LEGAL
Through their enforcement actions, policy initiatives, and press releases, United States regulators are showing what effective whistleblowing practices look like, and why their importance is growing.
Although many firms probably already have a whistleblowing policy in place, maybe even a confidential whistleblowing hotline, such steps may not be enough to satisfy critical regulatory imperatives.
Employers continue to be penalized for including language in their severance agreements requiring outgoing employees to agree to waive their right to file a whistleblower complaint with the Securities and Exchange Commission, an impermissible impediment to employees exercising their right to communicate directly with the SEC about a possible law violation.
It might seem clear that a process for the proper escalation of concerns helps a company and industry as a whole, but people are only going to act if they feel comfortable doing so. The idea of whistleblowing is not always seen positively; it’s ratting on your colleagues or career suicide, many believe.
With this in mind, regulators are increasingly telling firms, particularly in light of a couple recent enforcement actions: Ensure one’s employees can easily and comfortably speak up.
The 2010 Dodd-Frank Act established whistleblower programs for both the SEC and the Commodity Futures Trading Commission. Whistleblowers who provide unique and useful information to the SEC can collect 10 percent to 30 percent of a penalty when it exceeds $1 million.
Under the SEC program, the commission has broad international reach. It offers eligible whistleblowers the ability to report anonymously and earn substantial monetary awards, regardless of nationality.
The SEC said last year that tipsters who report their whistleblower information to the company first are protected from retaliation claims, but an appeals court ruled in 2014 that that particular protection does not apply to employees in other countries.
To ensure that adequate funds are available to pay awards, Congress has established a replenishing Investor Protection Fund.
In February 2016, the Securities and Exchange Commission (SEC) reviewed its 2015 whistleblower awards and the status of its whistleblower cooperation program.
Attempting to address skepticism surrounding the benefits of cooperation, the SEC indicated that it would keep using cooperation incentives such as nonprosecution agreements (NPAs), deferred prosecution agreements (DPAs), and penalty reductions for self-reporting.
The SEC’s Office of the Whistleblower received nearly 4,000 tips in 2015, up 30 percent since 2012, and it awarded more than $37 million to whistleblowers. The single largest award that year was $30 million, a record which still stands.
The SEC’s cooperation program extends the most credit to early self-reporters of corporate misconduct; companies that decide against self-reporting run the risk of a whistleblower informing the SEC about the misconduct.
The benefits of cooperation can include flexibility on charging decisions, lower monetary penalties, reduced suspensions, or a public reference to the cooperation in litigation or a settlement press release.
Evaluating cooperation and determining how to reward it remain largely with the SEC’s staff. Awards can be sizable and attract significant attention, even though the identities of those reporting are concealed.
The SEC announced in May 2016 that it would award between $5 million and $6 million to a whistleblower whose detailed information led the agency to uncover securities violations that would have been “nearly impossible to detect” without the company insider’s help.
The award is the third highest under the SEC whistleblower program since it began in 2011, and closely followed another whistleblower award of over $3.5 million granted a week earlier.
In August 2016, the SEC charged an Atlanta-based building products company for using severance agreements that violated U.S. securities law by requiring outgoing employees to waive their rights to a monetary recovery if they filed a complaint with the SEC or other agencies. Under the monetary-recovery provision, employees leaving the company were forced to waive possible whistleblower awards or risk losing their severance payments and other benefits, the SEC said.
The company added the provision nearly two years after the SEC adopted Rule 21F-17, which prohibits any action to impede someone from communicating with the SEC about possible securities-law violations, the SEC said.
The company, without admitting or denying the SEC’s findings, agreed to pay a $265,000 penalty, amend its severance agreements, and contact former employees who signed the restrictive provisions.
The use of illegal confidentiality agreements showcases an effort to prevent employees from speaking out against misconduct.
Less than a week following that case, the SEC filed civil charges against another organization for inserting language into its severance agreements preventing outgoing employees from reaping the benefits of government whistleblower awards.
The Commission said the organization must pay $340,000 to settle the charges without admitting or denying wrongdoing.
In a 2015 survey of U.S. and UK financial services professionals conducted by Labaton Sucharow LLP and the University of Notre Dame, one in every five respondents believed their company’s confidentiality policies and procedures barred the reporting of potential illegal or unethical activities directly to law enforcement or regulatory authorities.
Individuals whose principal duties involve compliance or internal audit responsibilities generally are excluded from award eligibility unless an exception applies.
But in April 2015, the commission awarded more than $1 million to a compliance professional who provided information that helped the SEC in an enforcement action against the whistleblower’s company.
Here, the SEC determined the whistleblower’s information was still “original information” under the whistleblower rules. The grounds were that the whistleblower had a reasonable basis to believe that telling the SEC was necessary to prevent the firm from engaging in conduct likely to substantially harm the firm or investors.
Although the Commission previously rewarded individual with compliance or internal audit functions, this was the first time it had used the “substantial injury” exception.
The SEC notes that its whistleblower program was designed to complement, rather than replace, existing corporate compliance programs.
While it provides incentives for insiders and others with information about unlawful conduct to come forward, it also encourages them to work within their company’s own compliance structure, if possible.
When submitting a tip to the SEC, whistleblowers are asked to identify the nature of their complaint allegations. For 2015, the most common complaint categories reported by whistleblowers included corporate disclosures and financials (17.5 percent), offering fraud (15.6 percent), and manipulation (12.3 percent).
As the SEC’s whistleblower office advises, the more specific, credible, and timely a whistleblower tip is, the more likely it will be forwarded to SEC enforcement staff for further follow-up or investigation.
As federal agencies and Congress have made clear, and the recent BlueLink case holds, corporate entities cannot obstruct an individual’s fundamental right to freely engage with his or her government.
Passed by Congress in Rule 21F-17(a) provides: “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.”
Unlike general anti-retaliation provisions, this rule comes into play when a company attempts to block or deter an individual from providing information to the SEC and cooperating in the agency’s investigation of that information. The rule is often violated well before an individual experiences any actionable retaliation.
Whistleblower advocates express concern that that some of those who enter into separation agreements with their employers to obtain severance or other benefits are whistleblowers or could become ones. Such agreements are routinely presented to employees.
They require that the employee release any legal claims against the company in exchange for whatever benefits the company provides. Countless employees sign such agreements in the United States every year, and often without the advice of counsel.
In the case, the SEC has made clearer what will constitute an unlawful impediment that employers cannot use to discourage employees from reporting securities violations and participating in the whistleblower program.
To avoid any such attention from the SEC, companies should review their employee agreements with an eye toward:
This article was originally published on the Financial Regulatory Forum.
-->
