The US Securities and Exchange Commission has issued its Annual Report on the Dodd-Frank Whistleblower Program.
The SEC’s Report, assembled for Congress and issued on November 15, provides an early glimpse of the whistleblower program and sets out the complaints received between August 12, 2011 – when the regulator’s final rules implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act whistleblower provisions became effective – and September 30, 2011, the end of the fiscal year.
According to the Report, during this brief period, nearly 10 percent of the 334 tips received came from workers in foreign countries – a surprising and unexpected percentage of the total number of tips received by the SEC.
After a brief summary of certain key aspects of the whistleblower provisions and the content of the Report, this alert outlines some practical steps for foreign companies to consider in responding to this new development in the securities enforcement world.
Dodd-Frank’s whistleblower program and jurisdictional expansion
Dodd-Frank enacted the whistleblower provisions in Section 21F of the Securities Exchange Act. The law directs the SEC to pay awards to whistleblowers who voluntarily provide the SEC with original information about a violation of the securities laws that leads to the successful enforcement of an action brought by the SEC (in either one or more proceedings or combined with other government actions) and that results in monetary sanctions exceeding US$1 million. The law provides for significant awards to whistleblowers of between 10 percent and 30 percent of the monetary sanctions. Sanctions for the purposes of the award include disgorgement, prejudgment interest and penalties.
This has particular significance for foreign companies listed on US exchanges and US companies with foreign operations. With Dodd-Frank, the US government has sought to expand significantly US regulatory enforcement’s extraterritorial jurisdiction. Section 929P of Dodd-Frank grants jurisdiction to US federal district courts over actions brought by the SEC or the US Department of Justice alleging violations of the US securities laws in securities transactions where (1) conduct within the United States constitutes a significant step in furtherance of a violation, even if the transaction occurs outside the United States and involves only foreign investors, or (2) conduct occurring outside the United States has a foreseeable substantial effect within the United States.
The November 2011 Report
The Whistleblower Program became effective on August 12, 2011. The Report issued by the SEC in November 2011 summarizes the whistleblower tips the SEC received between August 12 and the end of the SEC’s fiscal year, September 30, 2011. The Report shows that during this 7-week period, 32 tips – nearly 10 percent of the 334 tips received – have come from workers in foreign countries. The whistleblower tips originated from sources in eleven foreign countries, including China (10), Spain (2), Uruguay (1) and the UK (9). The fact that the Dodd-Frank whistleblower program is already attracting so many tips from outside US borders is unexpected. That China is leading the pack, however, is not particularly surprising in light of the increasing number of Chinese companies going public on US exchanges.
The Report also provides a glimpse into the types of allegations that whistleblowers are making to the SEC. Tipsters reported “market manipulation,” “offering fraud” and “corporate disclosure and financials.” The biggest complaint category was “other,” meaning that 79 whistleblowers chose not to use one of the available predefined complaint categories.
Impact on foreign companies listed on US exchanges and foreign operations of US companies
The fact that after a mere 7 weeks nearly 10 percent of the tips received by the SEC came from workers in foreign countries strongly suggests that the SEC’s extraterritorial reach cannot be overlooked and that foreign companies listed on US exchanges, as well as US companies with foreign operations, must take practical steps now to minimize risk. In light of this, what can these companies do?
Give potential whistleblowers nothing to report. In those areas where misconduct is likely to occur, companies should evaluate whether the proper controls are in place to prevent, detect and remedy misconduct. For example, companies should have in place an internal reporting system such as hotlines that is functioning effectively around the clock and preserving anonymity The more a company is able to prevent violations, the less there is for the whistleblower to report.
Provide incentives for internal reporting. If misconduct is detected, a company should have a well-publicized internal company reporting process that makes clear that the company will reward an employee who relies upon and uses its own internal reporting mechanism to address issues, regardless of their size or seriousness. When wrongful conduct is discovered, the company is far better off discovering it itself, allowing it to investigate the issue in question and determine whether it may be resolved internally and therefore more efficiently.
Do not overlook foreign laws. Companies should also consider the applicability of foreign laws when implementing any new measures. For instance, after Sarbanes-Oxley was enacted, some European countries concluded that certain aspects of anonymous whistleblower hotlines violated their privacy and data protection laws. Before implementing any new measures, therefore, companies should assess the applicability of privacy, data protection and other laws in all the countries where they do business.
The SEC Report makes clear that whistleblowers from foreign companies have already made use of the SEC’s reporting mechanisms and will likely only continue to do so in increasing numbers in the coming months and years. There is little doubt that by receiving tips directly from employees, the SEC will have better and more direct evidence to support its enforcement actions than in years past. It is therefore critical that foreign companies listed on US exchanges, as well as US companies with foreign operations, carefully analyze areas of exposure and begin planning now to reduce the potential impact of whistleblowers in the future.
For more information about the implications of this report, please contact:
Perrie M. Weiner
International Co-Chair, Securities Litigation
Chair, Securities Enforcement
You may also be interested in our earlier Alert about the whistleblower rules, SEC issues final rules implementing whistleblower bounty program, and our regular reports on breaking developments around Dodd-Frank.