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Regulation and Compliance > Federal Regulation > SEC

Revenge of the compliance nerds: The SEC’s whistleblower program

By Bob Clark

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This is a shout out to all those hard-working, underpaid and unappreciated compliance folks in the securities and advisory industries who just can’t take the animosity of their co-workers, clients and/or bosses any longer and are looking for a career change. It appears as if your friends at the Securities and Exchange Commission have come up with an attractive severance package for you. 

According to a September 17 “RIA Compliance Alert” from Advanced Regulatory Compliance, Inc. in Beverly Hills, CA, the Commission has created an “Office of the Whistle Blower,” for folks just like you. “As a result of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act,” reports ARC, “the SEC is statutorily required to pay awards to whistleblowers, including industry insiders.” 

According to ARC, to qualify for such an award: “Information provided to the SEC must: (1) be provided voluntarily, (2) consist of original information pertaining to possible securities law violations not currently known to the SEC, and (3) lead to a successful enforcement action resulting in more than $1,000,000 in ordered sanctions. Under the program, individuals are enticed to come forward with the allure of a monetary reward of up to 30% of any resulting enforcement action.” 

In case math isn’t your strong suit, that’s a minimum of $300,000 to a whistleblower, with the potential for much more, depending on the size of the sanction that results from your whistling.

(See the article, SEC Gives First Compliance Employee a Whistleblower Award)

This windfall is available to any “officers, directors, trustees, partners, and/or employees whose principal duties involve compliance, including accountants and third-party firms, may qualify as whistleblowers so long as they: (1) first report the possible violations of federal securities laws to the appropriate internal personnel, and (2) wait at least 120 days before reporting the activity to the SEC.”

Don’t qualify under any of those descriptions? Don’t despair: Your deal is even better. ARC tells us that: “Most other individuals not listed above are free to tip off the SEC at any time.” So you don’t even have to put your firm on notice of its infraction, let alone give them time to correct it.

In case you’re thinking these awards are just pie-in-the-sky—like those big annual bonuses you were supposed to have gotten for keeping your firm on the straight and narrow—ARC tells us that in an August 29 press release, the SEC announced “its first ever whistleblower award payout to an internal compliance staff member employed by an SEC regulated firm.” The whistleblower in this case was a compliance staffer, who reported securities violations to the SEC in response to the firm’s failure to take corrective action upon being notified about whatever it did or didn’t do.

(See the article, SEC Plans to Hand Out Whopping $30 Million Whistleblower Award)

That release quotes Sean McKessy, Chief of the Office of the Whistleblower, who, according to ARC: “…appears to encourage those who work in financial industry audit, compliance, or legal positions to come forward with information pertaining to possible securities law violations by their employers. After all, such individuals are the ones with access to, and knowledge of, the type of sensitive and confidential information that can form the basis for successful enforcement actions being launched against financial firms.” Kind of like a “mole,” in a John Le Carre’ novel.

I suspect there are some readers—those involved in compliance, as well as those who own, run or work in firms that employ compliance people—who are wondering whether paying substantial cash awards to employees who rat them out is such a good idea.

ARC shares their concerns, writing: “Encouraging inside individuals to report their employers to the SEC for personal gain sets a dangerous precedent and could have numerous unintended consequences industrywide. Financial firms may be reluctant to share information with compliance staff [or] seek their advice if they believe such information could later be used against them by a whistleblower. This situation could have a chilling effect on firms’ compliance efforts.”

But compliance folks need have no such concerns. Apparently, the SEC intends to protect their anonymity, so they can collect their awards, and keep their jobs, so they can report more violations.

Or they could quit and go to work for another firm, with even greater violation potential. The possibilities are endless—and potentially way more lucrative than being a compliance officer. Hey, what could go wrong?

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