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Cady Bar the Door Insight & Commentary on SEC Enforcement Actions and Related Issues

SEC and CFTC Whistleblower Chiefs Speak

Posted in Whistleblowers

Sean McKessy and Vince Martinez, the respective chiefs of the whistleblower offices for the SEC and CFTC, spoke last week on a webinar hosted by Securities Docket, and made a number of salient points about their programs.  You can listen to the 70-minute webinar here.  Some of the more interesting issues (to me) follow:

Internal Reporting

Much ado was made after the Dodd-Frank Act was passed in 2010 and these two agencies had to write rules implementing the whistleblower provisions of the statute.  Many publicly traded companies pushed to require insider whistleblowers to report potential violations to internal compliance departments before bringing them to the attention of government agencies.

McKessy noted that the SEC’s rules were crafted to encourage, but not require, internal reporting, and that he hoped corporate compliance officers felt empowered by rules that would hold companies’ feet to the fire.  That is to say, he hopes compliance staff will be able to use the rules to impress the importance of robust compliance programs on corporate management.  If those programs are not funded and staffed adequately to make internal reporting an attractive and unthreatening option for employees, other, less appealing options are available.  Employees can simply go to the government instead.

For the CFTC’s part, Martinez pointed to rules that allow his agency to strike a balance between encouraging internal reporting and allowing whistleblowers to make the government their first stop in flagging violations of the law.  Specifically, assisting an internal investigation can be a factor increasing a whistleblower’s award, 17 C.F.R. § 165.9(b)(4), while undermining the integrity of internal compliance and reporting systems can be a factor in decreasing such an award, 17 C.F.R. § 165.9(c)(3).

Self-Reporting

Current rules for both agencies allow a whistleblower to report a potential violation internally and maintain her place “in line” for 120 days for award purposes, even if a second whistleblower goes directly to the SEC or CFTC with the same information in the intervening period.  McKessy made the point several times that this 120-period was not a de facto deadline for companies to initiate and complete internal investigations and report the results to the government.  At the same time, he acknowledged that it would be naïve to think that companies should not consider the 120-deadline at all.  For companies that think it is likely that internal tips have also been communicated to the government, perhaps an interim update to let regulators know the situation is under control could be a good idea.

Martinez said the situation was quite similar for the CFTC.  He added that the most significant threat to cooperation credit was the prospect that a company could sit on an allegation without making a materiality determination and decide not to report to the government at all.

McKessy also repeated an observation he had made last month at the SEC Speaks conference in Washington:  the vast majority of insider whistleblowers have reported their tips to internal compliance departments before reporting to the SEC.  He could think of only “less than a handful” of instances in which a whistleblower had disregarded his company’s internal reporting mechanisms and gone to the SEC directly.  The threat obviously remains, but I think this anecdotal evidence is fairly significant given the corporate protests of rules that did not require internal reporting – and worries that those rules would strongly discourage internal reporting at all.

Professional Whistleblowers

Martinez and McKessy both said that external whistleblowers are encouraged by rule and policy.  That is, people making original observations from the outside of corporations or doing original, independent analysis are free to make submissions to either agency and can earn whistleblower awards for doing so.  It is possible that such whistleblowers could connect dots in a way that the enforcement staffs have not yet been able to do.  Harry Markopolos, of Bernard Madoff fame, is perhaps the most celebrated example of this type.  Martinez hopes those whistleblowers will become a very prominent part of the CFTC’s program.

I’ll close by adding that the webcast series on Securities Docket is really quite extraordinary.  It now includes about 75 seminars on a wide variety of topics relevant to securities enforcement and litigation.  The panelists are always excellent, the programs are completely free, and they can be viewed at any time.  If you haven’t listened to these, I encourage you to check them out.