The U.S. Securities and Exchange Commission (SEC) operates an enormously successful whistleblower award program. In just ten years, it has paid out over $1.3 billion to individuals who have helped the SEC prosecute hundreds of securities violations. Most award recipients are regular employees who report their employer, but a small portion are compliance personnel. Compliance personnel occupy a unique role in a company as they are often responsible for ensuring that securities laws aren’t violated in the first place, or if there is a violation, that the company remediates appropriately by reporting the violation to the SEC.
While awards to compliance personnel may seem questionable given the unique role of compliance personnel within the company, the truth is that it’s difficult for attorneys, compliance or audit personnel to qualify for a whistleblower award. This is a result of a number of restrictions and narrow exceptions that have to be carefully navigated to become eligible for an SEC award if you are employed in one of these roles. In addition, licensed attorneys may face further limitations and potential sanctions from state bar associations for seeking whistleblower awards. The upshot is that prospective whistleblowers in compliance or the legal profession should proceed with caution if seeking an SEC whistleblower award.
The Rules for Outside Counsel
Outside counsel are only eligible for SEC whistleblower awards in extremely limited circumstances. The SEC doesn’t have a blanket prohibition on outside counsel collecting whistleblower awards, however, the rules of the whistleblower program make it very difficult as a practical matter for outside counsel to become eligible.
When it comes to the SEC’s own rules on whistleblower eligibility, there are two significant limitations on submitting information that apply to all whistleblowers. While these are rules of general application, they pose an acute obstacle for outside counsel seeking awards. These limitations state that a person cannot qualify for a whistleblower award if their information was obtained:
- Through a communication that was subject to the attorney-client privilege; or
- In connection with the legal representation of a client.
Almost all communications between outside counsel and a client will either be subject to the attorney-client privilege, or made in connection with legal representation. This means that there are very few circumstances in which outside counsel could obtain information that would avoid both these prohibitions. However, the SEC provides a narrow set of exceptions to these two rules.
The above prohibitions do not apply if the person is representing the company before the SEC and reasonably believes that providing the information to the SEC is necessary to:
- Prevent the company from committing a material violation that is likely to cause substantial injury to the financial interests of the company or its investors;
- Rectify a material violation that is likely to cause substantial injury; or
- Prevent the company from committing perjury or fraud during an SEC investigation or administrative proceeding.
These exceptions are narrow and there are few circumstances, if any, that come to mind where outside counsel would find themselves in possession of information of this type. But the analysis does not end there.
Even if outside counsel manages to thread the needle of one of these exceptions, they may be ethically prohibited from collecting an award due to state Bar Association rules. For example, the Committee on Professional Ethics of the New York County Lawyers’ Association stated its view that a New York lawyer may not ethically serve as a whistleblower seeking a bounty from a client-related enforcement action given the conflict of interests that would be posed between claiming an award and representing the clients’ best interests.
Different states take different approaches, but state bar rules are an important limitation on outside counsel’s ability to collect an SEC whistleblower award. Particularly because violating these rules could lead to disciplinary action or fines.
The Rules for In-House Counsel
In-house counsel can qualify for whistleblower awards in limited circumstances. Just like outside counsel, in-house counsel cannot provide information that is subject to the attorney-client privilege, or information that was obtained in connection with legal representation of a client.
However, when it comes to three SEC exceptions mentioned above that allow for attorneys to become eligible for awards, in-house counsel may find it very difficult to rely on these. This is because those exceptions are reserved for people who are representing a client before the SEC. In-house counsel will rarely (if ever) represent their employer before the SEC and instead, they typically hire outside counsel specifically for that purpose. This could lead to an odd situation where both in-house and outside counsel become aware of a serious violation of securities laws, but only outside counsel can avail of the SEC’s exceptions to report the information and claim an award.
In addition, even if in-house counsel can find a way weave between the prohibitions, they will also have to comply with local ethics rules from their local bar association.
The Rules for Non-Attorney Compliance (and Audit) Personnel
Non-attorney compliance and audit personnel are eligible for whistleblower awards in certain circumstances. Like all other whistleblowers, they cannot have obtained the information through a communication that was privileged, or in connection with legal representation of a client.
As a practical matter, for non-attorneys, these prohibitions pose less of a problem as non-attorneys cannot create attorney-client privilege, as their day-to-day work is unlikely to be considered “legal representation.”
However, given the important work compliance and audit personnel do in investigating violations and ensuring compliance within a corporation, the SEC has placed limitations on when they can claim awards. As a result, compliance and audit personnel can only claim a whistleblower award for information given to the SEC if one of the following three criteria apply:
- They have reported the information to the audit committee, chief legal officer, chief compliance officer or a supervisor, and 120 days has passed;
- The whistleblower reasonably believes immediate reporting is necessary to prevent substantial injury to the entity of investors; or
- The whistleblower reasonably believes the company is engaging in conduct that will impede an investigation of the misconduct (e.g., destroying evidence).
If one of these criteria applies, the compliance employee can report to the SEC and will be eligible for a whistleblower award. If they fail to meet any of these criteria, their award application will be denied even if the information was useful and led to a successful enforcement action.
When the SEC makes an award, only sometimes does it provide information on the whistleblower and their role within the corporation. While there has been a limited number of awards that have referenced compliance personnel (and none in recent years) this may simply be the result of decreased information being released by the SEC to help preserve the anonymity of compliance whistleblowers. In any event, attorneys or compliance personnel who are thinking of reporting would be wise to familiarize themselves not just with the rules of the SEC whistleblower program, but also applicable state bar rules. Getting sounds advice on these could make the difference between a lucrative award and a costly misstep.
John Joy is the Managing Attorney of FTI Law, a boutique firm in New York specializing in securities and whistleblower laws. He has worked for almost a decade on financial crime, corruption and FCPA cases around the globe. He regularly acts as an expert commenter in business and legal media on FCPA and other international corruption issues.