Monday, the U.S. Securities and Exchange Commission (SEC) announced a Dodd-Frank Act whistleblower award of $450,000 given to an individual who reported concerns about internal compliance. The investigation into the violations was refocused based on the whistleblower’s original information.

The whistleblower, who had compliance-related responsibilities, reported concerns about the relevant conduct internally within the company and then waited 120 days before reporting to the SEC.  In most cases, the SEC regulations require employees with compliance-related functions to wait 120 days before to filing an award claim.

This award is the SEC’s third whistleblower award to an individual who had compliance or internal audit responsibilities.

The Dodd-Frank Act established whistleblower offices within both the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) to incentivize individuals to come forward with high-quality information on securities fraud, foreign bribery, and commodities fraud.

The SEC has awarded over $396 million to 77 individuals since issuing its first award in 2012. The average award is over $5 million.

The SEC reviewed whether the individual complied with Exchange Act Rule 21F-4(b)(4)(iii)(B), which excludes information from being credited as the whistleblower’s “original information” if it came to them as “[a]n employee whose principal duties involve compliance or internal audit responsibilities. . . .”.  While the whistleblower, in this case, became aware of the potential securities violations through the course of compliance-related responsibilities, the SEC found that the whistleblower met the requirements for the exception to the rule. That exception applies when:

[a]t least 120 days have elapsed since you provided the information to the relevant entity’s audit committee, chief legal officer, chief compliance officer (or their equivalents), or your supervisor, or since you received the information, if you received it under circumstances indicating that the entity’s audit committee, chief legal officer, chief compliance officer (or their equivalents), or your supervisor was already aware of the information.

The SEC considered the following criteria to determine the amount of the monetary award:

1. although not the source of the investigation, Claimant’s information was significant in that it refocused the investigation on the violations that were ultimately charged; 
2. Claimant assisted Commission staff early in the investigation including by meeting with them in-person;
3. Claimant suffered unique hardships as a result of Claimant’s internal reporting, including internal compliance program.

“To ensure that important information about securities laws violations is reported to the SEC when appropriate corrective action is not taken by the company, the rules permit awards to compliance professionals in certain limited circumstances,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “Here, the whistleblower made reasonable efforts to work within the company’s compliance structure, suffered unique hardships as a result, and reported to the Commission after the requisite time period had passed, ultimately providing meaningful assistance to the Commission’s investigation and subsequent enforcement action.”

Whistleblowers, including those who reside outside of the United States, can qualify for financial awards under the Dodd-Frank Act, the Securities Exchange Act, and the Commodity Exchange Act.  Although whistleblowers can file claims anonymously and confidentially, the SEC has specific guidelines to qualify as an anonymous whistleblower. The SEC’s confidential filing procedures strictly protect the identity of any whistleblower who reports securities fraud.

Whistleblowers become eligible for a reward once the SEC issues sanctions based on the whistleblower’s information of $1 million or more.  If a whistleblower's original information results in the sanction, the law requires that the whistleblower a monetary award of between 10% and 30% of all fines and penalties collected. 

The first step to filing an official complaint regarding securities fraud or insider trading with the SEC’s Office of the Whistleblower is to fill out a TCR (“tip, complaint, and referral”) form. This form notifies the SEC about a potential violation. It is to a whistleblower’s advantage to file this form as quickly as possible. 

A whistleblower who would like to remain anonymous must hire an attorney to file the TCR form on their behalf. Because rewards can only be paid based on “original” information, the whistleblower who first alerts the Commission to a potential violation stands the strongest chance of obtaining the most substantial reward.