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SEC Gives First Ever Whistleblower Award Under Rule That Incentivizes Internal Reporting

Posted  May 31, 2019

On May 24, the Securities & Exchange Commission announced that it awarded over $4.5 million to a whistleblower who both reported allegations of securities fraud at a company internally and shared this information with the SEC. This is the first time since the creation of its whistleblower rewards program that the SEC awards a claimant under Rule 21-F4(c)(3) of the Exchange Act, a provision designed to encourage whistleblowers to use internal compliance systems.

Under its three requirements, if 1) a whistleblower reports “original information through an entity’s internal whistleblower, legal, or compliance procedures” before or at the same time he or she] reports it to the Commission; and 2) the entity either provides the whistleblower’s information to the Commission, or provides results of an investigation triggered by the whistleblower’s information; and 3) “the information the company provided to the Commission” was sufficient to lead to a successful enforcement action, then the whistleblower is eligible for a reward.

Of course, making any internal report does not automatically qualify as going through proper compliance channels for purposes of the SEC rule. Some companies do not even have a formal internal reporting or compliance mechanism in place. In implementing the rule, the SEC provided guidance for what constitutes an internal report in such cases.

According to the Commission, a report to a supervisor would qualify as internal reporting if a company’s internal compliance procedures “require or permit reporting misconduct in the first instance to supervisors.” Additionally, if a company does not have established internal procedures for reporting violations, “a report to the company’s legal counsel, senior management, or a director or trustee” would qualify. The Rule thus serves the additional purpose of encouraging companies to strengthen their internal compliance programs and promote internal reporting.

The SEC noted that it anticipated companies would “take steps to promote a corporate environment where employees understand that internal reporting can have a constructive result, and that the net effect of this will be enhanced corporate compliance with the federal securities laws.”

In this case, the whistleblower first provided information through his or her employer’s compliance system. The company internally investigated the allegations and shared its results with the SEC, which led to the enforcement action. While the SEC does not typically reveal many details of the fraud or the enforcement target, the Commission highlighted in its award order that its enforcement interest was high in part “because of the difficulty in discovering violations occurring outside the United States.”

This brings the total amount of SEC awards to approximately $381 million since it issued its first award in 2012.

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Tagged in: Financial and Investment Fraud, SEC Whistleblower Reward Program, Securities Fraud, Whistleblower Rewards,