One of the collateral impacts of employee anxiety due to COVID-19 has been an increase in whistleblower reports to the Securities and Exchange Commission (SEC). According to Steven Peikin, Co-Director of the Division of Enforcement, the SEC received 35% more tips, complaints and referrals for investigation between mid-March and early May 2020 than during the same period in 2019. This uptick may lead to additional SEC enforcement actions and penalties, giving SEC-regulated companies cause for concern.
The SEC’s Whistleblower program
The SEC’s Whistleblower program, initiated as a result of the 2010 Dodd-Frank Act, accepts information from members of the public regarding potential violations of the securities laws. Such violations may arise from activities by publicly-traded companies, as well as securities industries professionals like registered investment advisers and broker-dealers.
Since August 2011, the SEC has awarded more than $500 million for tips that led to monetary sanctions of more than $1 million. Three of the ten largest awards were issued in the last six months: an award of $50 million in June and awards of $27 million and $18 million in April. According to the SEC’s most recent annual report, the money available for payouts to whistleblowers was about $400 million as of September 30, 2019.
Clearly, the SEC’s whistleblower program is here to stay, and conditions created by the pandemic may increase whistleblowing activity. For companies that are regulated by the SEC, this has important implications.
Considerations for SEC-regulated companies
Both the Dodd-Frank Act and Sarbanes-Oxley Act of 2002 prohibit retaliation against whistleblowers. The U.S. Supreme Court has held that the broader whistleblower protections of Dodd-Frank only apply when the whistleblower made a report to the SEC, not if the matter was only reported internally. But it would be a rare case indeed for an employer to know that an employee submitted a tip to the SEC hotline. As a result, employers must use care in handling any potential whistleblower, both to avoid employee claims and to avoid a possible SEC action for retaliation.
The SEC has taken enforcement action against companies whose employment agreements contain language that can be read to discourage whistleblower reports to the SEC. All employment agreements (including severance agreements), compliance manuals, and codes of ethics should be drafted and reviewed carefully to avoid such a finding.
Regulated companies should continue to investigate potential violations of the securities laws, including those where a potential SEC whistleblower may be involved. Any internal investigation must avoid disclosure of the whistleblower’s identity, if discovered, and retaliation. But good governance and risk mitigation both require critical self-examination, and internal investigations fill that role. In the event of an SEC investigation, companies can receive cooperation credit for investigating and remediating, as well as self-reporting, potential violations of the securities laws.
As businesses navigate the COVID-19 pandemic, responding to increased whistleblower activity does not require a new playbook, just good execution of existing strategies.
Mary L. O’Connor’s practice focuses on representing companies and their officers and directors in commercial litigation and arbitration, as well as securities litigation, internal investigations, regulatory investigations, and enforcement proceedings.