On March 30, 2020, the SEC ordered its third ever whistleblower award to a compliance officer in the amount of $450,000.
In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which, among other things provided for the payment of monetary awards under certain circumstances to whistleblowers whose tips to the SEC lead to its recovery of more than $1 million. To qualify for a whistleblower award, the individual must voluntarily provide to the SEC “original information” related to a possible violation of federal securities laws.
To incentivize internal reporting, ”original information” generally excludes information that was obtained because of the whistleblower’s duties as a compliance officer. However, the rule has an exception if at least 120 days have elapsed since the compliance officer raised the information internally to the relevant entity’s audit committee, chief legal officer, or chief compliance officer, or to the whistleblower’s supervisor. In certain limited cases, a compliance officer need not wait the 120-day period if misconduct is “imminent” and could cause “substantial financial harm to the company or investors.”
Here, the whistleblower had first reported the information to his supervisor. The claimant then waited the requisite 120 days before reporting to the SEC.
In determining the amount of the award as reasonable, the SEC weighed the following factors:
- Although not the original source of the SEC’s investigation, the whistleblower’s information was significant enough that the SEC refocused its investigation on the violations that were ultimately charged;
- the whistleblower assisted the SEC early in the investigation, including attending in-person meetings;
- the whistleblower suffered hardships as a result of internal reporting; and
- the whistleblower participated in the company’s compliance program.
The SEC had previously issued only two whistleblower awards to individuals performing compliance functions. In the first case, the SEC awarded $300,000 to a compliance person who reported information to the SEC after 120 days elapsed without the employer taking any action in response to the employee’s internal report.
In the second case, a compliance officer reported misconduct directly to the SEC after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it. The SEC awarded that compliance officer $1.5 million.
With its third ever whistleblower award to a compliance officer, the SEC reminds us that compliance programs continue to be of utmost importance. As we are currently experiencing an economic downturn, and many companies are experiencing financial hardship and budget constraints, this case is a reminder that cutting corners on compliance can be costly.