More Clues on SEC Whistleblower Office

The Securities and Exchange Commission is collecting a steady flow of tips through its new bounty-paying whistleblowing program, and public companies are scrambling to shore up their own internal compliance operations or even offer bounties of their own.

During a recent compliance outreach program, the SEC told investment companies and investment advisers that its new whistleblower office, formed under the Dodd-Frank Act, collects an average of seven tips a day—and they're high-quality morsels, said Norm Champ, deputy director of the SEC's Office of Compliance, Inspections and Examinations.

“The system, perhaps because of the monetary rewards, is producing a better class of TCR,” he said during the conference. (TCR is regulator-speak for tips, complaints, and referrals.) “These are credible, high-quality complaints, and we are staffing up to triage of these complaints.”

Under Dodd-Frank, whistleblowers whose tips lead to monetary sanctions of $1 million or more are eligible for an award of 10 to 30 percent of the amount ultimately collected by regulatory or law enforcement agencies. The SEC posts a running list of settled actions that could lead to whistleblower awards, but whistleblowers must apply for the award within 90 days to collect their bounty.

The SEC determines the exact amount to award based on a variety of criteria, including whether whistleblowers tried to alert corporate compliance departments before taking their information to the government—and that's the nuance that has irritated corporate compliance officers the most. They fear the lure of monetary reward will tempt whistleblowers to ignore the company hotline and go straight to the feds.

“It's almost as if the government created an incentive to circumvent company controls because of the allure of a payday,” says Brad Preber, a partner with Grant Thornton. Companies are mobilizing in response, he says, shoring up and improving processes internally to try to keep whistleblowers inside the ranks.

Public companies can take a variety of measures to beef up their internal processes and communicate with their employees, but some are even considering whether they should offer rewards for tips internally. “I've participated in discussions with compliance officers who have contemplated that idea,” says Toby Bishop, director at the Deloitte Forensic Center. “There are lively discussions on this topic with strongly held, principled views that people should not be rewarded for doing the right thing because that is part of their everyday job responsibilities.”

Bobby Kipp, a partner with PwC's risk assurance services practice, says she's hearing the dialogue in corporate boardrooms as well, but isn't aware of any company that has instituted an internal reward system. From her perspective, most in the boardroom would argue that companies should not consider paying employees for reporting concerns about wrongdoing. “It's not something to be rewarded, but expected,” she says.

Bishop sees the other side to the argument. “Companies often give quite substantial incentives to sales people who do a great job when that's their core job,” he says. “I see no reason for refusing to reward people for their strong job performance. If we pay for rewards, it can help to change the culture of how whistleblowers are viewed and create a new perception of whistleblowers as heroes who are helping their organizations survive and succeed.”

“There are lively discussions on this topic with strongly held, principled views that people should not be rewarded for doing the right thing because that is part of their everyday job responsibilities.”

—Toby Bishop,

Director,

Deloitte Forensic Center

More Practical Ideas

Beyond the consideration of internal bounty systems, companies are taking up a variety of activities to improve the performance of their compliance processes, Bishop says. “We're entering a new era where the value proposition for companies has changed significantly,” he says. “This is a major opportunity to revisit whistleblowing systems and take a strategy refresh on what are the goals of the system and how well is it accomplishing those goals. The shift is from compliance to performance.”

The idea of employees first reporting their concerns outside of the company shouldn't seem so new, says Robert Plotkin, a partner with law firm McGuireWoods. Other government agencies, including the Internal Revenue Service, offer similar types of whistleblowing programs, he notes.

“Companies that are regulated by those agencies have been dealing with this for years, so this doesn't just spring out of the head of Zeus,” he says. Companies would be wise to take a look at their existing programs, many of them created after the Sarbanes-Oxley Act 10 years ago, and see where they need updating, he says.

TIPS RECEIVED & AWARDS MADE

From the SEC's Office of the Whistleblower: Whistleblower tips received and incentive awards made during Fiscal Year 2011:

Whistleblower Tips Received During Fiscal Year 2011

The final rules specify that individuals who would like to be considered for a whistleblower award must submit their tip to the Office of the Whistleblower on Form-TCR either via facsimile or mail or via the Commission's online TCR questionnaire portal. Concurrently with the effectiveness of the Final Rules on August 12, 2011, the Commission updated its Tips, Complaints and Referrals System to conform the online questionnaire to the substantive requirements in the final rules and to provide enhanced whistleblower functionality. The updated online TCR questionnaire allows whistleblowers to make online submissions that satisfy Regulation 21F, including making the required declarations. In addition, the TCR System allows the Commission to comprehensively and centrally track all whistleblower tips submitted to the Commission online or via hard copy by mail or facsimile.

Because the Final Rules became effective Aug. 12, 2011, only 7 weeks of whistleblower tip data is available for fiscal year 2011. Appendix A lists, by subject matter and month, the 334 whistleblower tips received from Aug. 12, 2011 through Sept. 30, 2011. The most common complaint categories were market manipulation (16.2 percent), corporate disclosures and financial statements (15.3 percent), and offering fraud (15.6 percent).

The Commission received whistleblower submissions from individuals in 37 states, as well as from several foreign countries, including China (10) and the United Kingdom (9) ...

Whistleblower Incentive Awards Made During Fiscal Year 2011

The final rules set out the procedures for applying for a whistleblower award. The award process begins following the entry of a final judgment or order for monetary sanctions that, alone or jointly with judgments or orders previously entered in the same action or an action based on the same nucleus of operative facts, exceeds $1 million. Following the entry of such a judgment or it is anticipated that as the program evolves, the Office of the Whistleblower's standard practice will be to provide individualized notice to whistleblowers who may have contributed to the success of a Commission action resulting in monetary sanctions exceeding $1 million.

On Aug. 12, 2011, the Office of the Whistleblower posted Notices of Covered Actions for the 170 applicable enforcement judgments and orders issued from July 21, 2010, through July 31, 2011, that included the imposition of sanctions exceeding the statutory threshold of $1 million. Analysis of claims submitted in connection with any of these Covered Actions requires, as a preliminary matter, identifying all claimants who submit an application for an award in connection with the Covered Action before the deadline. The 90-day deadline for all applications for the initial list of Covered Actions is Nov. 11, 2011. Because the 90-day application period had not passed with respect to any Notices of Covered Actions as of the end of the fiscal year, applications for awards had not yet been processed. Accordingly, the Commission did not pay any whistleblower awards during fiscal year 2011.

Source: SEC.

Steve Kuzma, leader for corporate compliance services for Ernst & Young in the Americas, says companies should go back to the basics: fortify tone at the top, communicate the code of conduct, review processes and procedures for handling tips internally, and train managers on how to deal with complaints so employees don't perceive that they fall on deaf ears. “Most of the activity we see going on right now is on investigation protocols around hotline calls,” he says. Employees need to see that tips reported internally will not get lost in the organization but will be taken seriously and investigated, he says.

Communication is a “no brainer,” says Kipp, getting the message out loudly and frequently that the company values good behavior and welcome reports of aberrations. “This is another reminder that you can't communicate too often about the company's expectations and desires that employees bring issues to the company first,” she says. PwC is advising companies to pay special attention to non-retaliation policies to assure a culture where employees won't fear consequences for reporting concerns.

Preber says the current environment creates an ideal opportunity for compliance officers to appeal to the board and the CFO for the resources necessary to beef up their operations. “Companies are redoubling their efforts and putting money into their compliance officers and groups that are responding to this,” he says. “They believe that there is a cost to the company if they don't engage their workforce in reporting concerns timely.”

John Walsh, a partner with law firm Sutherland and a former director for the SEC's Office of Compliance Inspections and Examinations, says he's curious to see whether the SEC's new whistleblowing system draws credible tips from third parties outside of corporate entities. For example, when the SEC's inspector general, David Kotz, recently retired from the agency, Kotz joined a private investigation firm with plans to assist whistleblowers.

“The classic model of a whistleblower is someone at a company who sees something happening and tries to do something about it,” Walsh says. “I wonder if we will now see third-party investigators, almost third-party bounty hunters under this new model.”