SEC’s $9 Million Award: The Promise and Hurdles for Whistleblowers Who Serve in Compliance
On July 12, 2023, the Securities and Exchange Commission (SEC) awarded $9 million to a whistleblower who submitted a tip through the SEC’s Whistleblower Program. Per agency policy, the Award Order is heavily redacted and does not reveal the nature of the enforcement action, let alone the whistleblower’s identity. The Award Order is notable, however, as it explains that the whistleblower worked in a compliance or internal audit role (“compliance/audit”), and such individuals are subject to special rules under the SEC Whistleblower Program regulations.
Typically, a whistleblower (be it a corporate insider or outsider) can go directly to the SEC, submit a tip, and remain eligible for an award. Thus, in most cases there is no requirement to report the misconduct internally to obtain an award. But that is not the case for certain designated classes of individuals, including “employee[s] whose principal duties involve compliance or internal audit responsibilities, or [who are] employed by or otherwise associated with a firm retained to perform compliance or internal audit functions for an entity.” 17 C.F.R. § 240.21F-4(b)(4)(iii)(B).
For such compliance/audit personnel to remain eligible for an award, the whistleblower generally must report his or her concerns to the company’s “audit committee, chief legal officer, chief compliance officer (or their equivalents), or his or her supervisor” and then wait 120 days before submitting a tip to the SEC. § 240.21F-4(b)(4)(v) (providing certain other narrow exceptions for compliance/audit personnel as well). This rule provides companies the opportunity to timely self-report violations of federal securities laws to the government while still offering a route for compliance/audit personnel to reap a whistleblower award. In this case, this is precisely what the whistleblower did. The whistleblower reported the information to “[his or her] supervisor and then waited at least 120 days to report the information to the [SEC].”
The Award Order is otherwise remarkable as it emphasizes the significance of the whistleblower’s contribution to the SEC’s investigation and subsequent enforcement action. The Commission recognized that:
- the whistleblower’s tip caused the SEC to open its investigation (i.e., the Commission was not already on the trail);
- the tip included “highly significant and detailed information”;
- the “information b[ore] a close nexus” to the SEC’s charges;
- the whistleblower continued to provide assistance to the government during the investigation;
- the whistleblower repeatedly raised concerns internally; and
- millions of dollars were returned to investors via the underlying enforcement action.
While the Award Order does not set out the percentage of the monetary sanctions awarded to the whistleblower, the laudatory tenor of the order and the above factors suggest that the tipster received a percentage close to the statutory maximum of 30%, if not the 30% maximum itself.
In sum, the July 12th Award Order illustrates the opportunities offered to, and procedural rules governing, whistleblowers who serve in compliance or audit roles while also highlighting key factors that the SEC weighs in determining an award percentage for eligible whistleblowers.