Up and Running: Developments with the SEC Whistleblower Program

Transcription

1 Up and Running: Developments with the SEC Whistleblower Program June 25, :30 p.m. Registration 6:00 p.m. Panel Discussion 7:00 p.m. Cocktail Reception Moderator Mary Hansen, Partner, Drinker Biddle Panelists Sean McKessy, Chief of the SEC s Office of the Whistleblower Stephen Stroup, Counsel, Drinker Biddle Table of Contents Presentation Slides Speech: Remarks at Georgetown University by Sean X. McKessy, Chief, Office of the Whistleblower 2012 Dodd-Frank Whistleblower Annual Report Press Release: SEC Announces Whistleblower Action, June 12, 2013 Article: Regulatory: Companies Should Take Action on Employee Tips in Light of the SEC Whistleblower Program by Mary P. Hansen and William L. Carr, InsideCounsel, June 5, 2013 Speaker Profiles Drinker Biddle s Practice Information Tab 1 Tab 2 Tab 3 Tab 4 Tab 5 Tab 6 Tab 7

2 Up and Running: Developments with the SEC Whistleblower Program June 25, :30 pm Registration 6:00 pm Panel Discussion 7:00 pm Cocktail Reception Panelists Sean X. McKessy Chief, Office of the Whistleblower Securities and Exchange Commission Mary P. Hansen Partner Drinker Biddle & Reath LLP Stephen G. Stroup Counsel Drinker Biddle & Reath LLP Up and Running: Developments with the SEC Whistleblower Program 2 1

3 Overview of Discussion Summary of whistleblower provisions and the bounty program Recent statistics Expectations vs. reality Impact of whistleblower provisions on internal compliance programs SEC staff s handling of whistleblower complaints Handling internal reports of misconduct Anti-retaliation provisions Up and Running: Developments with the SEC Whistleblower Program 3 Payment of Awards The Commission will pay an award or awards to one or more whistleblowers who: 1) Voluntarily provide the Commission 2) With original information 3) That leads to the successful enforcement by the Commission of a federal court or administrative action 4) In which the Commission obtains monetary sanctions totaling more than $1,000,000 See Section 21F(b) and Rule 21F-3. Up and Running: Developments with the SEC Whistleblower Program 4 2

4 Original Information Original information means information that: (1) is derived from the independent knowledge or analysis of a whistleblower; (2) is not known to the Commission from any other source; (3) is not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information; and (4) is provided to the Commission for the first time after July 21, See Section 21F(a)(3) and Rule 21F-4(b). Up and Running: Developments with the SEC Whistleblower Program 5 Amount of Award Amount of the award will be at least 10% and no more than 30% of the monetary sanctions that the Commission and other authorities are able to collect Determination of the amount is in the discretion of the Commission See Rule 21F-5. Up and Running: Developments with the SEC Whistleblower Program 6 3

5 Criteria for Determining Amount of Award The Commission will consider the following factors in determining the appropriate award percentage: Significance of the information provided by the whistleblower Assistance provided by the whistleblower Law enforcement interest Participation in internal compliance systems See Rule 21F-6. Up and Running: Developments with the SEC Whistleblower Program 7 Factors that May Decrease an Award: Interference with Internal Systems Did the whistleblower interfere with the entity s established legal, compliance or audit procedures to prevent or delay detection of the violation? Did the whistleblower make any material false, fictitious or fraudulent statements that hindered an entity s efforts to detect, investigate or remediate the violation? Did the whistleblower provide any false writing or document that hindered an entity s efforts to detect, investigate or remediate the violation? See Rule 21F-6(b)(3). Up and Running: Developments with the SEC Whistleblower Program 8 4

6 August 21, 2012: Whistleblower Awards Whistleblower who helped the SEC stop an ongoing multimillion dollar fraud received an award of 30% of the amount collected in the SEC s action June 12, 2013: Three whistleblowers who provided information about an ongoing fraudulent scheme that resulted in investor losses of $2.7 million were awarded a total of 15% of the amount collected in the SEC s action against a sham hedge fund and its CEO See Whistleblower Award Proceedings, File Nos , Up and Running: Developments with the SEC Whistleblower Program 9 Whistleblower Statistics FY ,001 whistleblower TCRs received from all 50 states, D.C. and Puerto Rico, as well as 49 countries outside of the U.S. Most common complaints: Corporate disclosures and financials (18.2%) Offering fraud (15.5%) Manipulation (15.2%) Complaints also related to: Insider trading (6.3%) Trading and pricing (4.8%) FCPA (3.8%) Municipal securities (2.1%) See Annual Report on the Dodd-Frank Whistleblower Program, FY 2012 (Nov. 2012). Up and Running: Developments with the SEC Whistleblower Program 10 5

7 The 120-Day Rule Employees who report wrongdoing internally first and, within 120 days, then report the wrongdoing to the SEC, will be deemed to have reported the information to the SEC on the date they reported internally, thereby preserving their place in line in terms of when the information was provided to the SEC and giving the whistleblower credit for information uncovered by the company in connection with its internal investigation See Rule 21F-4(7). Up and Running: Developments with the SEC Whistleblower Program 11 Participation in Internal Compliance Systems The Commission will consider whether the whistleblower reported the possible securities violations internally and whether the whistleblower assisted with any internal investigation See Rule 21F-6(a)(4). Up and Running: Developments with the SEC Whistleblower Program 12 6

8 Limitations on Information Information obtained through communications subject to attorney-client privilege generally cannot be used, in order not to weaken the benefits that consultation with counsel often contributes to an effective compliance program and the development of corporate best practices See Rule 21F-4(b)(4)(i). Up and Running: Developments with the SEC Whistleblower Program 13 Staff Communications with Whistleblowers No person may take any action to impede an individual from communicating with the Commission staff about a potential securities law violation If the whistleblower is a director, officer, member, agent, or employee of an entity that has counsel, the staff is authorized to communicate directly with the whistleblower regarding the possible securities law violations without seeking consent of the entity s counsel See Rule 21F-17. Up and Running: Developments with the SEC Whistleblower Program 14 7

9 No Amnesty Securities Whistleblower Incentives and Protection provisions do not provide amnesty to individuals who provide information to the SEC Providing information to the SEC does not preclude the SEC from bringing an action against a whistleblower based on his conduct See Rule 21F-15. Up and Running: Developments with the SEC Whistleblower Program 15 Anonymous Whistleblowers A whistleblower may submit information to the SEC anonymously, provided that the whistleblower is represented by counsel in connection with the submission of information and claim for an award Before the SEC will pay any award to a whistleblower, the whistleblower must disclose his identity to the SEC See Rule 21F-7(b). Up and Running: Developments with the SEC Whistleblower Program 16 8

10 Summary of Seaboard Factors Self-policing prior to the discovery of the misconduct, including establishing effective compliance procedures and appropriate tone at the top Self-reporting of misconduct when it is discovered, including conducting a thorough review of the nature, extent, origins and consequences of the misconduct, and promptly, completely, and effectively disclosing the misconduct to the public, to regulators Remediation, including dismissing or appropriately disciplining wrongdoers, modifying and improving internal controls and procedures to prevent recurrence of the misconduct, and appropriately compensating those adversely affected Cooperation with law enforcement authorities, including providing the Commission staff with all information relevant to the underlying violations and the company s remedial efforts See Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions (Oct. 23, 2001). Up and Running: Developments with the SEC Whistleblower Program 17 Prohibition Against Retaliation No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower Whistleblower has a private right of action and the Commission may bring an action based upon retaliation in an action or proceeding See Section 21F(h)(1) and Rule 21F-2. Up and Running: Developments with the SEC Whistleblower Program 18 9

11 Albany 321 Great Oaks Blvd. Albany, NY (518) phone (518) fax Chicago 191 N. Wacker Dr., Ste Chicago, IL (310) phone (312) fax Florham Park 500 Campus Dr. Florham Park, NJ (973) phone (973) fax London Drinker Biddle & Reath (U.K.) LLC 50 Mark Lane, 5th Floor London, EC3R 7QR +44 (0) phone +44 (0) fax Los Angeles 1800 Century Park East, Ste Los Angeles, CA (518) phone (518) fax Milwaukee 777 E. Wisconsin Ave., Ste Milwaukee, WI (310) phone (312) fax New York 1177 Avenue of the Americas, 41st Floor New York, NY (212) phone (212) fax San Francisco 50 Fremont St., 20th Floor San Francisco, CA (415) phone (415) fax Philadelphia One Logan Square, Ste Philadelphia, PA (215) phone (215) fax Washington, D.C K Street, N.W. Washington, DC (202) phone (202) fax Princeton 105 College Road East P.O. Box 627 Princeton, NJ (609) phone (609) fax Wilmington 1100 N. Market St., Ste Wilmington, DE (302) phone (302) fax Up and Running: Developments with the SEC Whistleblower Program 19 Thank You for Coming Mary P. Hansen Partner Drinker Biddle & Reath LLP (215) mary.hansen@dbr.com Stephen G. Stroup Counsel Drinker Biddle & Reath LLP (215) stephen.stroup@dbr.com 10

12 Speech by SEC Staff: Remarks at Georgetown University by Sean X. McKessy Chief, Office of the Whistleblower U.S. Securities and Exchange Commission Washington, D.C. August 11, 2011 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, or of the author's colleagues upon the staff of the Commission. Thank you for that kind introduction and for inviting me here today. As many of you know, the Securities and Exchange Commission serves to protect investors from fraud and ensure our markets operate fairly. We are a relatively small agency responsible for regulating more than 35,000 entities from investment advisers to corporate filers to national exchanges. In fact, our entire operating budget is smaller than the amount that some individual financial firms spend on their IT systems alone. Because we simply cannot be everywhere, our Chairman -- Mary Schapiro - - constantly urges us to find new ways to leverage the resources of others to fulfill our mission. That is why the new whistleblower program authorized by last year s financial reform legislation is so crucial to our work. It will help us to more quickly identify and pursue frauds that we might not have otherwise found on our own. It will strengthen our ability to carry our mission. And, it will save us much time and resources in the process. To summarize, the WB program provides a monetary incentive of between 10 and 30 percent of sanctions we collect for WB who voluntarily provide us with original information that lead to a successful SEC action with sanctions exceeding $1 million. This speech on the whistleblower program is particularly timely now because tomorrow marks the first day that our final rules implementing this

13 program go into effect. So I am excited to be here and to announce the launch tomorrow of our new Office of the Whistleblower website tomorrow morning, which I hope you will check out. And, as the first Chief of the SEC s Office of the Whistleblower, I am excited about the promise that this program holds. Since the Final Rules were adopted by the Commission in May, I have focused my efforts on reaching out to various sectors and constituencies to let people know about the benefits of the whistleblower program and the way the rules work. It has been the part of this job that I have enjoyed the most, as it helps me put a face to the names of people who will be directly affected by this new program whistleblowers, in-house compliance officers and lawyers. I have been impressed at how thoughtful many have been in parsing through the rules to try to understand what they require and how they may play out. But, my outreach efforts -- and review of the widely distributed commentary on the rules -- have led me to conclude that there still exists some misunderstanding about certain hotly debated issues related to the whistleblower program. So I d like to try to address three of them here today. As I do so, please keep in mind that my remarks represent my own views and not necessarily those of the Commission, the staff or any of the Commissioners. Issue Number 1:The Whistleblower program will bolster, not hamper, the internal compliance systems at companies across the country. This seems rather apparent to me, yet no topic has been, and continues to be, more heavily debated than this one. The fact is that the SEC whistleblower program is the first and only such program in the country that makes available a monetary award from the government to an individual that reports possible wrongdoing internally. Put another way, the SEC s WB program is the only one in the country that extends significant benefits to individuals that report internally that enhance the opportunity for a whistleblower award, and possibly an award at a higher end of the allowable range. Here s how: the rules specify that employees who report wrongdoing internally first and, within 120 days, then report the wrongdoing to the SEC, benefit in two significant ways. First, those employees will be deemed to have reported the information to the SEC on the date they reported internally. This preserves their place in line in terms of when information was provided to the SEC. Second, the employees who report internally first receive the benefit of all the information uncovered by the company in connection with its own internal investigation of the alleged wrongdoing. These are not hypothetical or inconsequential benefits. Under this scenario, an employee who reports information internally that itself might not have warranted an SEC investigation, could nonetheless become eligible for an

14 award if the internal investigation uncovers such information that does lead to an SEC investigation. For example, imagine an employee who, based on his experience, knows but does not have sufficient proof to substantiate that something is amiss with the company s accounting for a certain matter. That gut feeling in and of itself, may not be sufficiently timely, specific and credible to cause the SEC to open an investigation if it were reported to us. If, however, the employee were to report that gut feeling internally, and the company s subsequent investigation were to uncover specific, timely and credible information that is reported to us, the reporting employee who might not have otherwise even qualified for an award would then be eligible. Additionally, the employee gets the benefit of all the facts and details uncovered and reported to us by the company in connection with its internal investigation of the issue. So, the percentage of the award to the employee could be increased based on the enhanced quality and value of the information uncovered by the company s internal investigation. So the same employee that reported the tip of the iceberg something is wrong gets the benefit of the full iceberg everything that the internal investigation uncovered. That employee s award will be based on the whole iceberg likely a higher award than if just the tip were uncovered. The rules also require that cooperation with internal compliance programs be considered as a positive factor that could increase a whistleblower award, and interference with such programs as a negative factor that could decrease an award. These significant benefits to those who report internally first offer a great opportunity for companies and their compliance officers and personnel. Rather than undermining or weakening internal compliance programs, I believe the whistleblower program actually should empower internal compliance personnel to advocate for stronger and more transparent internal compliance programs. Why? Because the rules leave it to the employee to decide whether to report internally first or to contact the SEC -- and those companies that best ensure that their employees view internal reporting as a viable and credible option to address possible securities law violations are more likely to have the wrongdoing reported internally first. In my view, the net effect of the incentives for reporting internally is a rising tide that should lift all boats when it comes to the strength and effectiveness of internal compliance programs. Issue Number 2: The final rules recognize that in most instances, attorneys, compliance personnel and external auditors should not be allowed to become whistleblowers. Some have argued that by failing to adopt an absolute exclusion on attorneys, auditors and compliance officials, the final rules provide negative incentives that is to say, it encourages these individuals to abandon their professional responsibilities in favor of a potential bounty award. But I don t believe the rules have created any negative incentives. The best way to address this issue is to take a step back and consider the purpose of the whistleblower award program. While I certainly hope and expect that the SEC will end up paying awards to individuals who have provided information, such payment is the end result, but not the purpose,

15 of the whistleblower program. Instead, the program was created to add a tool to the SEC s arsenal to identify wrongdoing, prevent or stop it and, if appropriate, punish those responsible. By providing for the possibility of a whistleblower award to attorneys, compliance officials and auditors, the final rules recognize that we may in some narrow circumstances, need these individuals to come forward, in order to accomplish that goal. And I believe that, in the narrow circumstances described below, these individuals can and should be eligible for an award. But, make no mistake, those circumstances are limited. In essence, a monetary incentive is provided to these types of professionals to report to the Commission only when i. it is necessary to prevent imminent or ongoing misconduct; or, ii. the misconduct has been identified and reported, but not remediated in a timely fashion. Let s consider each group and the rationale to understand why these exceptions that allow for the possibility of an award are appropriate. Attorneys. With respect to attorneys, the final rules are very clear that attorneys may not break their attorney-client privilege for the purposes of reporting wrongdoing and receiving an award. Indeed, the rules specifically exclude from the definitions of independent knowledge or independent analysis (required to be eligible for an award) any information obtained through a communication subject to the attorney-client privilege. However, the final rules make reference to policy determinations -- made long before the whistleblower program was created -- that permit attorneys to come forward with potentially privileged information under very limited parameters. First, the rules provide for the possibility of an award to an attorney if disclosing the information is permitted under the Commission s attorney conduct rules adopted in connection with the Sarbanes-Oxley Act of Those rules adopted in are limited to the issuer context and permit attorneys to disclose information only if they reasonably believe that disclosure is necessary: i. to prevent the issuer from committing a material violation that is likely to cause substantial injury to the financial interest or property of the issuer or investors; ii. to prevent the issuer from interfering with an ongoing Commission or investigation or iii. to rectify the consequences of a material violation by the issuer that caused, or may cause, substantial injury. Similarly, the final rules do not preclude an award to an attorney who provides information when disclosure is permitted by state attorney conduct rules. These rules -- which pre-date the creation of the whistleblower program by decades -- vary by state but generally permit attorneys to disclose information: i. to prevent reasonably certain death or substantial bodily harm; ii. to prevent a client from committing a crime or fraud; or,

16 iii. to prevent, mitigate or rectify substantial injury to the financial interests that is reasonably certain to result or has resulted from the client s commission or a crime or fraud. By allowing for the possibility of an award to an attorney who reports under these circumstances, the final rules have created no negative incentives for attorneys. Think about the circumstances I just described. If the ultimate goal is to ferret out wrongdoing, how is it negative to provide for the possibility of an award to attorneys when severe harm is imminent? Compliance and Internal Audit Personnel. As for compliance and internal auditors, some claim the final rules allow for the possibility of an award to these professionals merely for doing what the company is paying them to do. But, as with attorneys, an employee with compliance or internal auditor responsibilities may only be eligible for a whistleblower award under the same limited circumstances as attorneys; that is if they have a reasonable belief that reporting is necessary to prevent actions that will result in imminent harm or impede an investigation. For the same reasons as with attorneys, allowing for the possibility of a whistleblower award under these circumstances does not encourage a breach of their responsibilities it rewards them for taking those obligations seriously. The third circumstance under which there is a possibility of an award to compliance or internal audit personnel occurs only when more than 120 days have passed since the information was reported to certain officials including the entity s audit committee, chief legal officer, chief compliance officer or supervisor. In this case, an award is possible only after these professionals have done what they are paid to do: They reported wrongdoing internally with a view of having it addressed -- but, for whatever reason, the entity failed to take timely remedial action. Keeping in mind the ultimate goal to prevent or stop possible violations of the securities laws, I see nothing wrong with incentivizing compliance and internal audit employees to come forward when the internal compliance process has failed. External Auditors. And, with respect to external auditors, their eligibility is also limited to narrow circumstance. In their case, it s where the auditors have a reasonable basis to believe that their employer (the audit firm) failed to make the required disclosures of the audit client s wrongdoing under Section 10A of the Exchange Act. In these rare instances, the eligibility for an award is limited to the reporting of misconduct that has been detected but not reported to us. Issue Number 3: The whistleblower program ensures that efforts to address misconduct are sped up, not delayed. Of course, I ve heard the claim that employees will delay reporting ongoing misconduct to increase the size of the potential award. The theory is that

17 since the whistleblower award percentage is calculated against the monetary sanctions obtained, whistleblowers will be incentivized to allow misconduct to grow so the sanctions will be greater. However, this theory ignores some significant aspects of the final rules. First, to be eligible for an award, a whistleblower must provide the SEC with original information that is, information not already known. This requirement is a natural and powerful disincentive for an individual to sit on information about ongoing misconduct because doing so means someone else may come forward first. Second, information reported to us must be specific, credible and timely if it is to lead us to open an investigation. So an individual who delays reporting risks that the information will not lead to an investigation -- a no investigation, no case, and no case, no award. Third, the final rules include an unreasonable delay as one of the factors that might decrease the size of an award. So, the whistleblower who waits may end up with a lesser percentage than he or she might have gotten if he or she had report promptly. Additionally, I ve also heard some claim that wrongdoing reported by a whistleblower will be allowed to continue because the SEC will needlessly keep management in the dark about the report, depriving the company of the opportunity to take swift responsive action. This theory rests on the assumption that because a whistleblower is involved, the SEC cannot or will not involve the company in the investigation. In fact, the SEC has been working with insiders and whistleblowers long before the whistleblower award program was established, and, when appropriate, we have included the company in efforts to investigate and punish wrongdoing most effectively and efficiently. Companies should expect that the SEC s practice of involving them where appropriate will continue. The possibility that there could be a monetary award paid to the whistleblower at the conclusion of a successful action should in no way alter this historic practice. * * * * * While the final rules go into effect tomorrow, we have already seen an increase in the quality of the tips we have received since the passage of Dodd-Frank in July Long letters that include detailed information about potential violations. It s information like this that can save our attorneys months of investigation and allow us to stop a fraud earlier in the process. Violations of the securities laws have far-reaching consequences even beyond those directly affected by the wrong. Surely, the enormous losses suffered by investors are tragic enough, but perhaps a greater harm is the loss of confidence by the public in the fairness of the investment process. While the vast majority of companies and securities professionals are honest and law-abiding, the actions of a few rotten apples can unfairly taint the entire industry in the minds of much of the public.

18 It is in the interest of all of us - investors, - companies, securities professionals, regulators and whistleblowers -- to stop those who seek to violate the securities laws, manipulate the markets and cheat investors. At the same time, we also understand the need to ensure that the heavy hand of government does not place an undue burden on the proper functioning of our markets and the capital formation process. The Whistleblower Program is a balanced approach designed to aid the SEC' by encouraging those aware of misconduct to come forward while at the same time incentivizing those individuals to report their suspicions of misconduct to their companies first so the companies take appropriate action to remedy it. The Whistleblower Program recognizes that we all have a stake in eliminating wrongdoing and that only when we act together can we effectively stop those who seek to take unfair advantage of the vast majority of investors and companies that play by the rules. Thank you for your time and attention and I will be pleased to take any questions.

19 U.S. Securities and Exchange Commission Annual Report on the Dodd-Frank Whistleblower Program Fiscal Year 2012 This is a Report of the Staff of the U.S. Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, findings, or conclusions contained herein. November 2012

20 Table of Contents I. Introduction... 1 II. Activities of The Office of The Whistleblower... 2 III. Whistleblower Tips Received During Fiscal Year IV. Processing of Whistleblower Tips During Fiscal Year V. Whistleblower Incentive Awards Made During Fiscal Year VI. Securities and Exchange Commission Investor Protection Fund... 9 Appendix A: Whistleblower Tips by Allegation Type Fiscal Year 2012 Appendix B: Whistleblower Tips Received by Geographic Location United States and its Territories Fiscal Year 2012 Appendix C: Whistleblower Tips Received by Geographic Location International Fiscal Year 2012

21 I. Introduction Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ), 1 amended the Securities Exchange Act of 1934 (the Exchange Act ) 2 by, among other things, adding Section 21F, 3 entitled Securities Whistleblower Incentives and Protection. Section 21F directs the Commission to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful Commission enforcement actions resulting in the imposition of monetary sanctions over $1,000,000, and certain successful related actions. Awards are required to be made in the amount of 10% to 30% of the monetary sanctions collected. Awards will be paid from the Commission s Investor Protection Fund (the Fund ). In addition, 924(d) of the Dodd-Frank Act directs the Commission to establish a separate office within the Commission to administer and to effectuate the whistleblower program. Section 924(d) of the Dodd-Frank Act requires the Commission s Office of the Whistleblower (the Office or OWB ) to report annually to Congress on OWB s activities, whistleblower complaints, and the response of the Commission to such complaints. In addition, Exchange Act 21F(g)(5) requires the Commission to submit an annual report to Congress that addresses the following subjects: the whistleblower award program, including a description of the number of awards granted and the types of cases in which awards were granted during the preceding fiscal year; the balance of the Fund at the beginning of the preceding fiscal year; the amounts deposited into or credited to the Fund during the preceding fiscal year; 1 Pub. L. No , 922(a), 124 Stat 1841 (2010) U.S.C. 78a et seq U.S.C. 78u-6. 1

22 the amount of earnings on investments made under Section 21F(g)(4) during the preceding fiscal year; the amount paid from the Fund during the preceding fiscal year to whistleblowers pursuant to Section 21F(b); the balance of the Fund at the end of the preceding fiscal year; and a complete set of audited financial statements, including a balance sheet, income statement and cash flow analysis. This report has been prepared by OWB to satisfy the reporting obligations of Dodd-Frank Act 924(d) and Exchange Act 21F(g)(5). Parts II, III, and IV of this report primarily address the requirements of Dodd-Frank Act 924(d), and Parts V and VI of this report, along with the financial statements of the Investor Protection Fund that are included in the Commission s annual Agency Financial Report, primarily address the requirements of Exchange Act 21F(g)(5). II. Activities of The Office of The Whistleblower Section 924(d) of the Dodd-Frank Act directs the Commission to establish a separate office within the Commission to administer and to enforce the provisions of Exchange Act 21F. On February 18, 2011, the Commission announced the appointment of Sean X. McKessy to head OWB in the Division of Enforcement ( Enforcement ). 4 On January 17, 2012, the Commission named Jane A. Norberg as the Office s Deputy Chief. 5 In addition to Mr. McKessy and Ms. Norberg, the Office is currently staffed by eight attorneys, three paralegals, and one program support specialist Additionally, as of the date of this report, the Office has extended an offer to one additional attorney who is expected to join OWB shortly. 2

23 Since its establishment, OWB has focused primarily on establishing the office and implementing the whistleblower program. During Fiscal Year 2012, the Office s activities included the following: Communicating with whistleblowers who have sent tips, additional information, claims for awards, and other correspondence to OWB. OWB also meets with whistleblowers, potential whistleblowers and their counsel, and consults with the staff in Enforcement to provide guidance to whistleblowers and their counsel concerning expectations and follow up; Reviewing and processing applications for awards; Working with staff in Enforcement to identify and track all enforcement cases potentially involving a whistleblower to assist in the documentation of the whistleblower s information and cooperation in anticipation of an eventual claim for award; Maintaining and updating the OWB website to better inform the public about the whistleblower program ( The website includes two videos by Mr. McKessy providing an overview of the program and information about how tips, complaints and referrals are handled. The website also contains detailed information about the program, copies of the forms required to submit a tip or claim an award, notices of covered actions, links to helpful resources, and answers to frequently asked questions; Supporting the initiative of the Residential Mortgage Backed Securities (RMBS) Fraud Working Group, a working group of the Financial Fraud Enforcement Task Force established by President Obama in November 2009, by establishing an online link to the OWB website from the member agencies of the RMBS Fraud Working Group for the public to submit tips and complaints about possible illegal activity in the offering and sale of residential mortgage-backed securities. The OWB website was also updated in connection with this initiative to include a page providing an overview of the RMBS Fraud Working Group and a direct link to report RMBS fraud. OWB further supported the initiative by helping to implement procedures, consistent with the confidentiality requirements of Exchange Act 21F(h)(2), to permit the Enforcement staff to share whistleblower tips with the member agencies of the RMBS Fraud Working Group; Providing extensive training on the Dodd-Frank Act and the Commission s implementing rules (the Final Rules ) 7 to the Commission s staff. This included in-person training and educational sessions in seven of the eleven Regional Offices, video-linked training to the entire Enforcement staff, as well as training in the Home Office; C.F.R. 21F-1 through 21F-17. 3

24 Establishing and implementing internal policies, procedures, and protocols; Manning a publicly-available whistleblower hotline for members of the public to call with questions about the program. OWB attorneys return all calls within 24 business hours. During the 2012 fiscal year, the Office returned over 3,050 phone calls from members of the public; 8 Reviewing and entering whistleblower tips received by mail and fax into the Commission s Tips, Complaints, and Referrals System (the TCR System ); Conferring with regulators from other agencies whistleblower offices, including the Internal Revenue Service, Commodity Futures Trading Commission, Department of Justice, and Department of Labor (OSHA), to discuss best practices and experiences; Publicizing the program actively through participation in webinars, media interviews, presentations, press releases, and other public communications; 9 and Providing ongoing guidance to Commission staff regarding various aspects of the program, including the development of internal policies for the handling of confidential whistleblower identifying information. III. Whistleblower Tips Received During Fiscal Year 2012 The Final Rules specify that individuals who would like to be considered for a whistleblower award must submit their tip to OWB on Form-TCR either via facsimile or mail or via the Commission s online TCR questionnaire portal. All whistleblower tips received by the Commission are entered into the TCR System, the Commission s centralized database for the prioritization, assignment, and tracking of TCRs received from the public. In Fiscal Year 2012, 3,001 whistleblower TCRs were received. Appendix A lists, by subject matter and month, the number of whistleblower tips received during the 2012 fiscal year. The most common complaint categories reported by whistleblowers were Corporate Disclosures and 8 Since the hotline was established in May 2011, the Office returned approximately 3,700 phone calls from members of the public through the end of the 2012 fiscal year. 9 See, e.g., 4

25 Financials (18.2%), Offering Fraud (15.5%), and Manipulation (15.2%). 10 The Commission received whistleblower submissions from individuals in all 50 states, the District of Columbia and the U.S. territory of Puerto Rico, as well as 49 countries outside the United States. Appendices B and C set forth tabular presentations of the sources of foreign and domestic whistleblower tips. IV. Processing of Whistleblower Tips During Fiscal Year 2012 OWB currently leverages the resources and expertise of the Commission s Office of Market Intelligence ( OMI ) to evaluate incoming whistleblower TCRs and to assign specific, timely, and credible TCRs to members of the Enforcement staff for further investigation. During the evaluation process, both staff and supervisors in OMI examine each tip to identify those that are sufficiently specific, timely, and credible to warrant the further allocation of Commission resources. Tips that relate to an existing investigation are generally forwarded to the staff working the existing matter. Tips that could benefit from the specific expertise of another Division or Office within the Commission are generally forwarded to staff in that Division or Office for further analysis. When appropriate, tips that fall within the jurisdiction of another federal or state agency are forwarded to the Commission contact at that agency, provided this can be done consistent with the confidentiality requirements of Exchange Act 21F(h)(2). Tips that relate to the financial affairs of an individual investor or a discrete investor group, and that are determined not to be strong candidates for further expenditure of the Commission s investigative resources, are usually forwarded to the Office of Investor Education and Advocacy ( OIEA ). Comments or questions about agency practice or the federal securities laws are also forwarded to OIEA. 10 The Commission also receives TCRs from individuals who do not wish or are not eligible to be considered for an award under the whistleblower program. The data in this report is limited to those TCRs that include the required whistleblower declaration and does not reflect all TCRs received by the Commission during the fiscal year. 5

26 OWB supports the tip allocation and investigative processes in several ways. When whistleblowers submit tips on Form TCR in hard copy via mail or fax, OWB enters this information into the TCR System so it can be evaluated. 11 During the evaluation process, OWB may assist by contacting the whistleblower to obtain additional information, or may participate in the qualitative assessment of the best course of action to take in response to a whistleblower tip. During an investigation, OWB is available as needed to serve as a liaison between the whistleblower (and his or her counsel) and investigative staff. On occasion, OWB arranges meetings between whistleblowers and subject matter experts on the Enforcement staff to assist in better understanding the whistleblowers submissions and developing the facts of specific cases. OWB staff also communicates frequently with Enforcement staff with respect to the timely documentation of information regarding the staff s interactions with whistleblowers, the value of the information provided by whistleblowers, and the assistance provided by whistleblowers as the potential securities law violation is being investigated. V. Whistleblower Incentive Awards Made During Fiscal Year 2012 OWB posts a Notice of Covered Action for each Commission enforcement action where a final judgment or order, by itself or together with other prior judgments or orders in the same action issued after July 21, 2010, results in monetary sanctions exceeding $1 million. Once a Notice of Covered Action is posted, individuals have 90 calendar days to apply for an award by submitting a completed Form WB-APP to OWB by the claim due date listed for that action. Timely submitted applications are reviewed by the staff designated by the Director of Enforcement ( Claims Review Staff ) in accordance with the criteria set forth in the Dodd-Frank 11 Tips that are submitted by whistleblowers through the Commission s online Tips, Complaints and Referrals questionnaire are automatically forwarded to OMI for evaluation. 6

27 Act and Final Rules. The Claims Review Staff is currently comprised of four senior officers in Enforcement and a senior attorney in the Office of the General Counsel. To assist the Claims Review Staff in its review, OWB prepares a binder of relevant documents and a recommendation concerning the appropriate disposition of the award claim. The Claims Review Staff then makes a Preliminary Determination setting forth its assessment as to whether the claim should be allowed or denied and, if allowed, setting forth the proposed award percentage amount. If a claim is denied and the applicant does not object, then the Preliminary Determination of the Claims Review Staff becomes the Final Order of the Commission. However, an applicant can ask for reconsideration of the Preliminary Determination, in which event the Claims Review Staff considers the issues and grounds advanced in the applicant s response, along with any supporting documentation provided. After this additional review, the Claims Review Staff issues a Proposed Final Determination, and the matter is forwarded to the Commission for its decision. In addition, all Preliminary Determinations of the Claims Review Staff that involve an award of money are forwarded to the Commission as Proposed Final Determinations irrespective of whether the applicant objected to the Preliminary Determination. These procedures ensure that all claims for which a monetary award is recommended and all preliminary denials of claims to which the applicant objects are put before the Commission for final decision. Within 30 days of receiving notice of the Proposed Final Determination, any Commissioner may request that the Proposed Final Determination be reviewed by the full Commission. If no Commissioner requests such a review within the 30-day period, then the Proposed Final Determination will become the Final Order of the Commission. In the event a Commissioner requests a review, the Commission reviews the record that the Claims Review Staff relied upon in making its determinations and issues its Final Order. 7

28 During Fiscal Year 2012, the Commission made its first award under the whistleblower program. On August 21, 2012, a whistleblower who had helped the Commission stop an ongoing multi-million dollar fraud received an award of 30 percent -- the maximum percentage payout allowed by law -- of the amount collected in the Commission s enforcement action against the perpetrators of the scheme. 12 The award recipient in this matter submitted a tip concerning the fraud and then provided documents and other significant information that allowed the Commission s investigation to move at an accelerated pace and ultimately led to the filing of an emergency action in federal court to prevent the defendants from ensnaring additional victims and further dissipating investor funds. 13 The whistleblower s assistance led to the court ordering more than $1 million in sanctions, of which approximately $150,000 had been collected by the end of the fiscal year. In accordance with the 30 percent award determination, on August 21, 2012, the whistleblower was paid nearly $50,000. Motions for additional judgments are currently pending before the court and any additional collections or increase in the sanctions ordered and collected will increase the amount paid to the whistleblower. 14 As noted below, whistleblowers receive their awards from the Securities and Exchange Commission Investor Protection Fund ( Fund ) established pursuant to Section 922 of the Dodd-Frank Act. During the 2012 fiscal year, OWB posted 143 Notices of Covered Action for enforcement judgments and orders issued during the applicable period that included the imposition of sanctions 12 Exchange Act Release No (Aug. 21, 2012). The Commission also denied a claim from a second individual seeking an award in this same matter because the information provided did not lead or significantly contribute to the Commission s successful enforcement action, as required under the Dodd-Frank Act and the Final Rules for a whistleblower award. 13 The statutory obligation under the Dodd-Frank Act to protect the identity of whistleblowers under the program precludes us from providing additional details as to the whistleblower who was paid and the covered action to which payment related. 14 An additional payment of over $500 was made to the whistleblower in September, 2012, representing 30 percent of additional sanctions collected in connection with the case. 8

29 exceeding the statutory threshold of $1 million. 15 OWB is continuing to review and process applications for awards received during the 2012 fiscal year. VI. Securities and Exchange Commission Investor Protection Fund Section 922 of the Dodd-Frank Act established the Fund to provide funding for the Commission's whistleblower award program, including the payment of awards in related actions. 16 In addition, the Fund is used to finance the operations of the SEC Office of the Inspector General s suggestion program. 17 The suggestion program is intended for the receipt of suggestions from Commission employees for improvements in the work efficiency, effectiveness, and productivity, and use of resources at the Commission, as well as allegations by Commission employees of waste, abuse, misconduct, or mismanagement within the Commission. 18 The following table provides certain of the information required by Exchange Act 21F(g)(5) for the 2012 fiscal year (October 1, 2011 through September 30, 2012). As of 15 By posting a Notice of Covered Action for a particular case, the Commission is not making any determinations either that (i) a whistleblower tip, complaint or referral led to the Commission opening an investigation or filing an action with respect to the case or (ii) an award to a whistleblower will be paid in connection with the case. 16 See Exchange Act 21F(g)(2)(A). 17 See Exchange Act 21F(g)(2)(B), which provides that the Fund shall be available to the Commission for funding the activities of the Inspector General of the Commission under section 4(i). The Office of the General Counsel has interpreted section 21F(g)(2)(B) to refer to Section 4D of the Exchange Act, which establishes the Inspector General's suggestion program. Subsection (e) of that section provides that the activities of the Inspector General under this subsection shall be funded by the Securities and Exchange Commission Investor Protection Fund established under Section 21F. 18 See Exchange Act 4D(a). 9

30 September 30, 2012, the Fund was fully funded, with an ending balance of $453,429, FY 2012 Balance of Fund at beginning of fiscal year $452,788, Amounts deposited into or credited to Fund during fiscal year $ Amount of earnings on investments during fiscal year $757, Amount paid from Fund during fiscal year to whistleblowers ($45,739.16) Amount disbursed to Office of the Inspector General during fiscal year ($69,727.07) Balance of Fund at end of the fiscal year $453,429, The audited financial statements for the Fund, including a balance sheet, income statement, and cash flow analysis are included in the Commission s Agency Financial Report, separately submitted to Congress and accessible at 19 Pursuant to Exchange Act 21F(g)(3), no monetary sanctions are deposited into or credited to the Fund if the balance of the Fund exceeds certain thresholds at the time the monetary sanctions are collected. 10

31 Appendix A: Whistleblower Tips by Allegation Type- Fiscal Year c: c: 0 80 ~ 70.a > 60 <11 Q. 50 ~ 40 c: 0 30 ',P 20 1>0 "' ~ 10 <{ 0 «: ~ Disclosure Offering al 3 and Fraud Financials Insider Trading Trading and Pricing FCPA Unregistered Offerings Market Event Securities and Public Pension Other* Blank Total * "Other" indicates that the submitter has identified their WB TCR as not fitting into any allegation category that is listed on the online questiom1aire.