The SEC’s Annual Report on the Dodd-Frank Whistleblower Program: Statistics Suggest Best Practices for an Effective Compliance and Ethics Program

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The Securities and Exchange Commission’s Annual Report on the Dodd-Frank Whistleblower Program,1 released November 2012, provides the first complete year of data on the activities of the Office of the Whistleblower (“OWB”) since that office’s establishment in 2011.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) empowers the SEC to pay financial awards to whistleblowers who provide significant, original information that leads to a monetary sanction greater than $1 million.2 The SEC enjoys the discretion to award the whistleblower(s) 10 to 30 percent of the sanctions collected. Awards are paid from an Investor Protection Fund. The Dodd-Frank Act requires the SEC to establish a separate office – the Office of the Whistleblower – to administer the whistleblower program. The OWB is statutorily required to report annually to Congress on its activities, whistleblower complaints, and the SEC’s response.3

This year’s first Annual Report shows that the SEC received 3,001 tips, complaints and referrals from whistleblowers across the country and abroad in fiscal year 2012 (October 1, 2011 through September 30, 2012). The most common complaint categories related to corporate disclosures and financial statements (18.2 percent), offering fraud (15.5 percent) and manipulation (15.2 percent). Other categories of complaints tabulated had significantly lower reporting percentages, including: insider trading (6.3 percent), trading and pricing (4.8 percent), FCPA (3.8 percent), unregistered offerings (3.3 percent), market event (2.8 percent) and municipal securities and public pension (2.10 percent).4 Geographically, the constituency of whistleblowers spans all 50 states, the District of Columbia, the U.S. territory of Puerto Rico as well as 49 countries outside of the United States. Domestically, the largest number of tipsters came from California (435), New York (246) and Florida (202). Outside the United States, the largest number of tipsters came from the United Kingdom (74), Canada (46), and India (33). The People’s Republic of China was a close fourth, with 27 tips. The lion’s share of tips originated from within the United States; the total number of tips received from abroad was 324, which constitutes 10.8 percent of the total tips received for the period covered in the Annual Report.

There were 143 enforcement judgments and orders issued during fiscal year 2012 that potentially qualify as eligible for a whistleblower award. The OWB provided the public with notice of these actions because they involved sanctions exceeding the statutory threshold of more than $1 million. The OWB has not yet completed its review of the award applications for the tips that led to these judgments, so we do not yet have the gross award dollar number for the 2012 fiscal year.

Employers should of course continue to encourage employees to report possible corporate wrongdoing internally. And robust policies and procedures designed both to prevent and detect criminal and fraudulent conduct will inure to a company’s benefit in the event the SEC determines that wrongdoing has in fact occurred because the SEC has made clear that it will not process awards in a manner that undercuts bona fide compliance programs. But there is still work that companies can do. The complaint incident numbers we have reported here can and should guide companies as to where they allocate their training and educational resources. In other words, training on compliance issues relating to corporate disclosures and financial statements should account for approximately 18 percent of a company’s educational effort; offering fraud, 16 percent; and stock price manipulation, 15 percent. Companies should also not ignore issues that trigger relatively low numbers of complaints. Some of these issues — like insider trading and FCPA violations — carry such high reputational risk, or have such a high priority for enforcement within the SEC, that they warrant educational and training resources disproportionate to their complaint rate.

In sum, the OWB’s first Annual Report provides helpful guidance on how best to allocate educational and training resources in the context of a robust corporate compliance program. We note also that periodic program assessments are an integral part of every bona fide compliance regime, and stand ready to help in this regard — before an employee blows the whistle.

1 U.S. Sec. & Exch. Comm’n, Annual Rep. on the Dodd-Frank Whistleblower Program (Nov. 2012), http://www.sec.gov/about/offices/owb/annual-report-2012.pdf.

2 15 U.S.C. § 78u-6.

3 Id.

4 Two categories of allegation type not referenced above, “other” and “blank,” together constituted the remaining 27.8 percent of the total tips calculated.