The U.S. Securities and Exchange Commission (SEC) whistleblower program went into effect on July 21, 2010, when the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The same law also established a whistleblower incentive program at the Commodity Futures Trading Commission to incentivize reporting of violations of the Commodity Exchange Act, which is run by former senior SEC enforcement attorney Christopher C. Ehrman. The SEC Whistleblower Program rewards people who submit tips related to violations of the federal securities laws. The program offers robust employment protections, monetary awards and the ability to report anonymously. SEC whistleblowers are entitled to awards ranging from 10 to 30 percent of the monetary sanctions collected, which are paid from a replenishing Investor Protection Fund. Since 2011, whistleblower tips have enabled the SEC to recover over $4.8 billion in financial penalties from wrongdoers. The SEC has awarded more than $1 billion to whistleblowers. The largest SEC whistleblower awards to date are $279 million, $114 million, $110 million, and $86 million.
Overview While the SEC had in place a bounty program for more than 20 years to reward whistleblowers for insider trading tips and complaints, an Office of the Inspector General's 2013 report found that the SEC's old program received very few applications from individuals seeking a bounty, and there were very few payments made under the program, possibly because the program was not widely recognized. The report also determined the program was not well-designed. After the 2008 financial crisis and the Madoff investment scandal, in July 2010, the SEC's bounty program was significantly enhanced after the President signed Dodd-Frank into law. Specifically, Section 922 of Dodd-Frank amended the Securities Exchange Act of 1934 (Exchange Act) by adding Section 21F, which created the SEC Whistleblower Program and the SEC Whistleblower Office.
Under the new whistleblower program, the SEC is authorized to make monetary awards to whistleblowers who voluntarily provide original information that leads to successful enforcement actions resulting in monetary sanctions over $1,000,000. Under the program, a whistleblower may receive an award of between 10 and 30 percent of the monetary sanctions collected.
The SEC's new whistleblower program represents a major benefit over other whistleblower reward programs that do not allow anonymous submissions, such as the IRS whistleblower program. Anonymous whistleblowers must sign a declaration in their complaint under the penalty of perjury "that the information contained herein is true, correct and complete to the best of my knowledge, information and belief."Section F of the Form TCR Whistleblower's attorneys are responsible for the retaining the original, signed copy of the declaration.Section G of the Form TCR
According to the 2017 Annual Report to Congress on the Dodd-Frank Whistleblower Program, a majority of tips received by the SEC related to corporate disclosures and financials (19 percent), offering fraud (18 percent), and manipulation (12 percent). The states that yielded the highest number of tips in Fiscal Year 2017 were California, New York, Texas, Florida, and New Jersey. The countries that yielded the highest number of tips in Fiscal Year 2017 were Canada, the United Kingdom, and Australia. Since the inception of the program, the SEC has received whistleblower tips from 114 countries.
Violations
Insider trading Accounting fraud Financial reporting violations Bribery or corruption Ponzi schemes Misuse of client funds Manipulation of securities prices Violations of the Foreign Corrupt Practices Act Release agreements that interfere with the ability of the SEC to investigate
Notable awards Since 2011, whistleblowers' tips have enabled the SEC to recover more than $1.4 billion in financial penalties from wrongdoers. Former SEC Chair Mary Jo White called the new SEC whistleblower program a "game changer," in an April 2015 speech. "The program is a success – and we will work hard at the SEC to build on that success," she said.
Given that SEC investigations can take two to four years to complete, there were no awards made in the Program's first year of operation.
The first SEC whistleblower award was made on August 21, 2012 to a whistleblower who provided documents and information relating to an ongoing multimillion-dollar fraud. The whistleblower received $50,000, which represented 30 percent of the amount the Commission had collected at the end of the fiscal year.
Four awards were made in Fiscal Year 2013, which totaled over $14 million.
In Fiscal Year 2014, the Commission issued awards to 9 whistleblowers, with actual payouts during the year approaching $2 million. In 2014, the SEC announced an award of more than $300,000–the first to an employee in an audit or compliance function–who filed a submission with the SEC after reporting internally and the company failed to take action.
In Fiscal Year 2015, the Commission paid more than $37 million out of the Investor Protection Fund to eight whistleblowers. Among the awards, someone outside of the United States received more than $30 million, one of the largest award in the Program's history. Other precedent setting cases include the first award to a former company officer and the first award to a whistleblower who suffered retaliation for reporting possible securities violations to the SEC.
Fiscal Year 2016 proved to be record-breaking, with the SEC awarding $57 million in whistleblower awards, more than the total paid in all years combined. Among the significant awards, a former company employee received an award of more than $17 million for a detailed tip that substantially advanced the agency's investigation and another insider received $22 million for extensive assistance that helped the agency halt a well-hidden fraud.
While the financial incentive to report to the SEC is critical, approximately 84% of the award recipients to date raised concerns internally to their supervisors, compliance personnel or through internal reporting mechanisms before reporting violations to the SEC. When internal compliance systems fail, the monetary awards the program offers appropriately incentivize whistleblowers to continue their efforts to expose the wrongdoing by reporting directly to the SEC.
In Fiscal Year 2021, the SEC awarded its second-highest award to date, more than $50 million, to two whistleblowers. According to Jane Norberg, chief of the SEC Office of the Whistleblower, the joint whistleblowers played a critical role in alerting SEC staff to violations involving "highly complex transactions," and helping the agency recover tens of millions of dollars for investors. In a press release dated April 15, 2021, Norberg stated that the office had awarded more than $250 million to whistleblowers in Fiscal Year 2021 alone, with more than five months left to go in the government's fiscal year.
In Fiscal Year 2022, the SEC awarded whistleblowers approximately $229 million in 103 awards. They also received the largest number of whistleblower tips ever in a single fiscal year - 12,300 tips - from a variety of alleged misconduct categories that included Manipulation (21%), Offering Fraud (17%), Initial Coin Offerings and Cryptocurrencies (14%), and Corporate Disclosures and Financials (13%).
The former Chief of the Office of the Whistleblower, Sean McKessy, once said he understood the public's skepticism about the program. "I view it as already having been a very significant success, but I understand that people want to see the deliverable. And the deliverable, in our view, is paying people for good information," he said. He added that he welcomes the opportunity to make payouts: "The more, the better, obviously. The higher the amounts, the better," he said. "We are likely to see more awards at a faster pace now that the program has been up and running and the tips we have gotten are leading to successful cases," McKessy told the Wall Street Journal in June 2013. Sean McKessy left the agency in July 2016 after serving for five years and later joined a whistleblower law firm. He followed in the footsteps of Jordan A. Thomas, a former Assistant Director in the Enforcement Division, who had a leadership role in the development of the SEC Whistleblower Program. Thomas created a law firm specifically with the purpose of representing corporate whistleblowers in 2011. The SEC named Jane A. Norberg, the longtime Deputy Chief, Chief of the Office of the Whistleblower on September 28, 2016. On April 8, 2021, the SEC announced that Jane Norberg would be stepping down from her position sometime in April.
Appellate Court Challenges
On December 12, 2015 an anonymous party filed the first petition for a writ of mandamus in John Doe v. SEC. The motion is a rarely used motion that asks for intervention of the United States Court of Appeals for the District of Columbia Circuit into the SEC's alleged negligent dealing with the individual's claim. The motion claims that the SEC whistleblowers office had been negligent in a case originally posted as available for reward in 2012. The motion goes on to state that the anonymous petitioner applied for the reward in October 2012 and three years later there had been no preliminary determination made in the case USCA #15-1444.Unknown The petition went into detailed facts about the backlog of the program, and was highly redacted. It was later rendered as moot when the SEC issued an award to the anonymous party.
On December 5, 2017 the SEC program was again challenged by an anonymous party in John Doe V SEC (case number 16-1414) in the United States Court of Appeals for the District of Columbia Circuit.
Use of the Investor Protection Fund
Establishment of the fund
The Investor Protection Fund was established in the fourth quarter of fiscal year 2010 to be available to the U.S. Securities and Exchange Commission, without further appropriation or fiscal year limitation for paying awards to whistleblowers and funding the work activities of Office of Inspector General’s employee suggestion program.
The SEC is required to annually request and obtain apportionments from the Office of Management and Budget to use these funds. OFM has developed policies and procedures for Investor Protection Fund that include a description of the whistleblower awards process, financial reporting requirements, budget request procedures, and procedures for replenishing the Investor Protection Fund.
The Investor Protection Fund was established in August 2010 with approximately $452 million of non-exchange revenue that was transferred to the fund from the U.S. Securities and Exchange Commission's disgorgement and penalties deposit fund. At the end of fiscal year 2016, the fund had $368 million in it.
If the Investor Protection Fund balance drops below $300 million, Enforcement will replenish it by identifying qualifying receipts for deposit.
The fund earns interest through short-term investments with the Bureau of Public Debt.
Whistleblower process
Phase 1 – Intake/triage
During Phase 1 of intake and triage, whistleblowers submit a complaint to the SEC. Designated Division of Enforcement staff review the complaint to determine whether it should be assigned for further investigation or based on their initial review no further action (NFA) is warranted. Whistleblowers can submit a complaint using SEC form TCR to the SEC.
Online submissions are automatically uploaded into the SEC's Tips, Complaints, and Referrals system. Complaints received by mail and fax are manually entered into the TCR system by the Tips, Complaints, and Referrals intake group. The Office of Market Intelligence (OMI), located within Enforcement, reviews all Tips, Complaints, and Referrals and whistleblower complaints Enforcement receives.