The number of whistleblower tips to the Securities and Exchange Commission (SEC) continues to rise, according to the SEC’s 2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program. In the November 17, 2014 report, Sean X. McKessy, Chief, Office of the Whistleblower, notes that his office received 3,620 whistleblower tips in Fiscal Year 2014, which is more than a 20% increase from two years prior. Indeed, the SEC’s Office of the Whistleblower received 3,001 tips in the 2012 fiscal year and 3,238 in the 2013 fiscal year, so the 2014 number (which is almost 400 tips greater than the previous year) also represents a larger leap forward year-over-year.
The SEC maintains their growing whistleblower operation by incentivizing whistleblowers with an award that can range from 10%-30% of the SEC’s recovery. According to SEC counsel (at a 2014 Securities Litigation & Regulatory Update CLE in Philadelphia) the whistleblower will even get credit for any information gathered from a company’s internal investigations, although the date that the whistleblower informs the SEC is the date that is used to start the clock on the whistleblower’s award.
Not to be outdone, FINRA also has an Office of the Whistleblower, which, created in 2009, actually predates the SEC’s 2010 Office of the Whistleblower that was established under Dodd-Frank. However, unlike the SEC, FINRA does not financially incentivize whistleblowers. Thus, according to FINRA’s counsel, it only receives approximately 1,000 whistleblower tips per year, with between 200-300 referrals.
Counsel for the SEC and FINRA (at the 2014 CLE noted supra) agreed that self-reporting is considered a mitigating factor that is taken into consideration for fine determination. However, both the SEC and FINRA cautioned that self-reporting will not preempt a fine for wrongdoing, as both agencies can still impose hefty fines even where a company self-reports a violation.
The takeaway here is that whistleblowers continue to be a growing source of information for the SEC and FINRA to begin investigations and enforcement actions. As the SEC continues to incentivize whisleblowers and publicize large awards, the number of tips they receive is expected to continue to increase annually. Moreover, while there is some incentive for companies to self-report, the risk of being hit with a large fine still looms large. Additionally, as we noted earlier this year, the SEC discourages incentivizing whistleblowers to keep complaints in-house. Thus, if faced with a possible violation, it is important for companies and in-house counsel to engage experienced outside counsel as early as possible to investigate and advise on the proper response and path forward.