40Endnotes1 See Arthur H. Aufses III, David S. Frankel, Alan R. Friedman & Theodore S. Hertzberg, SEC Proposes Rules To Implement DoddFrank Whistleblower Program, Sec. & White Collar Litig. Alert (Kramer Levin Naftalis & Frankel LLP, New York, N.Y.), Nov. 2010.2 Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, Exchange Act Release No. 64545 (May 25, 2011) [hereinafter Final Release], available at http://www.sec.gov/rules/final/2011/34-64545.pdf.3 Rule 21F-2(a) (to be codified at 17 C.F.R. § 240.21F-2(a)) (emphasis added).4 Rules 21F-4(c)(1)-(2) (to be codified at 17 C.F.R. §§ 240.21F-4(c)(1)-(2)).5 Rule 21F-3(b) (to be codified at 17 C.F.R. § 240.21F-3(b)).6 The SEC has posted the comment letters at http://www.sec.gov/comments/s7-33-10/s73310.shtml and http://www.sec.gov/ comments/df-title-ix/whistleblower/whistleblower.shtml.

This marks the second time an employee with an internal audit or compliance function—who does not typically qualify under whistleblower rules—received an award under the SEC’s whistleblower program dictated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under SEC rules, disclosures of misconduct by those whose principal duties are related to compliance or internal auditing do not qualify as “original information” eligible for whistleblower status (see 17 C.F.R. 240.21F-4). The SEC does not believe employees in such quasi-investigative roles obtain such information as a result of “independent knowledge or independent analysis” [17 C.F.R. 240.21F-4(b)(1)].

This request, which contemplates rendering participation irrelevant, is somewhat at odds with the proposed rule that would allow the SEC to consider interference with an internal compliance and reporting program when determining whether to adjust relatively small awards upwards. Proposed Rule 21F-6(c).22)17 C.F.R. § 240.21F-4(b)(4).23)17 C.F.R. § 240.21F-4(b)(7).24)17 C.F.R. § 240.21F-6(b)(2).25)Proposed Rules at 56.26)Kokesh v. SEC, 137 S. Ct. 1635 (2017);Gabelli v. SEC, 568 U.S. 442 (2013);see alsoMeasuring the Impact of the SEC’s Enforcement Program(noting that the Enforcement Division has already had to forego recovery of hundreds of millions of dollars in disgorgement following the decision inKokesh).27)Proposed Rules at 56, 60.

Such an employee is entitled to an award, however, if they first report the misconduct to the company and it subsequently fails to take action within 120 days. See 17 C.F.R. §§ 240.21F-4(b)(4)(iii)(B),v(v). This exception applied to the claimant because he reported the conduct to his supervisor 120 days prior to submitting it to the Commission.In the Matter of the Claim for Award, Exchange Act Rel.

Last week the SEC announced that, for the first time, it had made a whistleblower award to an employee who performs audit and compliance functions at a company. As the SEC noted in its order in the case, although its regulations generally preclude whistleblower awards to employees whose principal duties involve compliance or internal audit responsibilities, there is an exception to this rule where the employee first reports the alleged violation internally and then waits at least 120 days before contacting the SEC. See17 CFR § 240.21F-4(b)(iii)(B); 17 CFR § 240.21F-4(b)(v)(C). That is what happened in this case.

mitted a tip through the SEC’s Whistleblower Program. Per agency policy, the Award Order is heavily redacted and does not reveal the nature of the enforcement action, let alone the whistleblower’s identity. The Award Order is notable, however, as it explains that the whistleblower worked in a compliance or internal audit role (“compliance/audit”), and such individuals are subject to special rules under the SEC Whistleblower Program regulations.Typically, a whistleblower (be it a corporate insider or outsider) can go directly to the SEC, submit a tip, and remain eligible for an award. Thus, in most cases there is no requirement to report the misconduct internally to obtain an award. But that is not the case for certain designated classes of individuals, including “employee[s] whose principal duties involve compliance or internal audit responsibilities, or [who are] employed by or otherwise associated with a firm retained to perform compliance or internal audit functions for an entity.” 17 C.F.R. § 240.21F-4(b)(4)(iii)(B).For such compliance/audit personnel to remain eligible for an award, the whistleblower generally must report his or her concerns to the company’s “audit committee, chief legal officer, chief compliance officer (or their equivalents), or his or her supervisor” and then wait 120 days before submitting a tip to the SEC. § 240.21F-4(b)(4)(v) (providing certain other narrow exceptions for compliance/audit personnel as well). This rule provides companies the opportunity to timely self-report violations of federal securities laws to the government while still offering a route for compliance/audit personnel to reap a whistleblower award. In this case, this is precisely what the whistleblower did. The whistleblower reported the information to “[his or her] supervisor and then waited at least 120 days to report the information to the [SEC].”The Award Order is otherwise remarkable as it emphasizes the significance of the whistleblower’s contribution to the SEC’s investigation and subsequent enfo

7 U.S.C. § 26(a)(4). Pursuant to 17 C.F.R. § 240.21F-4(a), a submission is made voluntarily if provided before a request, inquiry or demand that relates to the subject matter of the submission is directed to the whistleblower by the SEC or other investigatory body described in the rule or if the whistleblower is required to report the original information as a result of a pre-existing legal duty to report the information to the SEC. The CFTC’s definition of voluntary generally tracks the SEC’s.

As we have previously discussed here, all but a few whistleblower tips fail to lead to any award; this order serves as a reminder that a whistleblower’s information must have, in the SEC’s view, “significantly contributed to the success of [its] action.” 17 C.F.R. § 240.21F-4(c).Background The “Covered Action” addressed in the SEC’s order “arose out of two separate investigations, one by Enforcement staff in the Commission’s Home Office and the other by Enforcement staff in the Denver Regional Office (“DRO”) into” unidentified conduct.

L. No. 111-203, 124 Stat. 1376 (2010).3 15 U.S.C. § 78u-6(a)(3).4 17 C.F.R. § 240.21F-4(b)(4)(iii)(B).5 17 C.F.R. § 240.21F-4(b)(4)(v)(A).6 Press Release 2015-73, SEC Announces Million-Dollar Whistleblower Award to Compliance Officer (April 22, 2015). A copy of this press release may be found at http://www.sec.gov/news/pressrelease/2015-73.html.7 U.S. Securities and Exchange Commission, How Investigations Work (July 15, 2013), available at http://www.sec.gov/News/Article/Detail/Article/1356125787012.8 15 U.S.C. § 78u-6(b)(1).9 A second complainant was denied an award, the Order revealed, because he or she did not provide information leading to the successful enforcement of the Action, nor did he or she contest the denial following the Preliminary Determination.

The Dodd-Frank Whistleblower rules generally exclude information that is obtained by an “employee whose principal duties involve compliance or internal audit responsibilities … .” 17 C.F.R. § 240.21F-4(b)(4)(iii)(B). This rule would ordinarily prevent those employees from qualifying as a Whistleblower.