SEC Whistleblower Program: Can compliance personnel, auditors, officers or directors qualify for an SEC whistleblower award?

Compliance Personnel, Auditors, Officers and Directors Can Obtain SEC Whistleblower Awards

Compliance personnel, including internal auditors, external auditors, officers, and directors, may incorrectly assume that they are not eligible for awards under the SEC Whistleblower Program. Under certain circumstances, however, compliance and ethics personnel can be eligible SEC whistleblower awards.

The SEC recognizes that key compliance personnel often are in the best position to recognize and expose fraud. Indeed, the recent Shkreli trial reveals how difficult it often is for compliance personnel to halt or remedy securities fraud.

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Click here to learn more about anti-retaliation protections for SEC whistleblowers under the Dodd-Frank Act and Sarbanes-Oxley Act.

When Can Key Compliance Personnel Report to the SEC?

Generally, individuals who are integral to a company’s compliance are not eligible for awards, unless an exception applies. These individuals include employees whose principal duties involve compliance or internal-audit responsibilities, employees of public accounting firms, and even the officers, directors, trustees, and partners of the relevant entity.

The exceptions to this rule, found in Section 21F-4 of the Securities Exchange Act, allow these individuals to report to the SEC and receive awards under the program if:

they reasonably believe the disclosure is necessary to prevent conduct likely to cause “substantial injury” to the financial interest or property of the entity or investors;
they reasonably believe the entity is engaging in “conduct that will impede an investigation of the misconduct”; or
at least 120 days have passed either since they properly disclosed the information internally, or since they obtained the information under circumstances indicating that the entity’s officers already knew of the information.

The 120-day exception does not apply to external auditors who obtained the information during their audit of an issuer. Instead, those external auditors can report to the SEC immediately after they inform a superior in their accounting firm about improper or illegal client activity and the accounting firm fails to promptly report that information to the SEC. The first two exceptions also apply to external auditors when the violation is “material.”

Information Necessary to Prevent “Substantial Injury” to Financial Interest

In April 2015, the SEC issued an award of more than $1 million to a compliance professional who “had a reasonable basis to believe that disclosure to the SEC was necessary to prevent imminent misconduct from causing substantial financial harm to the company or investors.” The SEC has not, however, provided detailed guidance on what type of conduct is “likely” to cause “substantial financial harm.” This vagueness may work in whistleblowers’ favor, as the SEC has used its discretion to issue awards liberally.

In a recent enforcement action, the SEC awarded more than $5.5 million to a whistleblower who failed to meet the requirements for an award. Specifically, the whistleblower did not provide his or her disclosures “in writing,” as the Whistleblower Program requires. The SEC cited “highly unusual circumstances” in deciding to waive the “in writing” requirement for the whistleblower, who had provided information in a manner “expressly requested” by SEC enforcement staff.

Information About “Conduct that Will Impede an Investigation of the Misconduct”

Key compliance personnel can also report to the SEC if their information reveals conduct by the entity that will impede an investigation of the misconduct. While the SEC has not yet issued an award under this exception, the rule appears to be straightforward: if one has evidence of tampering with an internal investigation, then he or she is permitted to report to the SEC immediately. This improper conduct may include destroying documents, influencing witnesses, or otherwise concealing material information.

120-Day Exception

The final, and most concrete, exception applies where at least 120 days have passed since the compliance personnel reported the information to their supervisor or to another person in the organization who is responsible for remedying the violation (i.e., audit committee, chief legal officer, chief compliance officer, or their equivalents). Alternatively, the individual may report the information at least 120 days after receiving the information, if it was received under circumstances indicating that any of the above-mentioned parties was already aware of it.

Importantly, any whistleblower who chooses this route should document the date of his or her disclosure in, for example, an email. Prior to receiving an award, all whistleblowers must prove their eligibility. Documentation that proves they waited 120 days may be the difference between a multimillion-dollar award and nothing.

Does the SOX Whistleblower Anti-Retaliation Law Protect Compliance Officers?

The SOX whistleblower lawyers at Zuckerman Law have represented compliance officers and other employees performing compliance and ethics work at public companies.

Click here to read reviews and testimonials from former clients. Drawing on our substantial experience representing corporate whistleblowers, we have published a free guide to SOX titled Sarbanes-Oxley Whistleblower Protection: Robust Protection for Corporate Whistleblowers:

Attorneys Representing Compliance and Ethics Whistleblowers

The experienced whistleblower lawyers at Zuckerman Law represent whistleblowers worldwide before the SEC under the Dodd-Frank SEC Whistleblower Program. The firm has a licensed Certified Public Accountant and Certified Fraud Examiner on staff to enhance its ability to investigate and disclose complex financial fraud to the SEC, and two of the firm’s attorneys served on the Department of Labor’s Whistleblower Protection Advisory Committee and in senior leadership positions at a government agency that protects whistleblowers.

Firm Principal Jason Zuckerman has been named by Washingtonian Magazine as a “Top Whistleblower Lawyer” and the firm has been ranked by U.S. News as a Tier 1 Firm in Labor & Employment Litigation.

Leading whistleblower law firm Zuckerman Law has substantial experience investigating securities fraud schemes and preparing effective submissions to the SEC concerning a wide range of federal securities violations, including:

For more information about the SEC Whistleblower Program, download our free ebook SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award and see the following resources:

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Yes, auditors and other compliance personnel can submit claims to the SEC for an award. However they must fall under one of three exceptions. The first exception is if the information is in order to prevent substantial injury to the financial interest of either investors or an entity. The second way is if the information is regarding an entity’s effort to impede with an open investigation into the specific conduct.

Finally is the 120-day rule. This is when if you report the violation to a supervisor or somebody in the company with the ability to remedy the specific violation such as the audit committee or chief legal officer for example, and you wait 120 days, then you can submit the information to the SEC.