SEC Whistleblower Program--The SEC Inspector General's Report
Post-Madoff, we have followed the legislative efforts to help establish an effective SEC whistleblower program. We know that the Senate Banking Committee in particular has worked hard in attempting to devise the best overall arrangement to encourage and reward whistleblowers who report fraud within the SEC's jurisdiction.
Shortly before Congress authorized the first meaningful IRS Whistleblower Program in December 2006, the Treasury Inspector General for Tax Administration issued its report on many of the changes needed for the IRS to use whistleblowers effectively.
Now, the SEC's Inspector General David Kotz has issued his report, "Assessment of the SEC Bounty Program." No one is surprised that it concludes that the SEC has not effectively encouraged, used, or rewarded whistleblowers over the past decades. Perhaps this report will pave the way for something meaningful--like the TIGTA report that preceded the now-promising IRS Whistleblower Program, which rewards whistleblowers with 15-30% of the government's tax recoveries.
The SEC report recommends adopting the "best practices obtained from DOJ and the IRS into the SEC bounty program." The SEC Inspector General's report states as follows:
Although the SEC has had a bounty program in-place for more than 20
years for rewarding whistleblowers for insider trading tips and complaints, our
review found that there have been very few payments made under this program.
Likewise, the Commission has not received a large number of applications from
individuals seeking a bounty over this 20-year period. We also found that the
program is not widely recognized inside or outside the Commission. Additionally,
while the Commission recently asked for expanded authority from Congress to
reward whistleblowers who bring forward substantial evidence about other
significant federal securities law violations, we found that the current SEC bounty
program is not fundamentally well-designed to be successful.
More specifically, we found that improvements are needed to the bounty
application process to make it more user-friendly and help ensure that bounty
applications provide detailed information regarding the alleged securities law
violations. We also found that the criteria for judging bounty applications are
broad and the SEC has not put in place internal policies and procedures to assist
staff in assessing contributions made by whistleblowers and making bounty
award determinations. Additionally, we found that the Commission does not
routinely provide status reports to whistleblowers regarding their bounty
applications, even if a whistleblower’s information led to an investigation.
Moreover, we found that once bounty applications are received by the SEC and
forwarded to appropriate staff for review and further consideration, they are not
tracked to ensure they are timely and adequately reviewed. Lastly, we found that
files regarding bounty referrals did not always contain complete documentation,
such as a copy of the bounty application, a memorandum sent to the
whistleblower to acknowledge receipt of the application, and a referral
memorandum showing the office or division and official to whom the bounty
application was referred for further consideration.
We wish to note that the SEC has begun to take steps to correct the deficiencies
identified in its whistleblower/bounty program. The SEC has had consultations
with the Department of Justice (DOJ), Internal Revenue Service (IRS), and other
agencies, as well as the Financial Industry Regulatory Authority, to identify best
practices from existing well-defined whistleblower programs. The SEC has also
attempted to incorporate some of these best practices into legislation which it is
seeking from Congress to include expanded authority to reward whistleblowers
for securities law violations. The proposed legislation also takes into account
some issues identified in this report in connection with the existing insider trading
bounty program.
We believe that it is critical for the SEC to implement the following
recommendations to ensure that it has a fully-functioning and successful
whistleblower program in place as its authority is potentially expanded.
Summary of Recommendations. Specifically, the review recommends that the
Division of Enforcement:
(1) Develop a communication plan to address outreach to both the public and
SEC personnel regarding the SEC bounty program. The plan should
include efforts to make information available on the SEC’s intranet,
enhance information available on the SEC’s public website, and provide
training to employees who are most likely to deal with whistleblower
complaints.
(2) Develop and post to its public website an application form that asks the
whistleblower to provide information, including, for example:
a) The facts pertinent to the alleged securities law violation and
explanation as to why the whistleblower believes the subject(s)
violated the securities laws;
b) A list of related supporting documentation in the whistleblower’s
possession and available from other sources;
c) A description of how the whistleblower learned about or obtained
the information that supports the claim, including the
whistleblower’s relationship to the subject(s);
d) The amount of any monetary rewards obtained by the subject
violator(s) (if known) as a result of the securities law violation, and
how the amount was calculated; and
e) A certification that the application is true, correct, and complete to
the best of the whistleblower’s knowledge.
(3) Establish policies on when to follow-up with whistleblowers who submit
applications to clarify information in the bounty applications and obtain
readily available supporting documentation prior to making a decision as
to whether a whistleblower’s complaint should be further investigated.
(4) Develop specific criteria for recommending the award of bounties,
including a provision that where a whistleblower relies partially upon public
information, such reliance will not preclude the individual from receiving a
bounty.
(5) Examine ways in which the Commission can increase communications
with whistleblowers by notifying them of the status of their bounty requests
without releasing non-public or confidential information during the course
of an investigation or examination.
(6) Develop a plan to incorporate controls for tracking tips and complaints
from whistleblowers seeking bounties into the development of
Enforcement’s tips, complaints, and referrals processes and systems for
other tips and complaints. These controls should provide for the collection
of necessary information and require processes that will help ensure that
bounty applications are reviewed by experienced Commission staff,
decisions whether to pursue whistleblower information are timely made,
and whistleblowers who provide significant information leading to a
successful action for violation of the securities laws are appropriately
rewarded.
(7) Require that a bounty file (hard copy or electronic) be created for each
bounty application. The file should contain at a minimum the bounty
application, any correspondence with the whistleblower, documentation of
how the whistleblower’s information was utilized, and documentation
regarding significant decisions made with regard to the whistleblower’s
complaint.
(8) Incorporate best practices obtained from DOJ and the IRS into the SEC
bounty program with respect to bounty applications, analysis of
whistleblower information, tracking of whistleblower complaints,
recordkeeping practices, and continual assessment of the whistleblower
program.
(9) Establish a timeframe to finalize new policies and procedures for the SEC
bounty program that incorporates the best practices from DOJ and IRS as
well as any legislative changes to the program.
