In a recent speech, Robert Khuzami, the Director of the Division of Enforcement for the U.S. Securities and Exchange Commission (“SEC”), discussed the SEC’s new whistleblower program and the role internal investigations will play.
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has created a whistleblower program that allows the SEC to reward whistleblowers by giving them up to 30% of any recovery above $1 million. The SEC Enforcement Director stated that the purpose of this whistleblower program is to “incentivize insiders and others who possess useful information regarding unlawful conduct to come forward early and assist the SEC with identifying and bringing enforcement actions against companies and individuals that have violated the securities laws.”
One issue that has received a lot of attention is whether potential whistleblowers would be required to first file their complaint with their employer or the company in question. The SEC has decided against such a requirement. According to Khuzami, the SEC determined that making internal reporting a prerequisite to filing a complaint with the SEC would “place an undue and additional burden on the whistleblower…and likely would deter others from coming forward.” The SEC Enforcement Director cited “pump and dump” schemes run by boiler room operations and Ponzi schemes as examples of corrupt organizations where internal reporting would be futile.
However, the SEC did structure the rules so that whistleblowers would be incentivized to report complaints to internal compliance programs. The amount awarded to a whistleblower may be increased if the whistleblower files a complaint with the company’s internal compliance office. Also, if the whistleblower originally files the complaint with the company, any information provided by the company to the SEC will be attributed to the whistleblower. On the other hand, interference with internal investigations can decrease the amount awarded to a whistleblower.
To access the full transcript of the SEC Enforcement Director’s speech, click here.
RIA Compliance Consultants strongly recommends that all investment adviser firms implement a system to handle internal whistleblower complaints. If your investment adviser firm needs help implementing complaint procedures or would like help reviewing your existing system, any of our compliance consultants would be happy to assist your investment adviser.