The SEC’s Record-Breaking Whistleblower Award Run: Practical Considerations for Companies
After fiscal year (FY) 2020, when the Office of the Whistleblower (OWB) of the Securities and Exchange Commission (SEC or Commission) awarded a record-breaking $175 million to 39 individuals, FY 2021 has proven to be even more active. With more than three months still left, the Commission already has awarded approximately $370 million to whistleblowers, setting up the year to surpass FY 2020 for an all-time high. Notably, in just the last month, the Commission has awarded approximately $116 million in awards in nine SEC enforcement actions and two related actions brought by other agencies. This Advisory surveys the lay of the land regarding SEC whistleblower awards and identifies some practical suggestions for companies in anticipation of increased whistleblower activity.
Formed in 2011, the OWB was established one year after the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) amended the Securities Exchange Act of 1934 (Exchange Act) by, among other things, adopting Section 21F. 15 U.S.C. § 78u-6. Section 21F, entitled “Securities Whistleblower Incentives and Protection,” directs the Commission to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions over $1 million, and successful related actions. Awards may range between 10% and 30% of the money collected. In addition to providing monetary awards to certain whistleblowers, Dodd-Frank and the Commission’s implementing rules create confidentiality protections for whistleblower submissions and prohibit employers from retaliating against whistleblowers for providing information to the SEC. 17 C.F.R. §§ 240.21F-7; 15 U.S.C. § 78u-6(h)(1).
The Commission has relatively straightforward procedures for claiming a whistleblower award. Following a successful “Covered Action,” which is defined as any judicial or administrative action brought by the Commission under the securities laws that results in monetary sanctions exceeding $1 million, the OWB will post a “Notice of Covered Action” on the OWB website. 15 U.S.C. § 78u-6(a)(1); 17 C.F.R. §§ 240.21F-10(a). Within 90 calendar days of the Notice of Covered Action, a whistleblower must submit a claim in order to collect an award, 17 C.F.R. §§ 240.21F-10(a), and there are additional procedures for whistleblowers seeking to receive an award based on monetary sanctions collected from a “Related Action” brought by certain other agencies or regulators, 17 C.F.R. §§ 240.21F-11. OWB attorneys assess each claim and the eligibility of the claimant, including conferring with relevant investigative or other SEC staff. OWB attorneys then provide a recommendation to “Claims Review Staff” comprised of senior leaders in the Division of Enforcement and, in the case of a positive award recommendation or a contested denial, to the Commission. After consideration, the Commission issues Final Orders determining whistleblower award claims. These orders are usually heavily redacted, such that the name of the whistleblower and the Covered or Related Actions are not publicly disclosed.
Recent Awards and a Notable Trend
The OWB’s activity in the first half of 2021 continues the uptick in awards seen in 2020. In May 2021 and halfway through June 2021 alone, the Commission issued awards to 19 individuals, totaling approximately $116 million. The SEC also is taking a liberal stance when it comes to interpreting provisions of the federal securities laws in a manner that appears to be designed to encourage whistleblowers to come forward.
In a recent Final Order issued on June 2, 2021, the Commission awarded approximately $23 million to two whistleblowers whose information and assistance led to successful SEC and related actions. One of the whistleblowers filed the application for award 18 days after the 90-day deadline, normally a fatal procedural defect. In the Final Order, the Commission noted that the mitigating circumstances asserted by the claimant did not rise to the level of circumstances beyond the claimant’s control and, therefore, were not “extraordinary circumstances” that might otherwise allow the Commission to waive the deadline under Rule 21F-8(a) of the Exchange Act. Despite this, the Commission determined to exercise its discretionary authority under Section 36(a) of the Exchange Act to waive the procedural defect and grant the whistleblower award. In doing so, the Commission noted that, based on the specific facts and circumstances of this case, “[s]trict application of the deadline would result in undue hardship to [the claimant], particularly in light of [the claimant’s] significant contributions to the successful enforcement of the Covered Action and certain unique obstacles faced by [the claimant].” Given that the waiver of this deadline has been denied in the past, this rare use of Section 36(a) exemptive authority to waive the application filing deadline shows the value that the current Commission places on otherwise meritorious whistleblower tips.1
The Commission also showed a willingness to interpret Dodd-Frank and the SEC’s implementing rules liberally to grant awards to whistleblowers in another high-value Final Order awarded on May 19, 2021. In the Final Order, the Commission awarded $28 million for a tip with a more tenuous nexus to the Covered Action—the whistleblower reported wrongdoing in one geographic region that resulted in investigations by the SEC and another agency, but the ultimate charges were based on conduct in another geographic region not reported by the whistleblower. The Final Order noted that, although “the Covered Action’s and the Related Action’s charges involved misconduct in geographical regions that were not the subject of the Claimant’s information” and there was “not a strong nexus between the Claimant’s information and the . . . charges,” an award would nonetheless be granted that “appropriately recognizes Claimant’s level of contribution to the Covered Action and Related Action.” This award was one of the ten largest awards ever paid out by the Commission.
Of note, unlike the usual anonymous nature of whistleblower tips, purported counsel for the whistleblower in the May 19 Final Order has given public statements to news media claiming that the award was for information resulting in the 2018 settlements of Foreign Corrupt Practices Act (FCPA) charges against Panasonic Avionics Corporation (PAC), which makes entertainment and communications systems for aircraft, along with certain of its former executives. PAC ultimately paid more than $137 million to the DOJ, and its parent company paid more than $143 million to the SEC, in connection with these FCPA and related charges. If true, the public statements made by the whistleblower’s counsel provide a rare public view into what is usually a confidential process.
Implications and Some Practical Considerations
In FY 2020, the Commission received more than 6,900 whistleblower tips, a 31% increase from FY 2018, the second-highest tip year. The high number of tips, the high value of awards, and the willingness of the SEC to liberally interpret the rules all indicate that the Commission views whistleblower tips as an important source of information in assessing wrongdoing in the markets. Credible whistleblower tips may serve as an increasing impetus to the opening of investigations by both the SEC and other regulators—and, given the start to FY 2021, the trend is likely to continue (if not strengthen) under the new administration.
In light of this, companies would be well-advised to anticipate the possibility of increased whistleblower activity and take proactive measures to ensure they comply with applicable law. While every situation is different, there are some practical considerations to bear in mind:
- Risk Assessments. Consider conducting risk assessments related to internal reporting structures to make sure that all reports—not just those going to an internal hotline—are captured, triaged, and investigated if appropriate. Use internal whistleblower information to get ahead of a potential problem with the regulators or law enforcement. Companies that are able to conduct thorough internal investigations showing a clear, robust response to an internal tip will be better able to effectively self-correct and have a defensible position if regulators or law enforcement get involved.
- Annual Training. Consider if annual training is appropriately robust and targeted to middle management to ensure that tips received outside of the employee hotline or formal reporting mechanisms are identified, logged, and triaged. This is particularly important given that 81% of SEC whistleblower awardees reported their concerns internally, including in many instances to their direct supervisor, before or at the same time as reporting to the Commission. If all tips are not identified and centrally reviewed, it is a lost opportunity for a company to self-correct an issue.
- Internal Reporting Mechanisms in a Post-Covid World. As more companies are pivoting back to an in-person workforce, consider a refresh on internal reporting mechanisms as well as related training. Record-breaking numbers of tips were reported to the SEC during the pandemic. This may have been because of a breakdown in internal reporting mechanisms for a remote workforce. Consider a fresh internal reporting campaign to refocus a returning workforce, whether it be full-time in the office, continuing remote, or some hybrid. The statistics show that the current mechanisms for internal reporting may not be effective anymore.
- Anti-Retaliation Policies and Training. Ensure that whistleblower anti-retaliation polices and training are up-to-date. Now is the time for companies to review anti-retaliation policies to ensure they are clear and concise. Annual training should be conducted to ensure that everyone understands what retaliation is and knows the steps that can and cannot be taken once someone reports internally or to the government. Zero tolerance policies that are advertised to the workforce can help employees get comfortable reporting internally rather than straight to the governmental authorities.
- Domestic and International Policies. Review and update both domestic and international policies. In light of the purported award in the PAC case, companies should be aware that whistleblower tips may arise from and with respect to any part of their business, including activity overseas. In FY 2020, 11% of whistleblower submissions to the Commission were submitted from non-US countries. Since the inception of the program, the SEC has received tips from whistleblowers in 130 countries. Properly and consistently implemented robust internal reporting mechanisms and whistleblower policies provides an additional safeguard for compliance with US and international laws and regulations.
Arnold & Porter is continuing to monitor developments in this area and plans to issue a series of important client advisories related to whistleblowing and best practices for companies. If you are seeking advice on how to mitigate risks in connection with whistleblower reporting and compliance, please reach out to any author of this Advisory or your regular Arnold & Porter contact.
© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.