrets or confidential information but indicated that it was not permissible for companies to prevent employees from reporting securities violations or take other actions (like the clause requiring pre-approval of government reporting) that might chill potential whistleblowing.
The SEC is also looking at employment agreements that require employees to forgo any whistleblower award as a condition of a severance payment. White hints that these contracts are looked upon unfavorably by the Enforcement Division. I would not be surprised if we see additional rules developed by the agency in order to cover this contingency, if it is not prohibited within the scope of the current rules.
Our SEC whistleblower attorneys can provide you with additional information about the program if you have evidence of a securities law violation or a question about an employment agreement. Please contact us or call 1-800-590-4116 to speak to a lawyer at McEldrew Young Purtell Merritt.