Loyola University Chicago School of Law, J.D. 2018
In the span of one week, two financial services companies paid penalty fees to the Securities and Exchange Commission for intentionally undercutting the Whistleblower Program. Impeding whistleblower communication is averse to quashing misconduct in the marketplace, which is the program’s main goal. Despite attempts in the financial industry to silence potential whistleblowers, the program has generated $935 million in financial remedies since 2011.
On January 17, 2017, the Securities and Exchange Commission (the “SEC”) announced that New York-based asset manager, BlackRock Inc., agreed to pay a fine in order to settle charges pending against the firm for improper use of separation agreements. The separation agreements issued by BlackRock forced departing employees to waive any right to whistleblower awards from the SEC, in turn, de-incentivizing former employees from reporting the firm’s misconduct to the SEC or other regulatory authorities. According to the SEC, more than one thousand exiting BlackRock employees signed this type of separation agreement in order to receive their monetary separation payments from the firm. BlackRock’s decision to insert this controversial waiver came on the heels of the SEC’s October 2011 announcement that it formally adopted whistleblower program rules.
On January 19, 2017, the SEC announced that Seattle-based financial services company, HomeStreet Inc., agreed to pay a penalty in order to settle pending charges regarding improper accounting methods that led to the firm impeding potential whistleblowers. The SEC’s report found that several employees expressed concerns to management in connection with accounting errors. Consequently, when the SEC contacted the firm independently seeking documents supporting the questionable accounting methods, the firm assumed this inquiry was the result of a whistleblower. HomeStreet took steps to silence the potential whistleblowers by suggesting unfavorable consequences and implementing separation agreements similar in form to those issued at BlackRock.
What is a whistleblower?
A whistleblower is an individual who reports time-sensitive information about securities law violations within the financial services industry to the SEC. It is not required for a whistleblower to be an employee of the firm he or she is reporting. However, a firm itself cannot be considered a whistleblower. In order for the SEC to issue a monetary award, the information provided by the whistleblower must lead to a successful SEC investigation. The SEC’s whistleblower program went into effect in 2010 when former President Barrack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The whistleblower program seeks to leverage reporting of misconduct by individuals inside or close to financial services firms with monetary rewards in order to more effectively protect investors from fraud.
Success of the Whistleblower Program
Since issuing the first whistleblower award in 2012, the SEC’s whistleblower program has awarded roughly $149 million to forty-one whistleblowers. As a result, SEC enforcement actions from whistleblower tips generated more than $935 million in financial remedies. The most recent whistleblower award went to three employees who reported their firm to the SEC for its participation in an investment scheme. The success and overall purpose of the SEC’s whistleblower program is impeded by firms, such as BlackRock and HomeStreet, who undercut their employees’ ability to report. An open line of communication between whistleblowers and the SEC is essential for meaningful, informative reporting, and, as a result, successful marketplace protection.
Whistleblowers Highlight the Importance of Effective Compliance Programming
By nature, whistleblowing constitutes retroactive reporting of misconduct. However, a strong internal compliance program can preempt misconduct in order to avoid liability in the long run. First and foremost, training and education for all employees on a firm’s policies and procedures is critical to ensuring a strong compliance culture. Cultivating a strong compliance culture will encourage all employees to act with integrity and diligence in their day to day duties. Additionally, monitoring and auditing procedures performed by internal compliance employees can both preempt and remedy misconduct before it escalates to an outside regulatory authority for investigation. It is equally important for an employee of a firm to have an open line of communication with its compliance department as it is for a whistleblower to have an open line of communication with the SEC.