The Advisor's Professional Library


January 1, 2012

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One of the most famous movie quotes of all time came from Lauren Bacall in To Have and Have Not. In the 1944 movie, Bacall said to Humphrey Bogart, “You know how to whistle, don’t you, Steve? You just put your lips together and...blow.” In response to Bacall’s invitation, Bogart whistles. It’s less romantic, however, when a whistleblower triggers regulatory scrutiny of your advisory firm.

The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide the Commission with original information about a violation of federal securities laws. Before the Dodd-Frank Act, the SEC’s ability to compensate whistleblowers was limited to insider trading cases. The amount awarded was capped at ten percent of the penalties collected in the action. A whistleblower is defined as any individual providing the SEC with original information related to a possible violation of federal securities law, which has occurred, is about to occur, or is ongoing.

On November 3, 2010, the SEC unanimously voted in favor of proposing rules for the whistleblower program, and finalized them on May 25, 2011. In the finalization process, the SEC took into consideration 240 comment letters and 1,300 form letters. The rules took effect on August 12, 2011.

Blowing the Whistle Can Be Lucrative

As you might expect, a whistleblower has to do more than just pucker up and whistle to receive payment. To be considered for an award, the information provided by whistleblowers must lead to the successful enforcement by the SEC of a federal court or administrative action resulting in monetary sanctions totaling more than $1 million.

Information from a whistleblower can be deemed relevant to successful enforcement, provided it satisfies any of the following requirements.

  • It was sufficiently specific, credible, and timely so as to cause the SEC to open a new examination or investigation, reopen a closed investigation, or open a new line inquiry in an existing examination or investigation.
  • It significantly contributed to the success of an action, even though the conduct was already under investigation when the information was submitted.
  • It was originally reported through an entity’s internal whistleblower program, was reported by the whistleblower to the Commission within 120 days of making the disclosure to the entity, and was subsequently provided to the SEC by the entity in the prescribed manner.

The final rules do not require a whistleblower who reports misconduct internally to be eligible for payment, however, they do give whistleblowers an incentive to go through internal channels first before reporting information to the SEC.

A whistleblower may be entitled to ten to thirty percent of the total monetary sanctions collected. The size of the reward depends on a number of factors, such as the extent of the assistance provided by the whistleblower and the significance of the information provided. The final version of the rules stated that the SEC has discretion regarding the size of the award.

The whistleblower program usually won’t permit payment to people who owe a pre-existing legal or contractual obligation to report their information. The reward program will normally exclude certain persons, such as compliance officers. In certain situations, however, compliance personnel, internal auditors, and public accountants may qualify as whistleblowers.

The Dodd-Frank Act also protects whistleblowers from retaliation. It is unlawful for any employer to “discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment.”

On February 18, 2011, the SEC named Sean McKessy to oversee the new Whistleblower Office in the Division of Enforcement. The SEC’s new webpage ( provides information dealing with eligibility requirements, how to submit a tip or complaint, and answers to frequently asked questions.

The Implications of Tips and Complaints

When the whistleblower program was originally proposed on November 3, 2010, SEC Chairman Mary L. Schapiro observed that the Commission receives thousands of tips each year. Although tips are not necessarily the same as whistleblowing, the information might put a firm on the SEC’s radar screen. If a tip relates to your advisory firm and the allegations seem to be legitimate, the SEC might decide it’s time to take a closer look at your operation. Because of budgetary constraints, SEC and state securities regulators may rely more on tips and complaints to determine which RIAs to examine. According to the SEC’s press release on August 12, 2011, a robust whistleblower program allows the Commission to maximize the effectiveness of its employees and uncover wrongdoing that might otherwise go undetected.

Even if they have nothing to hide, few RIAs welcome an unexpected visit by securities regulators. Firms will need to produce a wide range of documentation in anticipation of the exam. Furthermore, the exam itself may take days or weeks, and afterwards, the RIA may need to correct deficiencies uncovered by examiners.

A whistleblower complaint may be filed with the SEC by an unhappy client or even a disgruntled employee. Therefore, RIAs would do well to have detailed policies and procedures in place for dealing with customer and internal complaints, and they should also implement a whistleblower policy. The policy should encourage directors, officers, and employees to report unethical or illegal activities to a designation person, usually a supervisor or the firm’s CCO. The policy should also stipulate that no retaliation is permitted against someone who reports a violation of the firm’s code of ethics or any other violation.

A whistleblower policy can be intertwined with a firm’s code of ethics. However, a whistleblower complaint may relate to misconduct not specifically addressed in the RIA’s code of ethics and, many state-registered investment advisors are not even required to implement a code of ethics.

Whistleblower complaints can head off serious compliance and legal problems. Covering up these problems usually does even more damage to the RIA. Reporting violations at the firm level reduces the risk that complaints will be made to regulators. Even if a whistleblower complaint is without merit, RIAs are better off when no one whistles to securities regulators.

The Big Picture

In its August 12, 2011 press release, the SEC stated that the new whistleblower program strengthens the Commission’s ability to protect investors by generating better and timelier tips. The whistleblower program helps the SEC maximize its resources, and provides new protections against retaliation by employers.

The SEC’s whistleblower program also encourages employees to report wrongdoing to their company’s internal compliance department before contacting the SEC. The SEC rejected a requirement that whistleblowers must always report violations first to internal compliance personnel, since it determined that this mandate would dissuade whistleblowers from coming forward. The SEC attempted to strike a balance between encouraging whistleblowers to pursue the route of internal compliance when appropriate, while still giving them the option of reporting the problem directly to the Commission. Nonetheless, there is a financial incentive for whistleblowers to report problems internally where it is appropriate to do so. In making an award, the SEC will also consider how much a whistleblower has participated in or interfered with the internal compliance process.

The final rules extended the period of time a whistleblower can wait to come to the SEC after making an internal report. Whistleblowers will get credit for the original date they reported violations to their company, as long as they notify the SEC within 120 days.

Les Abromovitz

Les Abromovitz

Les Abromovitz is the author of The Investment Advisor’s Compliance Guide, published by The National Underwriter Company/ALM Media.

An attorney and member of the Pennsylvania bar, Les has handled hundreds of consulting and publishing projects for National Compliance Services,, a leading compliance and regulatory services firm. He has conducted a number of seminars and training sessions dealing with compliance subjects. Les is also the author of several white papers that analyze compliance issues impacting Registered Investment Advisors (RIAs)‎.

To contact Mr. Abromovitz, email or call 561-330-7645 Ext. 213‎.