SEC Sends a Message Regarding Corporate Compliance

Started in 2011, the U.S. Securities and Exchange Commission (“SEC”)  whistleblower program has since awarded more than $50 million to 16 whistleblowers. The SEC’s whistleblower program includes awards to a company’s compliance officers. The most recent award—between $1.4 and $1.6 million—is the second to an employee with an auditing or compliance role. With this latest announcement, the SEC sends a clear message about the importance of addressing compliance issues. Where a company either does not act, or does not act promptly, the SEC will reward employees who provide information to prevent “substantial injury to the financial interest or property of the entity or investors,” even if that employee is part of a compliance function.   

On April 22, 2015, the SEC announced its first award to a compliance officer who provided information that led to an SEC enforcement action against the officer’s company. The SEC order explained that a compliance officer believed disclosure was necessary to prevent imminent harm to investors under the exception to the “original information” requirement, which permits the granting of awards to persons whose principal duties are “compliance or internal audit responsibilities.” Whistleblower Award Order, Exchange Act Release No. 74781, n. 1 (April 22, 2015). It is unclear what steps the company took, if any, to address the problem internally before the compliance officer disclosed the alleged misconduct to the SEC. Notably, the SEC declined to give a second whistleblower from the company an award because that whistleblower did not provide original information. Although in August 2014, the SEC offered the first employee with compliance or auditing responsibilities $300,000 when the company failed to address an issue brought to its attention, the latest award differs because this it was issued to a compliance officer. 

A month earlier, on March 2, 2015, the SEC also offered its first whistleblower award to a corporate officer. That award, between $475,000 to $575,000, involved an officer who reported misconduct learned from another employee. The SEC explained that although officers, directors, trustees, or partners who learn of fraud through their employees are typically ineligible to collect whistleblower awards, an officer becomes eligible should a company fail to address compliance issues brought to its attention by the responsible compliance personnel within 120 days. 

The SEC’s issuance of whistleblower awards has created the fear that the possibility of receiving an award may strain the relationship between a corporation and its compliance team. These concerns have not deterred the SEC. Its activities underscore the need for companies to maintain rigorous internal compliance programs, and to immediately address any potential violations reported by all personnel from all corporate levels and keep the 120-day period in mind.

For more information about SEC compliance, please contact Jonathan S. Feld at 312-627-5680 or jfeld@dykema.com, Jason Ross at 214-462-6417 or jross@dykema.com, Suzanne Alton at 312-627-2110 or salton@dykema.com, any of the attorneys listed on the left, or your Dykema relationship attorney.