The Dodd-Frank Wall Street Reform and Consumer Protection Act directed the SEC to create a whistleblower program that rewards individuals who provide the agency with information about possible securities laws violations. As the U.S. Supreme Court explained in Digital Realty Trust, Inc. v. Somers, the core objective of the whistleblower program is "to motivate people who know of securities laws violations to tell the SEC."

Under the SEC whistleblower program, an individual may be eligible for an award if he or she voluntarily provides the SEC with original information that leads to a successful enforcement action in which sanctions of more than $1 million are ordered. In such a case, the whistleblower may be entitled to receive 10-30% of the total amount collected.

Importantly, whistleblowers are not required to report possible misconduct to their employers to qualify for an SEC whistleblower award. Whistleblowers are, however, required to report to the SEC in order to qualify for anti-retaliation protections under Dodd-Frank.

For more on the mechanics of the SEC whistleblower program, tune in to Episode 6 of PLI's inSecurities podcast where we discuss "the World of Whistleblowers" with Matt Stock, Director of the Whistleblower Rewards Practice at Zuckerman Law. Available here: https://www.pli.edu/insecurities/episode-6.

Tracking the Program's Success

Since the SEC’s fiscal year ended on September 30th, the Office of the Whistleblower has continued its incredible run of form. On October 22nd, the SEC announced a $114 million award to an individual whistleblower—the largest amount ever awarded to an individual under the SEC’s whistleblower program and "a testament to the Commission's commitment to award whistleblowers who provide the agency with high-quality information," according to SEC Chairman Jay Clayton.

We are only two months into fiscal year 2021, but the SEC has already awarded more than $166 million to 12 individuals; this brings the program's grand total to approximately $728 million paid out to 118 individuals since issuing its first award in 2012.

Corporate Insiders Provide Credible Information

To date, approximately 68% of the individuals who have received SEC whistleblower awards were corporate insiders. That is, of the whistleblowers who provided the highest quality tips about securities laws violations—whistleblowers who were helpful enough to earn an award—more than two-thirds were current or former employees.

According to the SEC's annual whistleblower report, those individuals often pointed to specific documents or information that substantiated their allegations, identified co-workers who were involved in the misconduct or identified specific financial transactions that evidenced fraud. As a matter of fact, in a recent whistleblower award, the SEC applauded two joint whistleblowers for providing probative documents and information, participating in interviews with the staff, and identifying key individuals involved in the misconduct.

The Office of the Whistleblower explains in its Annual Report that the staff may use information from corporate insiders in several ways. A whistleblower tip might prompt the staff to commence an examination of a regulated entity, or it may be used in connection with an ongoing exam. The staff may also use whistleblower information to open a new enforcement matter or to buttress an ongoing investigation.

Indeed, according to the Annual Report, the Office of the Whistleblower is currently tracking over 1,100 matters in which a whistleblower’s tip caused the staff to commence a new enforcement matter, or has been forwarded to the staff for consideration in connection with an ongoing investigation.

Internal Reporting Is an Underutilized Source of Information

While it is important to understand that most SEC whistleblowers are corporate insiders, it is equally important to understand that their complaints often strike at the heart of companies’ operations and compliance or reporting obligations.

Year after year, the most common whistleblower tips relate to corporate disclosures or financial reporting issues—accounting for 25% of the tips in 2020—while insider trading and bribery (FCPA) also count among the most reported violations. (It is worth noting that issuer disclosure and reporting issues, insider trading and FCPA violations consistently rank among the top priorities for the SEC’s Division of Enforcement.)

In that context, whistleblowers might be viewed as crucial internal sources of information about potential misconduct that companies would want to root out—literal "boots on the ground" who can help spot potential weaknesses in a company’s compliance, reporting or other core regulatory obligations.

Yet internal reporting remains an underutilized source of information.

Of the corporate insiders who have received SEC whistleblower awards—again, the most credible whistleblowers—approximately 84% "raised their concerns internally to their supervisors, compliance personnel, or through internal reporting mechanisms, or understood that their supervisor or relevant compliance personnel knew of the violations, before reporting their information of wrongdoing to the Commission."

Stated differently, of the whistleblowers whose tips ultimately led to successful enforcement actions against their current or former employers, roughly 1 in 5 did not report the misconduct internally.

The percentage of corporate insiders who received whistleblower awards based on tips that they did not report internally has remained relatively constant over time: In 2014 (the first year the Office of the Whistleblower reported the figure) and again 2015 and 2016, the SEC reported that approximately 20% of corporate insiders who received whistleblower awards did not report internally. In 2017 and 2018, the SEC reported that 17% of the corporate insiders did not report internally; in 2019, the number fell to 15%.

Simply put, the surge in SEC tips is far outpacing the uptick in internal complaints. Companies must find ways to keep pace with whistleblower reporting.

To better understand why many whistleblowers are reluctant to report internally, tune in to Episode 26 of PLI's inSecurities podcast where we discuss "Whistleblowing's New Frontier" with Tom Mueller, the New York Times best-selling author of Crisis of Conscience: Whistleblowing in an Age of Fraud. Available here: https://www.pli.edu/insecurities/episode-26.

Credible internal reports present opportunities for public companies and SEC registrants to identify and potentially mitigate or remediate problems or weaknesses before the SEC (or another government agency) asks about them.

The key is to develop a reporting apparatus that encourages whistleblowers to report internally without fear of reprisal, and systems that evaluate (and appropriately leverage) whistleblower tips. Essentially, this involves two steps: (1) figuring out how to foster a culture that encourage internal reports; and (2) figuring out how to triage those tips.

There is no "one size fits all" solution. But given the potential benefits of assessing and triaging whistleblower complaints, companies simply cannot settle for systems that allow credible tips to become mired in automated hotline spreadsheets or otherwise fall through the cracks.

In the Office of the Whistleblower's 2014 Annual Report, Sean McKessy, the former chief of the whistleblower office, observed that "companies not only need to have internal reporting mechanisms in place, but they must act upon credible allegations of potential wrongdoing when voiced by their employees." Indeed.

The SEC whistleblower program will only continue to encourage reporting—and that's a good thing. Companies should make sure their reporting mechanisms are designed to seize the opportunities presented in this age of the whistleblower.

This article has been published in the PLI Chronicle. It is reprinted here with permission.