In testimony before Congress earlier this year, U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler reported that the SEC received 46,000 complaints, tips, and/or referrals in fiscal year 2021, which nearly doubled the number received in fiscal year 2020. The number of whistleblower tips alone increased by 76% in 2021 to 12,200 – a single year record. The SEC whistleblower program paid $564 million to 108 individuals this past year, making 2021 a record year both for dollar amount and largest number of individuals rewarded in a single year. In fact, 2021’s awards ($564 million) exceeded all the prior years of the SEC’s whistleblower’s program combined payout between 2011-2020 ($562 million).
Importantly, roughly 60% of the award recipients in FY 2021 were current or former insiders of the entity he/she reported to the SEC and 75% of those recipients had raised their concerns internally to their supervisors, compliance personnel or through internal reporting mechanisms before reporting their information of alleged wrongdoing to the Commission. The fact that such a large percentage of whistleblowers previously utilized internal reporting processes to raise concerns, but ultimately resorted to the SEC indicates that corporate organizations continue to struggle with effectively responding to whistleblower complaints.
Fellow colleague at StoneTurn and an expert in corporate culture, governance and ethics, Tracey Groves, tells us that corporate whistleblower programs generally fail for one of two reasons – the two Fs – fear and futility. Some reporting programs fail because the whistleblower will fear some type of reprisal or retaliation. With the numbers that the SEC recorded in FY 2021 and the notable percentage of those that were insiders, fear does not appear to have been an impediment to raising concerns within that population. However, with 75% of all the insider award recipients having had reported allegations of wrongdoing internally first, we can assume that futility was at least a partial driver for escalating their issues to the Commission. Avoiding employee frustration and the feeling of futility amongst employees who report ethics or compliance concerns is critical to maintaining a high-functioning and effective ethics and compliance program.
Employers Must be Prepared to Respond to Complaints
All organizations should have policies and procedures in place for managing and responded to whistleblower complaints, which take into consideration employee perspectives and the expedient and accurate resolution of raised concerns. In that regard, and as entities evaluate their whistleblower program, consider the following elements for increasing the programs’ responsiveness and therefore effectiveness:
• Triaging the Complaint: As a rule, not all matters raised through a whistleblower hotline need to be treated the same. Constant calls to the reporting hotline lamenting the company’s share price, need not be treated the same as a complaint questioning payments made to government officials in Brazil. To sift through the noise, it is important to have a process in place to: review the complaints; understand the severity; determine the location and availability of information that would support or refute the complaint; assess the whistleblower’s motives, bias and scope of knowledge; review the company rules and regulations or local, state or federal laws at issue; and determine whether the complaint raises any immediate issues of safety or soundness for any stakeholders.
• Keep the Circle Small: Care must be taken when considering who to disclose a whistleblower complaint to. The broad dissemination of a whistleblower complaint can lead to retaliation claims, unnecessary regulatory concerns and/or the spoliation of evidence germane to the issues raised. With regard to evidence, the company’s Information Technology department should be informed to preserve relevant documents and emails and the Legal Department should consider legal holds on potentially relevant materials. Organizations should keep in mind that there may be situations in which disclosure to a regulator or law enforcement may be required either by law or by agreement. Counsel should be included in discussions involving the potential for self-reporting and required regulatory notifications.
• Establish Communication Protocols: There are several stakeholders to consider when developing strategies for managing internal and external communications. Most important is ensuring that the messaging with the whistleblower is consistent and reassuring, to maximize the potential for continued cooperation from her/him. Employees “in the know” must be reminded of relevant anti-retaliation policies, while human resources should track any changes to the whistleblower’s attendance or engagement, and safeguard the employee against any actions that could be construed as retribution. Consideration should be given to external stakeholders, in particular if the allegations may rise to regulatory concerns, a board of directors’ issue or become media worthy. The team managing the examination of the allegations may think about the retention of a public relations or crisis management firm to assist with external communications and media inquiries.
• Prepare to Investigate: All complaints raised by a whistleblower must be investigated to some degree, taking into account the severity of the allegations and the risks to the organization. The most important consideration is determining who will conduct the investigation. Some criteria for selecting the investigator include: the nature of the allegations (i.e.- the sufficiency of the investigation is a defense to employee harassment claims); the independence of the investigator (avoid the appearance of or an actual conflict due to the relationship between the investigator and the firm); the investigative resources required (i.e.- the geographic nature of the allegations and whether the investigation will require special skills, such as forensic accounting, computer forensics and other specialized experts); and other factors. In addition, thought should be given to the nature and location of potential evidence required to investigate the allegations and what will be required to obtain the information. Lastly, the organization should consider the timing required to complete the investigation and the timing of any regulatory requirements to make certain that deadlines are met.
Conclusion
According to SEC’s Gensler, the Commission is preparing for a steady flow of tips and complaints this year, equal to last year’s numbers. While the Commission is anticipating a slight drop off in whistleblower complaints in 2023, Gensler has requested an 8% increase in the SEC’s operating budget for fiscal year 2023 versus the current year’s budget, to bring headcount in line with previous high numbers. With the SEC laser focused on defending the capital markets—and as Gensler put it, “holding wrongdoers accountable” – companies would be wise to review the effectiveness of their internal whistleblowing program’s response capabilities and efficacy, and make the requisite adjustments to maximize the chances of remaining out of the Commission’s sights.
