Dodd-Frank Whistleblower Provisions

Will multi-million-dollar pay-outs spur a boom in tips?

ADAM WEISMAN and AYESHA AHMED, DELOITTE FINANCIAL ADVISORY SERVICES
3

An uneasy anticipation pervaded the financial industry in late 2011 when the Securities and Exchange Commission (SEC) Final Rules for submitting whistleblower tips under the Dodd-Frank Act went into effect. Tipsters who provided original information leading to $1 million and larger fraud recoveries could receive 10% to 30% of the recovered amount. Given the historical potential size of SEC fraud-related recoveries, such bounties could be a life-changing wealth event for would-be whistleblowers.

Activity in 2012, the first full year for the whistleblower provisions, gave the industry little cause for concern. According to the Annual Report on the Dodd-Frank Whistleblower Program for Fiscal Year 2012,[1] the SEC received 3,001 Form Tip, Complaint, or Referral (TCR) submissions, one-tenth what it had prepared to potentially handle. For the entire year, a lone whistleblower received a $50,000 payment, hardly suggesting a new era of tipster recompense lay ahead. That calculus changed abruptly in late 2013, however, when the SEC awarded more than $14 million to a whistleblower whose information led to recovery of substantial investor funds.[2] Applying the 10% to 30% award range, an estimate of the investor recovery was likely to be between $47 million and $140 million.

Receiving tens or even hundreds of thousands of dollars might not be worth the disruption to life and career that a tipster, despite the anti-retaliation provisions of Dodd-Frank, could face. Several million, though, might be more tempting.

The outsized award in 2013 is a not-so-subtle signal that asset managers may want to upgrade their fraud-fighting capabilities to demonstrate they are seriously working to safeguard the money they invest and the investors they serve. By developing a well-structured programme of anti-fraud controls which demonstrates to investors and regulators that necessary measures are in place, and instilling trust among employees that their concerns can and will be properly handled internally, fund managers can be better equipped to avert a potential financial catastrophe.

A bias for action, and a bulging war chest
Along with the size of the $14 million award, the speed with which the SEC recovered investor funds offered evidence of its resolve to pursue and consummate whistleblower cases. In less than six months after receiving the tip, the SEC was able to bring an enforcement action against the perpetrators and secure investor monies.

In announcing the award, the SEC’s Office of the Whistleblower (OWB) expressed hopes that such payments will encourage individuals to come forward and assist the SEC in stopping securities fraud. The SEC has also made clear its commitment to protecting the identity of tipsters. Those who prefer to remain anonymous can do so by submitting their tip through an attorney, and the SEC does not publicly disclose whistleblower identities when announcing awards.

Further evidence of government commitment to encourage whistleblowers is seen in the recent revision to laws in California. Among other provisions that further tipster protections, effective from 1 January 2014, employers in the state cannot retaliate against employees who report potential violations to a supervisor or other employee with the authority to investigate or correct alleged violations. Previously, the law only applied to employees reporting alleged violations to a government or law enforcement agency.

The SEC’s zeal to draw in whistleblowers is backed by an enormous budget for rewarding them. The SEC’s Investor Protection Fund, which serves as a war chest for whistleblower payouts, along with disbursements to the SEC’s Office of the Inspector General (OIG) suggestion programme for SEC employees, had a nearly half-billion-dollar balance at the close of the 2013 federal fiscal year.[3]

As word of the $14 million award and the government tip coffer spreads, it may not be surprising to see a substantial uptick in whistleblower tips, which grew a modest 8% from 2012’s 3,001 to 3,238 in 2013, according to the Annual Report on the Dodd-Frank Whistleblower Program for Fiscal Year 2013. Whatever the number, tips are likely to come from far and wide. In 2013 the SEC received submissions from all 50 states, the District of Columbia, three US territories, and 55 foreign countries. Since the programme’s commencement, individuals in 68 countries outside the United States have participated.3

Being prepared
The SEC whistleblower programme presents a new, possibly unsettling reality for asset managers: their employees are now highly incentivised to publicly report potential fraud or corruption where they work. Addressing this potential risk requires that managers create and maintain a strong internal anti-fraud and anti-corruption programme.

While individual managers should tailor these controls to their risks and culture, some general characteristics of an anti-fraud controls programme are applicable across fund management firms.
First, whistleblower programmes primarily work when employees are well aware of and not afraid to use them. Non-anonymous programmes, for the most part, do not work.

One vital programme feature is a mechanism for receiving whistleblower tips and complaints and reporting back the status of management’s response. This is usually done by assigning a case number that the employee can use to anonymously track progress. Other important anti-fraud programme features include:

  • Senior management conveys a strong message that employees are expected to “do the right thing” all the time.
  • Employees receive annual training on ethics policies and regulatory compliance.
  • An annual fraud risk assessment is conducted that includes gap analysis of existing controls and plans for remediation.
  • A report on the anti-fraud control programme is provided annually to the company’s governance committee.
  • Key controls are continuously monitored and tested.

Stay on top
As the SEC intensifies its whistleblower efforts, an effective programme of anti-fraud controls could be the difference between a fraud incident being handled well internally, or becoming a cause célèbre that could eventually take down the firm. A properly functioning whistleblower programme is an important element of a well-designed, well-executed anti-fraud and anti-corruption framework. Simply said, a well-functioning programme of anti-fraud controls could prove a priceless investment for asset managers.

Adam Weisman is a partner in Deloitte Financial Advisory Services LLP where he leads the Asset Management Industry Group. Ayesha Ahmed is a senior associate in Deloitte Financial Advisory Services LLP, where she serves Asset Management Industry clients.

Notes

  1. “Annual Report on the Dodd-Frank Whistleblower Program Fiscal Year 2012,” US Securities and Exchange Commission, November 2012
  2. “SEC Awards More Than $14 Million to Whistleblower,” US Securities and Exchange Commission, 1 October 2013. http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539854258
  3. “2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program,” US Securities and Exchange Commission, November 2013