A Risk Professional s Guide to Using the SEC Whistleblower Program to Strengthen Culture and Loyalty LGL006

Transcription

1 A Risk Professional s Guide to Using the SEC Whistleblower Program to Strengthen Culture and Loyalty LGL006 Speakers: Christopher Giovino, Director, Crime and Cyber Evaluation Risk Quantification, Aon Risk Solutions Joseph W. Martini, Partner, Wiggin and Dana Vicki Telford, Director, Global Insurance Risk Management, Hanesbrands Inc.

2 Learning Objectives At the end of this session, you will: Learn how risk managers can help their companies use the Whistleblower Program to their advantage Identify effective strategies for creating a corporate culture that encourages internal reporting Discover best practices for conducting internal investigations of whistleblower complaints

3 The SEC Whistleblower Program Origins: Madoff Serial misconduct in marketplace Law enforcement lean on early actionable intelligence Established under Dodd-Frank Wall Street Reform and Consumer Protection Act, most sweeping reform since Great Depression Final Rules implemented summer 2011

4 Basics of the SEC Program Section 21F of the Securities Exchange Act of 1934 requires SEC to pay whistleblowers who: voluntarily provide the SEC with original information regarding a violation of the securities laws that leads to a successful enforcement action with monetary sanctions exceeding $1,000,000.

5 Whistleblower Financial Sanctions & Rewards If SEC recovers more than $1 million, whistleblower is entitled to percent of amount recovered Civil penalties, disgorgement, prejudgment interest count toward $1 million threshold What determines amount of reward? Significance of information Degree of assistance provided Programmatic interest to SEC Participation in internal compliance program Factors that may decrease reward: Whistleblower s culpability Delay in reporting violation Interference with internal compliance program

6 Whistleblower Application: Public and Private Companies Whistleblower Act applies to all entities and individuals subject to federal securities laws Public Companies Including private subsidiaries and affiliates Private Companies Federal securities laws apply to private companies E.g., private offerings, employee equity plans, business acquisitions Aiding and abetting liability Mail and wire fraud Anti-bribery provisions of the FCPA

7 SEC Results: FY 2015 More than $37 million paid to whistleblowers SEC received nearly 4,000 new tips 687 corporate disclosure 613 offering fraud 10% of tips originated abroad 72 - UK 49 - India 43 - China 33 - India SEC s Investor Protection Fund: $400 million to pay future whistleblowers

8 Who is a Whistleblower? Any individual (or group of individuals) providing the SEC with information about a possible violation of federal securities laws that occurred, is ongoing, or about to occur Not limited to employees Third parties also eligible for whistleblower bounties (e.g., suppliers, contractors, customers, consultants)

9 Criteria: Voluntary Information must be voluntarily submitted Information is voluntarily submitted if provided before a request, inquiry, or demand made by the SEC, the PCAOB, any self-regulatory organization, Congress, or any other state or federal regulatory authority Whistleblower must report information to the SEC to be eligible for a reward Rule is different in the anti-retaliation context

10 Criteria: Original Information Derived from independent knowledge or independent analysis Not already known to the SEC Not derived exclusively from public sources Need not be from personal knowledge Hearsay can be basis for tip Can be expert analysis of publicly available data

11 Successful Enforcement Action Information considered as leading to successful enforcement action if: Sufficiently specific, credible and timely causing SEC to commence an examination or open an investigation, or Significantly contributes to success of an ongoing enforcement action

12 Who is Ineligible? Principals (officers, directors, trustees or partners) Attorneys and In-house counsel Compliance or Audit Personnel Accountants Exceptions: Reasonable basis to believe that: (a) disclosure necessary to prevent substantial injury to the financial interest or property of the entity or investors; (b) entity is engaging in conduct that will impede an investigation. Passage of time: (a) 120 days since individual reported information to entity s audit committee, chief legal officer, chief compliance officer or supervisor, or (b) 120 days since individual received information, if circumstances indicate audit committee, chief legal officer, etc. were already aware of it.

13 Internal Investigations: Some Best Practices Be efficient Company has, at most, 120 days until a whistleblower reports to SEC Whistleblowers are incentivized, but not obligated, to use the 120-day period Have contingency plan for self-reporting before completion of internal investigation if necessary E.g., investigation delays, whistleblower plans to report before investigation is concluded Be discrete Anyone advised of an issue through an internal investigation becomes a potential whistleblower Ensure information disclosed during internal investigation is properly excluded from Whistleblower Rules Attorney privilege and documentation Work with Legal to document information obtained or shared in internal investigation to demonstrate it is not original Make sure interview memoranda are privileged

14 Encouraging Internal Reporting Several obstacles to internal reporting Fear of retaliation Monetary Incentives SEC program requires report to SEC to collect bounty Other aspects of SEC program encourage external reporting Encourage internal reporting by: Creating ethical culture Educating employees about benefits of internal reporting Company will reap the benefits

15 Caution! Rule 21F-17(a): Provides that no person may take any action to impede an individual from reporting information about wrongdoing to the Commission. Includes by enforcing or threatening to enforce a confidentiality agreement with respect to such reporting. Evaluating confidentiality agreements for compliance a top priority for SEC in FY 2016.

16 Dodd-Frank Incentives for Internal Reporting day look-back period Rule 21F-4(b)(7): whistleblowers who report internally before going to SEC remain eligible for an award for 120 days Maintain priority over subsequent whistleblowers in determining if information is original 2. Piggybacking Rule 21F-4(c)(3): whistleblowers reporting internally receive credit for all information subsequently self-reported by the company Employee can use company resources to bolster claim and increase reward 3. Increased awards Rule 21F-6(a)(4): SEC will consider whether whistleblower assisted in an internal investigation in determining amount of award Conversely, under Rule 21F-6(b)(3), interference with the internal compliance function can decrease the amount of an award

17 Does Your Culture Foster Internal Reporting? Key questions: Does your organization have an ethical culture where employees will feel safe doing so? Will they fear retaliation? Will they get action from management?

18 Strong Ethics/Compliance Culture: A Difference-Maker ERC National Business Ethics Survey 2013: Organizations with effective, values-based ethics and compliance programs: Employee reporting of wrongdoing increases by 61 percent Retaliation decreases by 93 percent 97 percent of misconduct reported or addressed by employees Management commitment to ethics key: Employees report wrongdoing 71 percent of time when top management is committed; 69 percent when supervisors are committed Workers report wrongdoing only 56 percent when ethics seen as low priority

19 Impact of an Ethical Culture Reduces pressure to compromise standards Reduces instances of misconduct Reduces retaliation Increases likelihood that employees observing misconduct will report internally first Which leads to huge benefits to a company

20 Molding an Organizational Culture based on Ethics Risk Manager Ideally Positioned to Lead Initiative Interaction with all disciplines Responsible for protecting company against exposures Relationships with applicable insurers whose coverage may respond to employee incidents of fraud or corporate wrongdoing Form a Team Inform Board Audit and Risk Committees Engage CEO, CFO, General Counsel, Compliance, HR, Communications, Operations, IT

21 Corporate Background Company was born in 1901 in Winston-Salem, NC Sara Lee spin-off September 2006 Today we are the largest basic apparel company in the world, with annual worldwide sales close to $6B and a market cap in excess of $11B We employ over 65,000 people worldwide, producing nearly 2 billion units each year, making us an anomaly at a time when many apparel companies outsource most, if not all, of their production

22 Hanes/Sara Lee Cultural Legacy The Mirror Test Is it Legal? If not, don t do it. It s that simple. What will Others Think? If you were to explain your actions to your manager, family or the news media, could you justify what you have done? Is it Right? How does your conscience feel? What would a trusted friend say? 22

23 We Abide by the Law and are True to our Principles, as set out in our Global Code of Conduct (GCC) We always obey the law and act ethically and professionally, by building strong and fair business relationships We maintain safe and healthy workplaces wherever they exist, worldwide We keep accurate business records and are transparent and honest with the public We encourage prompt reporting of concerns, by providing multiple communications resources No reason, including the desire to meet business goals, is an excuse for violating the law, regulations, the GCC or Hanesbrands policies 23

24 Similarly, We have Global Standards for Suppliers Must comply with all applicable national and local laws, rules and regulations, including applicable employment laws; no employment of child labor (zero tolerance) Operate a safe and healthy work environment for their employees, including a workplace that is free of harassment or abuse Must share HBI s commitment to protecting the quality of the environment through sound management, in compliance with all environmental laws and regulations; suppliers seeking to reduce waste and minimize environmental impact will be favored. All information pertaining to business records is reported accurately and honestly; bribes and corrupt practices will not be tolerated. 24

25 We Treat Others as We Wish to be Treated Safeguard personal information No harassment No discrimination Honesty in marketing and sales activities Safe and healthy workplace Quality, value, safety and trust 25

26 We are a Responsible Corporate Citizen We comply with all environmental laws, regulations and Hanebrands policies We participate in political processes with integrity We comply with laws governing international trade We do not bribe government officials! 26

27 Internal Checklist Set tone at the top Reinforce with ongoing communication Encourage internal dialogues on whistleblower program Strengthen with training Link ethics to incentives (bonuses, raises, promotions) Establish employee tip-line (best way to spot wrongdoing) Educate employees on internal reporting process Ensure employees all internal reports will be dealt with promptly (most tips to SEC were first reported internally) Discourage false reporting (consequences including dismissal)

28 Set Tone at the Top Commit to ethics from the top down leaders should communicate a personal commitment to ethics Ensure regular communications reinforcing ethics and honesty as corporate values New employee orientation Employee town halls and informal discussions Job descriptions and performance evaluations Ethics training (including specific programs and modules) Bonus, promotions, salary reviews discussions/messaging Re-emphasize during major events (M&A, downsizings, office closures/openings, restructuring, etc.) Board and senior management informed of compliance concerns and are actively engaged in assessing and managing risks

29 Establish Reporting Protocol Maintain/establish an employee hotline/tip-line or other easily accessible means for internal reporting Regularly assess hotline protocols to ensure that reports of potential misconduct are escalated quickly and appropriately Train HR personnel and supervisors to recognize complaints that may implicate whistleblower issues and to promptly escalate them to legal or compliance departments Communicate with appropriate personnel upon receiving a complaint Complainant s supervisors, HR, legal, senior management

30 Resources The following resources may be used to raise questions or to report violations, issues or concerns: Manager/supervisor Human Resources The Law Department Code of Conduct Officers: total of 40 throughout HBI (for online reporting) Hanesbrands Resource Lines: total of 39 countryspecific numbers (for ing) 30

31 Zero- Tolerance for Retaliation Retaliation is a serious violation of our Global Code of Conduct and will not be tolerated. Retaliation against any individual in connection with an issue or concern raised in good faith, or an investigation of that issue or concern, is strictly prohibited. 31

32 Audit Your Culture Recognize the need to Conduct Regular Audits: Positive culture is not enough. CECO should actively work to detect and correct wrongdoing. Monitor employee reporting and outcomes Review potential retaliation and include in definition of misconduct

33 Questions Vicki Telford Director, Global Insurance Risk Management, Hanesbrands Inc. Joseph W. Martini, Esq. Partner, Wiggin and Dana LLP Christopher J. Giovino Director-Forensic Analysis and Cyber Evaluation Risk Quantification, Aon Global Risk Consulting