On March 29, 2021, the Securities and Exchange Commission ("SEC") announced an award of more than $500,000 to a whistleblower who had initially raised concerns internally about potential violations of the securities laws. The information provided by the whistleblower prompted an internal investigation by the company, which voluntarily reported the issues to an outside agency. That agency later turned over the information to the SEC. Separately, the whistleblower also reported the concerns directly to the SEC within 120 days of raising the potential violations internally to the company. The whistleblower's information and assistance allowed the SEC and another agency to quickly file enforcement actions ultimately resulting in the shutdown of an ongoing fraudulent scheme.
Although the whistleblower had reported their concerns internally before providing the information to the SEC, under the "safe harbor" provisions of the SEC's whistleblower program, Exchange Act Rule 21F-4(b)(7), information provided by a whistleblower is deemed submitted to the SEC at the same time it was reported internally so long as the whistleblower also reported the information to the SEC within 120 days of the internal report.
With this most recent award, the SEC has made awards to 40 individual whistleblowers in the first half of fiscal year 2021, totaling approximately $200 million. This exceeds the SEC's awards to 39 individual whistleblowers in all of fiscal year 2020, which at the time was the highest number of individuals receiving awards in the history of the whistleblower program. In September 2020, the SEC approved amendments to the whistleblower program intended to increase efficiency and expedite processing of award claims that likely contributed to the increased number of awards announced to date in 2021 and may also result in more whistleblower tips to the SEC. Whistleblower awards can range from 10% to 30% of the funds collected by the SEC in enforcement actions when monetary sanctions exceed $1 million.
Given the substantial financial incentives for employees and other individuals to report potential violations of the securities laws, companies should focus on implementing a robust internal reporting system that encourages internal reporting. A successful compliance program is designed to appropriately address all complaints or allegations of potential violations of the securities laws, including anonymous tips, and provide for full and prompt investigation of all such tips, as well as timely implementation of any necessary remediation. Self-policing prior to the discovery of potential violations, including establishing effective compliance procedures, is one measure considered by the SEC "in determining whether, and to what extent, it grants leniency to investigated companies for cooperating in its investigations and for related good corporate citizenship."
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