SEC & CFTC Whistleblower Award Q&A - Securities Whistleblower Inc.

Q: What are the Securities and Exchange Commission and Commodities Futures Trading Commission whistleblower award programs?

A: The Dodd-Frank Act, signed into law in 2010, created these two programs to financially incentivize and protect whistleblowers who provide information to the U.S. Securities and Exchange Commission (“SEC”) or U.S. Commodities Futures Trading Commission (“CFTC”) regarding potential violations of US securities and commodities laws, rules and regulations. Additionally, under this same program, the SEC may bring award eligible enforcement actions related to violations of the Foreign Corrupt Practices Act (“FCPA”). The award provision of these two whistleblower programs provide for potential awards of between 10% and 30% of sanctions both imposed and collected in SEC or CFTC enforcement actions and “related actions”.

Q: Who is a whistleblower?

A: The SEC defines a whistleblower as anyone who alone, or jointly with others, provides the SEC with information, in the manner proscribed (e.g. in writing, using Form TCR, etc.), relating to a possible violation of any federal securities law, rule or regulation that has occurred, is ongoing or is about to occur. A whistleblower cannot be an entity or organization. The CFTC defines a whistleblower in the same manner but insofar as reports regarding possible violations of any federal commodities law, rule or regulation.

Q: What sort of whistleblower tips potentially qualify for awards from the SEC and CFTC?

A: The range of malfeasance reportable and eligible for potential whistleblower awards under Dodd-Frank and the FCPA are far wider than classic examples of securities fraud like the insider trading and stock pump-and-dump schemes of old. In fact, reportable malfeasance under these programs need not at all be what might be considered classic fraud like accounting misrepresentations or market manipulation. Reportable malfeasance frequently now also involves violations of compliance, controls, and records keeping rules and regulations. In short, any violation of a federal securities or commodities law, rule or regulation is fair game for an enforcement action by either the SEC or CFTC. Award eligible malfeasance may also often include a variety of kick-back and bribery schemes that violate the FCPA.

The below examples are a non-exhaustive sample of the wide range of violations that the SEC and CFTC have brought award eligible enforcement actions over:

Potential whistleblowers seeking fuller insight into areas of SEC and CFTC enforcement interest may wish to review the SEC’s and CFTC’s annual enforcement priorities as well as recent award eligible enforcement actions that are publicly listed here https://www.sec.gov/whistleblower/nocas and here https://www.whistleblower.gov/notices.

Q: Can Securities Whistleblower Inc. represent you in bringing whistleblower tips to the SEC or CFTC if you are located outside of New York, Massachusetts or even outside of the USA?

A: Yes, there are no citizenship or geographic requirements to be eligible to participate in the whistleblower award programs offered by the SEC or CFTC and attorneys licensed to practice in the highest court of any U.S. state are also licensed to practice before federal agencies like the SEC, CFTC or the Department of Labor (where related whistleblower discrimination and retaliation suits may potentially be brought pursuant to another financial whistleblower protection law, the Sarbanes-Oxley Act).

Q: Who is potentially eligible for an award under the SEC and CFTC Whistleblower programs?

A: An Individual, or two or more individuals acting jointly, who “voluntarily” and in the manner proscribed by the SEC or CFTC, (e.g., on form TCR), provide written “original information” to the SEC or CFTC about a past, ongoing or prospective violation of federal securities or commodities laws, rules or regulations and/or makes a substantial and important contribution to the success of one or more ongoing enforcement actions regarding the same that leads to judicial or administrative proceedings in which over $1,000,000 of sanctions are ordered and paid. The terms “original information” and “voluntary” are important terms and specifically defined under SEC or CFTC rules which differ. Information that the SEC or CFTC have already requested from the whistleblower (or their representative), or in some cases requested from the whistleblower’s employer, may, depending on circumstances, not be considered information that was “voluntarily” provided. Relatedly, information already known to the SEC or CFTC will generally not be considered “original information” unless the whistleblower was the original source of that information, for instance by way of a prior disclosure to another government or self-regulatory agency (e.g. OSHA, the Department of Justice, PCAOB, a State Attorney General, or FINRA) or to an employer that then passed that information on to the SEC or CFTC. In order to maintain their position as the “original source” of such information that has already reached the SEC or CFTC, the whistleblower must also thereafter timely (e.g. within 120 days for SEC whistleblowers and within 180 days for CFTC whistleblowers) and correctly (e.g., on form TCR) report the information directly to the SEC or CFTC. “Original” information provided to the SEC or CFTC may be information obtained firsthand by the whistleblower or information obtained by the whistleblower from others such as a supervisor so long as it is not received from an individual such as a compliance officer, auditor, company attorney or others who would, subject to exceptions, normally be ineligible for an award under respective SEC or CFTC rules. Certain individuals including those in Compliance, Audit and Legal, or corporate officers, may be ineligible for SEC or CFTC whistleblower awards depending on the specific facts and circumstances of their tip and the manner in which it is reported.

Q: How do the SEC and CFTC define information that has been “voluntarily” provided?

A: Generally the SEC defines information as “voluntarily” provided where that information has been provided before an individual or their representative (e.g. their attorney) has received a request, inquiry or demand that relates to the same subject matter from the SEC, a regulatory or law enforcement agency, a self-regulatory organization (e.g., FINRA), Congress or any other authority of the federal government. The CFTC defines “voluntarily provided” similarly but additionally may attribute a request for information made to an individual’s employer as being made to the individual themself unless the employer, after receiving the information from the whistleblower, fails to provide the whistleblower’s information to the requesting authority in a timely manner. Both the SEC and CFTC may also deem information that the whistleblower is under a pre-existing legal or contractual duty to report as information that has not been “voluntarily” provided.

Q: How do the SEC and CFTC define “original information”?

A: Both the SEC and CFTC define original information to be information that is: (a) derived from the whistleblower’s independent knowledge and analysis; (b) is information not already know to the SEC or CFTC from any other source, unless the whistleblower is the original source of the information; and (c) information that is not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit or investigation, or from the news media, unless the whistleblower was the source of that information. The SEC or CFTC may define information as unoriginal if it is subject to the attorney-client privilege or is information that the person reporting it obtained by virtue of their title at their employer (e.g. officer, director, auditor, attorney) and/or because the individual learned it from a person with such a title or through their employer’s internal reporting systems.

Q: What is the potential reward for SEC and CFTC whistleblowers?

A: Where total sanctions ordered and paid are greater than $1,000,000, the Dodd-Frank Act authorizes awards comprising a minimum of 10% and a maximum of 30% of total sanctions ordered and paid in the covered action brought by the SEC or CFTC and any “related actions” based on the same original information brought by certain other regulatory and law enforcement authorities like the Department of Justice or a State Attorney General, or, in the case of the CFTC, a foreign futures authority. Sanctions include, penalties, disgorgement and interest. With a single successful whistleblower the award will be at least 10% and at most 30% of sanctions ordered and paid. Where multiple whistleblowers receive awards from the SEC or CFTC in relation to the same sanctions, the sum of all such awards will be between 10%-30% but the individual awards will be less. Where awards are possible under both the SEC and CFTC whistleblower programs, the awards may be offset to avoid the receipt of a double award based on the same set of sanctioned violations. Both the SEC and CFTC have discretion to determine the amount of any award within the 10%-30% band and their rules describe discretionary positive or negative factors that they will use when making such a determination. Such factors include the significance of the information provided, the alignment of the information provided with the SEC’s or CFTC’s dynamic enforcement priorities, degree of any culpability of the whistleblower in the reported violation, any undue delay in reporting the violation to the SEC or CFTC, a whistleblower’s participation in internal compliance and reporting systems, and ongoing cooperation by the whistleblower and/or their attorney with the SEC or CFTC. SEC and CFTC awards that fall below the 30% maximum may be challenged and the SEC has, at times, increased awards in response to such challenges.

Q: How does a whistleblower report potential malfeasance to the SEC or CFTC?

A: SEC and CFTC rules require that a whistleblower file their report using the SEC and CFTC’s proscribed form TCR. If a whistleblower wishes to remain anonymous they may submit their tip through an attorney.

Q: Can whistleblowers use company documents in their tips to the SEC or CFTC?

Substantiating tips with clear documentary evidence showing malfeasance can be important when providing tips to the SEC and CFTC and the Dodd-Frank Act generally places limitations on an employer’s right to chill or impede a whistleblower from sharing information with the SEC or CFTC. At the same time other laws exist that protect an employer’s right to maintain legitimate trade secrets unrelated to any potential reported violations or documents subject to the attorney-client privilege. Similarly, recorded conversations may run afoul of privacy laws.

Q: What if any timing issues come into play as regards whistleblower reports to the SEC or CFTC?

A: As described above, to be eligible for an award a whistleblower must “voluntarily” provide “original” information regarding a potential violation of a securities or commodities law, rule or regulation. As a result, if a prior whistleblower has already submitted a tip, later whistleblowers reporting the same violation may not be deemed to have provided “original” information not already known to the SEC or CFTC though those reporting thereafter may still be eligible for an award if they make a significant contribution to an ongoing investigation that for instance allows the SEC or CFTC to economize on resources or leverage existing enforcement efforts. A whistleblower that waits to report may also encounter a situation where the SEC or CFTC requests the information directly from the entity engaged in the violation thus also rendering the whistleblower’s information potentially no longer “original” and/or “voluntarily“ provided. Both the SEC and CFTC whistleblower rules also give the SEC and CFTC the discretion to reduce awards so long as they remain equal to or above the 10% floor where information was provided to them with an unjustified delay, especially where ongoing harm to investors is occurring. Despite this, whistleblowers in audit, compliance and similar functions are subject to special rules that dictate that they may have a 120 day waiting period and/or internal reporting requirement that must be fulfilled prior to submitting an award eligible tip. Finally, though internal whistleblowing may be protected from discrimination and retaliation under a different law, the Sarbanes-Oxley Act, the protections available under Dodd-Frank only become available after a whistleblower has made reports to the SEC or CFTC.

Q: Can an employee report potential malfeasance by their employer or former employer if they signed a non-disclosure agreement or if company policy forbids such reporting?

A: The Dodd Frank Act and rules promulgated pursuant to it makes unlawful any employment, severance or pre-dispute arbitration agreement that impedes a whistleblower from participating in the SEC and CFTC whistleblower programs. To the extent that an employer agreement requires such things as a waiver of any SEC or CFTC whistleblower award or notification to the employer prior to reporting to the SEC or CFTC these agreements may be invalid and unenforceable and may even constitute violations of the Dodd-Frank Act itself. Indeed both CFTC and SEC whistleblower rules allow for either agency to prosecute employers who impede whistleblower participation in their respective programs and the SEC has already brought several such actions.

Q: Can whistleblowers report a violation if they were involved in the violation and still be eligible for an award?

A: Yes, so long as the whistleblower is not convicted of a criminal violation related to the judicial or administrative action under which the whistleblower would otherwise be eligible for an award. The SEC has made awards to whistleblowers who were involved in the reported malfeasance though it has the discretion to lower any ultimate award to such a whistleblower depending on the circumstances and degree of the whistleblower’s involvement in the malfeasance. The CFTC treats potentially culpable whistleblowers in a similar manner.

Q: May auditors and compliance officers make award eligible reports to the SEC or CFTC?

A: Certain individuals including auditors and compliance officers whose job it is to uncover, report or address malfeasance may not be eligible for awards under the SEC and CFTC whistleblower rules. Whether they are eligible depends on the facts and circumstances, for instance: whether the whistleblower reasonably believes that an employer is actively covering up or impeding an investigation of the violation; whether the whistleblower reasonably believes that reporting to the SEC or CFTC is needed to avoid imminent and substantial injury to the entity or its investors; and/or whether at least 120 days have elapsed since the individual internally reported the violation to their employer. In fact, the SEC has already granted several awards to whistleblowers in compliance and audit roles where such individuals first reported internally and then, when their employers failed to act, subsequently, and after 120 days, reported the same information to the SEC. The SEC has also granted awards to those in compliance roles under the reasonable belief of “substantial injury” exception where management was aware of the violations and failed to take preventative measures.

Q: How long does the process take?

A: Well presented and merit worthy tips to the SEC are typically first reviewed by staff of the SEC’s Office of Market Intelligence. If merit worthy, the tip is then forwarded on to the appropriate field office or “regional office” of the SEC for further investigation. After that, the regional offices may prosecute the malfeasance and impose sanctions on the culpable institution. That process may take months or more often years. Finally, the whistleblower must submit a timely and well supported application for an award in the manner proscribed by SEC using form WB-APP within 90 days of the SEC’s public announcement of the sanctions on their Notice of Covered Actions (“NOCA”) website and/or announcements elsewhere of “related actions”. It is the responsibility of the whistleblower to vigilantly monitor for any such public announcements of covered or related actions. The SEC will then review and make a preliminary determination on the whistleblower’s application for an award. The preliminary determinations may be challenged in accordance with SEC rules including strict and short time limits on the submission of any such challenges. There are no hard and fast rules as to the duration of the process, but it often takes several years especially if any preliminary award determination by the SEC is challenged by the whistleblower. The CFTC process is very similar to the SEC’s including as regards their own NOCA website, 90 day limit on applications for an award, required use of form WB-APP and a whistleblower’s right to challenge any preliminary determinations.

Q: How many tips do the SEC and CFTC receive annually and what happens to them?

A: In 2020 alone, the SEC received over 23,650 form TCR whistleblower submissions and the CFTC over 1030. Many such tips are reviewed and then designated as requiring “no further action” either because the whistleblower is mistaken as to whether malfeasance has occurred or because they cannot explain it in a compelling, well documented and actionable form. Whistleblowers may increase the chances of their tips being given attention by ensuring that they submit tips in the manner proscribed by the SEC and CFTC, by highlighting aspects of the tip that may meet the current and dynamic enforcement priorities of the SEC or CFTC, and by ensuring that their tips are logical, well evidenced and legally actionable.

Q: Does the Dodd-Frank Act protect US based individuals who report a potential violation of securities or commodities law, rule or regulations to the SEC or CFTC?

A: Yes. the Dodd-Frank Act’s whistleblower provisions provide robust protections to individuals located in the US who voluntarily report what they reasonably believe comprise possible violations of securities or commodities laws, rules or regulations to the SEC or CFTC and thereafter are discriminated or retaliated against for doing so. Whistleblower protections adhere irrespective of whether the whistleblower meets the eligibility requirements for a potential award. However, where a whistleblower reveals themselves to their employer, if the employer then discriminates and retaliates against them, asserting their rights and protections may require litigating against their employer in open court – a potentially arduous, costly and very public proposition. Partly for those reasons the SEC and CFTC whistleblower tip submission process allows for a whistleblower to make anonymous submissions through an attorney. Both agencies will also ask whistleblowers to specify any documents or other information that might reveal the whistleblower’s identity so that they can make efforts to use such information with care. Similarly, while a whistleblower must verify their identify prior to collecting any award, the SEC and CFTC in practice redact names from public award decisions. In short, the SEC and CFTC are required to, and do in fact go to great lengths to protect the identity of individuals making such submissions. Nevertheless, the SEC and CFTC may, under certain circumstances, need to share information with other agencies, for instance a financial institution’s primary regulator, or may be compelled to produce identifying documents in a court or administrative proceeding.

Q: Does the Dodd-Frank Act protect foreign based individuals against discrimination and retaliation for reporting a potential violation of a U.S. securities or commodities law, rule or regulation to the SEC or CFTC?

A: US Courts have, in the past, refused to extend the Dodd-Frank whistleblower protections extraterritorially.

Q: Are US based whistleblowers protected from workplace discrimination and retaliation if they report what they reasonably believe to be a violation of any securities or commodities law, rule or regulation to their employer but not the SEC or CFTC?

A: Yes, but not under the Dodd-Frank Act. If an employee for whatever reasons did not report externally to the SEC or CFTC and only ever reported internally to their employer, the protections of Dodd-Frank do not apply. Dodd-Frank whistleblower protections only adhere after any whistleblower reports to the SEC or CFTC. However, a different law, SOX, provides robust protections to US based internal whistleblowers experiencing discrimination and retaliation for internally reporting what they reasonably believe to be a possible violation of a securities or commodities law, rule or regulation. SOX however has a somewhat short statute of limitations regarding complaints of whistleblower discrimination and retaliation. Employees experiencing any such discrimination and retaliation must file SOX charges with OSHA within 180 days of the discrimination or retaliation or within 180 days of the date on which they reasonably should have become aware of such discrimination and retaliation. An aggrieved employee pursuing discrimination and retaliation claims at OSHA and the Department of Labor (DOL) pursuant to SOX then has the opportunity to remove the complaint to federal court if the matter is still pending without a “final determination” before OSHA or a DOL Administrative Law Judge 180 days after the charges were filed.

Q: Are whistleblowers outside of the US protected from workplace discrimination and retaliation if they report a violation of securities or commodities law, rule or regulation to their employer or their employer discovers that they have reported to the SEC or CFTC.

A: While the SEC won’t hesitate to make whistleblower awards to whistleblowers located outside of the US, even at times for tips related to activity that also occurred outside of the US, US courts have denied the extraterritorial application of the anti-discrimination and retaliation provisions of Dodd-Frank and SOX Acts. That said, overseas whistleblowers are common and may make their tips to anonymously through an attorney and the SEC and CFTC are required to, and do, go to great lengths to protect the identity of whistleblowers.

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