Increased focus on whistleblower retaliation, employment agreements evident in latest SEC whistleblower report.
On November 16, 2015, the U.S. Securities and Exchange Commission issued its 2015 Annual Report to Congress on the Dodd-Frank Whistleblower Program and, to no one’s surprise, the program is going strong awarding over $37M to eight whistleblowers with over $30M going to one person.
Last year I blogged about the 2014 report and many of the same trends we observed last year continued in 2015. This year’s report, however, provides additional insight into how the Office of the Whistleblower (OWB) is working through the information they receive and how they are refining their focus on the topics that are their highest priorities. These priorities include looking for enforcement opportunities on issues of whistleblower retaliation, eliminating the use of employment agreements that could restrict reporting to the SEC, and increasing OWB program awareness.
In addition, we learned about some of the challenges the SEC is now facing in processing the ever-increasing volume of reports including how they are handling the “serial submitters” that are starting to clog the system and impact investigation and case closure times.
Following are our ten key takeaways and trends ethics and compliance professionals should learn from the 2015 SEC Office of the Whistleblower report and related NAVEX Global research on hotline reporting.
1. The number of whistleblowing reports continue to rise.
In FY 2015, the office received 3,923 reports. This is a is a 30% increase over FY 2012 which was the first full year of the program, and includes approximately 300 more reports than received last year. The numbers are going up, a trend that is consistent with the findings of the 2015 NAVEX Global Hotline Benchmarking Report—the data shows year-over-year increases in company internal report volumes as well. Since 2010, internal programs have seen a 44% increase in the median reporting rate.
2. Both the SEC and internal compliance programs are having difficulty keeping up with the increasing case load.
Both the OWB and our benchmark findings of company programs, indicate that keeping up with the demand to investigate all of the additional reports is becoming a challenge for all. In May of this year, The Wall Street Journal reported that informants were experiencing long wait times for a disposition on their case:
“The SEC’s whistleblower program imposes strict deadlines on claimants; at least six people have been denied an award because they didn’t submit their claims in time, according to the agency’s website. But there are no such time limits for the agency to respond to award claims… Experts worry that long delays, if allowed to persist, could deter future tipsters.”
Our hotline data shows that case closure time is going up for internal company cases, too, jumping from a median of 32 days in 2011 to a median of 39 days in 2014. It is important to note that a median or mid-point means that half of the cases in the system are taking longer than 39 days to close.
The SEC report notes that two additional attorneys will be added to the current staff of 10 in FY 2016. Ethics and compliance officers surveyed by NAVEX Global on the reasons for the longer internal case closure times said that they have not been able to add resources to address their increasing internal report volume. Perhaps it is time to keep up with the SEC on this one and add additional resources internally, too.
3. Some people are attempting to abuse the system. Probably nobody is surprised.
In a recent presentation at the Thomson Reuters Corporate Whistleblower Forum, Sean McKessy, Chief, Office of the Whistleblower, attributed some of the delays in case resolution to the challenge of dealing with “serial submitters.” Since 2014, they have banned two individuals from the program for life.
The FY 2015 report includes a section on “Curbing Abuses in the Program” noting that:
“One claimant’s submission of frivolous claims harmed the rights of legitimate whistleblowers and hindered the Commission’s implementation of the whistleblower program by, among other things, delaying the Commission’s ability to finalize meritorious awards to other claimants and consuming significant staff resources.”
At the Forum, regulators noted that, “We have now have laid the groundwork for how to manage out the serial reporters who are dropping 50-100 claims on the [OWB].”
And while likely nobody is surprised that there are some people attempting to cash in at the SEC with the amount of money involved, the issue of repeat reporters has long been a challenge for internal programs and needs to be managed carefully. Our hotline benchmark data found that reports from self-identified repeat reporters were substantiated at a higher rate (42%) than self-identified first time reporters (38%) so it is important to understand that not all internal repeat reporters are looking for personal gain. Instead they may be in a position to witness wrongdoing more frequently or have a heightened awareness of what should be reported.
4. Organizations need to increase focus on preventing and managing claims of whistleblower retaliation.
If it wasn’t clear last year, it should be abundantly clear this year that whistleblower retaliation is a hot button issue for the OWB. The report says that the OWB “continues to work with Enforcement staff on identifying potential anti-retaliation enforcement actions.” The report goes on to cite the actions the agency is taking to “ensure employees are protected from employment retaliation whenever they report possible securities law violations whether internally or to the SEC…”
And, they are not alone in their agency focus. In a recent blog article, Greg Keating, a Partner at Choate, Hall & Stewart and a recognized national authority in the area of whistleblowing and retaliation, highlighted that OSHA recently released for public comment a set of draft guidelines designed to help organizations design effective compliance programs that protect whistleblower rights and monitor for whistleblower retaliation. The guidance includes recommendations to implement retaliation response and monitoring systems and anti-retaliation training.
Our hotline benchmark data found that, while organizations are still receiving a very low volume of retaliation claims internally, the substantiation rate of these claims last year was more than double that of any of the prior four years. Even with this increase, the substantiation rate is still significantly lower than the overall substantiation rate of all reports in our database.
I continue to urge organizations to place more focus on this issue because employees are not giving their internal systems a second chance to resolve this particular type of concern. Further, I encourage compliance officers to include this metric in board reporting along with other key ethics hotline metrics—if they aren’t already asking.
5. The little paragraph last year on the SEC’s search for restrictive employment agreements came to fruition.
Last year I said, “Don’t miss the paragraph on the Office’s focus on restrictive employment, confidentiality and severance agreements.” That report highlighted that the Office has been “working to identify employee confidentiality, severance, and other kinds of agreements that may interfere with an employee’s ability to report potential wrongdoing to the SEC.”
The report references Rule 21F-17(a) under the Exchange Act that provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.” The OWB made good on that promise this year in a case against KBR, Inc.
6. When thinking about who may take an issue to the SEC, look up (the organization chain).
The OWB is utilizing the exceptions in the exclusions of who can claim an award. In 2015, two awards were made to individuals who, by virtue of their role in the organization, would generally be excluded from receiving an award.
First, in March 2015, the Commission awarded a half million dollar award to a former company officer. The report notes that typically officers, directors, trustees, or partners who learn about fraud through another employee reporting are not eligible for an award. In this case, however, an officer “is eligible if he or she reports the information to the Commission more than 120 days after other responsible compliance personnel possessed the information and failed to adequately address the issue.” Put this exception together with the longer case closure times we highlighted earlier from our benchmarking report and a savvy executive could have a great case for the SEC.
Second, in April 2015, the OWB used the “substantial harm exception” to award a compliance professional for information that was likely to cause substantial injury to the financial interest or property of the entity or investors. This was the second award (and under a different exception) made to a compliance or audit professional who again, are typically excluded from receiving an award.
7. Employees are continuing to give their employers a chance to respond internally before going to the SEC.
To date, of the award recipients who were current or former employees of the company, approximately 80% raised their concerns internally to their supervisors or compliance personnel—or understood that their supervisory or relevant compliance personnel knew of the violations—before reporting their information of wrongdoing to the Commission.
In our culture assessment work, we hear from employees that they would much rather raise the issue internally to their immediate manager than have to take it outside. And, our 2015 benchmarking data showed that 40% of all reports received by our clients internally were substantiated either all or in part. The data from the SEC, backed up by our substantiation data, confirms that companies generally do get the opportunity to resolve issues internally—the question continues to be whether they will take this opportunity or miss it. To avoid missing it—ensure that first and second level managers receive training on how to respond to issues raised to them.
8. The report provides specific guidance to whistleblowers on what characteristics of a tip make it more likely to be successful.
As part of an overall discussion of processing tips received, the agency offered some guidance as to what characteristics of a tip will make it more likely to be of interest to the government. “In general, the more specific, credible, and timely a whistleblower tip, the more likely it is that the tip will be forwarded to Enforcement staff for further follow-up or investigation.” It goes on to say that identifying the individuals involved or provides specific examples of transactions or non-public information increases the likelihood that the case will be assigned for investigation.
9. The OWB is focused on public outreach, education and ongoing communications with reporters.
The report specifically notes that “one of the Office’s primary goals is to increase public awareness of the Commission’s whistleblower program.” It further states that they are doing this “to increase the number of high quality tips that can assist the Commission in discovering and stopping fraudulent schemes.”
The OWB takes a multi-media approach to reaching potential reporters including public engagements and conference forums to promote the program, and a website that includes videos, links to helpful resources, forms for reporting, and also FAQs. In addition, they have very formal processes to maintain ongoing communications with reporters throughout the process.
Noting the proactive approach the agency is taking to engage with reporters, it is a good reminder that we need to do the same internally so that potential reporters are aware of the various options available to report internally and that we keep the lines of communication open with reporters during our investigation processes.
10. The Whistleblower fund still has over $400M available for awards.
The fund paid out almost $38M to whistleblowers in FY 2015 leaving a remaining balance of over $400M for future payouts. We’ll be staying tuned, and so should you...
