So far this year, the Securities and Exchange Commission (SEC) has awarded more than $63 million to whistleblowers for providing information and critical assistance in successful SEC enforcement actions. Most recently, on Mar. 31, 2023, the SEC announced that it awarded more than $12 million to two whistleblowers.
In 2010, the SEC established its Whistleblower Program to encourage individuals to come forward and report any possible violations of federal securities laws. Since its inception, the program has been successful in uncovering fraud, misconduct and other unlawful activities that might have gone unnoticed.
What is the SEC’s Whistleblower Program?
The SEC’s Whistleblower Program was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The program offers monetary awards to individuals who voluntarily provide the SEC with original information about violations of federal securities laws. The awards range from 10% to 30% of the total monetary sanctions collected by the SEC in enforcement actions.
To be eligible for an award, whistleblowers must provide the SEC with information that leads to a successful enforcement action with sanctions exceeding $1 million. The SEC has outlined how it expects firms to assist in this reporting process, including protecting the identity of any employees who file a report to the SEC. In particular, Commission Rule 21F-17(a) prohibits any person from taking any action to prevent an employee at a firm from contacting the SEC directly to report a possible securities law violation. Whistleblowers may remain anonymous and are protected from retaliation by their employers.
What are some compliance challenges at investment firms that could result in a whistleblower coming forward?
Investment firms face unique challenges in adhering to the SEC’s whistleblower regulations. Some of the challenges are:
- Complexity of financial transactions.
Investment firms engage in complex financial transactions that can be difficult to understand and monitor. These transactions can create opportunities for violations of federal securities laws, make it challenging for investment firms to detect and prevent these violations and cause an instance in which an employee will become a whistleblower.
- Employee turnover.
At investment firms where employee turnover is high, new employees may not be familiar with the firm’s policies and procedures. This turnover can affect your investment firm’s compliance program management, make it difficult to maintain a culture of compliance and increase the risk of violations of federal securities laws and therefore a whistleblower incident.
- Conflicts of interest.
Investment firms may have conflicts of interest that can create incentives for employees to engage in unethical or illegal activities. For example, an investment firm may have an incentive to promote a particular investment product to generate higher fees, even if the product is not suitable for all investors. Instances like these could cause an employee to become a whistleblower.
- Protection of confidential information.
Investment firms handle sensitive and confidential information, and employees may be reluctant to report violations of federal securities laws out of fear of retaliation or the loss of their job.
- Compliance program management with multiple regulatory requirements.
Investment firms must comply with multiple regulatory requirements, which can be time-consuming and resource-intensive. Compliance with the SEC’s whistleblower expectations adds an additional layer of complexity.
What effects can whistleblowing have on your investment firm?
Regulation violations can have significant consequences for financial firms. When allegations of misconduct or violations of federal securities laws are made public, it can damage the firm’s reputation, lead to regulatory investigations and legal actions and result in significant financial penalties.
The Whistleblower Program was designed to bring actions of misconduct to light. Whenever such actions are brought into public knowledge, it can result in customers and investors losing trust and ultimately disengaging in business with the firm.
Best practices for investment firms
To address these challenges and meet the SEC’s expectations, investment firms can implement the following best practices:
- Establish a whistleblower hotline.
Your investment firm can establish a whistleblower hotline that employees can use to report any concerns or potential violations anonymously. This hotline can be monitored by an independent third-party to ensure that reports are investigated appropriately.
- Create a culture of compliance.
Your firm can create a culture of compliance by establishing clear policies and procedures, providing regular training to employees and holding employees accountable for compliance violations.
- Protect whistleblowers from retaliation.
Your firm should protect whistleblowers from retaliation by creating policies that prohibit retaliation and establishing mechanisms to investigate and address retaliation claims.
- Cooperate with SEC investigations.
If the SEC initiates an investigation into potential violations of federal securities laws, your investment firm should cooperate fully with the investigation to avoid additional penalties.
While the compliance team at your investment firm can accomplish these tasks on their own, it might be helpful to bring in a compliance consultant. NRS® consultants have several years of broad experience in the regulatory compliance industry.
Furthermore, NRS’ SEC mock exam service can help investment firms adhere to the SEC’s whistleblower regulations. The mock exam service provides firms with a comprehensive review of their compliance program, including their policies and procedures for addressing whistleblower reports. By simulating an SEC examination, our consultants can identify areas where your investment firm may be vulnerable to potential violations of federal securities laws and provide recommendations for improving their compliance program. Additionally, the mock exam service can help your investment firm identify any gaps in its training and education programs related to whistleblower regulations and provide guidance on how to address these gaps.
NRS’ SEC mock exam service can help your firm better prepare for potential regulatory investigations, avoid potential financial penalties and establish a strong culture of compliance that promotes ethical behavior and encourages employees to report violations of federal securities laws without fear of retaliation.
For further guidance on how to improve the compliance program at your investment firm, schedule a call today.