As we previously discussed,
the SEC reported a number of important achievements regarding its Whistleblower Program in fiscal 2015, including a record number of whistleblower
tips as more and more individuals come forward with information about potential misconduct. This is an encouraging development, but it also reminds
us of the importance of understanding the factors that motivate or prevent people from speaking up.
Witnesses to misconduct often remain silent. The Ethics and Compliance Initiative’s 2013 National Business Ethics Survey of the U.S. workforce revealed
that 45 percent of individuals surveyed did not report misconduct because they did not trust their report would remain confidential. As we have
previously noted, whistleblowers face real and significant personal and professional risks. In fact, the ECI survey also revealed that more than
one in five respondents who reported misconduct said they suffered from retribution as a result.
A recent experiment reported in the American Accounting Association's
journal Behavioral Research in Accounting, examined this fear of retaliation. The researchers posited that when companies enact policies that
describe “explicit whistleblower protections” from retaliation, whistleblowers are actually discouraged by the “salience of retaliatory threats.” In
other words, hearing detailed information about the various forms of retaliation from which they were protected, made individuals feel increasingly afraid of retribution and less likely to report misconduct.
The experiment reveals a central issue in our work to deter corporate wrongdoing: fear of retaliation is the greatest single impediment to the reporting
of misconduct. The authors of the experiment and report do not suggest that corporations omit statements regarding protections, but the results indicate
the importance of recognizing and assuaging the powerful fear of retaliation when designing any compliance or whistleblower program.
In crafting the SEC Whistleblower Program, the Commission placed profound emphasis on confidentiality, understanding the fundamental importance of protecting
whistleblowers from retaliatory consequences. In addition to protecting whistleblowers who come forward, maintaining confidentiality creates an atmosphere
that encourages safe reporting. In fact, the record number of tips the SEC received last year seems to indicate a growing confidence in the protections
and incentives offered by the Whistleblower Program. If we are to architect true change in the landscape of corporate ethics, we must begin by empowering
and protecting those who wish to speak up. To read more about considerations for potential SEC whistleblowers, see here.
Last week, the Financial Industry Regulatory Authority (FINRA) released its regulatory and examination priorities for 2016. FINRA’s letter highlights five areas for examination
at brokerage houses and financial advisory firms, including standards of ethical behavior, alignment of firm and customer interests, and the management
of conflicts of interest. FINRA’s chairman also stated intentions to specifically examine the conflicts of interest that can arise in the sale of proprietary
investment products to clients. These conflicts have garnered increased regulatory scrutiny, including in a recent landmark action where our whistleblower client tipped the SEC to inappropriate client "steering"
at JPMorgan. One of the largest actions against an investment adviser, the matter resulted in a $267 million settlement with the SEC and an additional
$40 million to the CFTC in a parallel proceeding.
FINRA’s concentration on ethical culture marks an important first step in identifying the nature of corruption within the industry at large. As our
recent survey of financial services professionals revealed, the industry has a disregard for ethics and a deep-rooted culture of secrecy. While
regulatory oversight has played and will continue to play a critical role in dismantling the status quo, true and sustainable change requires organizations
to prioritize and demand integrity—from within and top down.
In developing a new paradigm for corporate ethics, companies need to begin by understanding that traditional reporting methods alone do not work. In a
New York Law Journal article, we previously discussed how too many compliance programs are designed to respond to problems after they have surfaced, and focus on
the latest reporting trends, rather than proactive, consistent, organization-wide change that puts a premium on transparency and ethical agency.
To be sure, creating such a culture is a substantial undertaking. But in an era of whistleblowers and empowered law enforcement, no organization can bear
the cost of noncompliance. As we reported earlier, the Ethics and Compliance Initiative recently examined certain key characteristics that are common to high-quality
compliance and ethics programs. These characteristics must be the admission standard for all commercial entities, but particularly those in the financial
In order to truly eradicate corruption, firms must embrace and develop comprehensive and clear ethical visions. We applaud FINRA’s decision to examine
corporate culture, and believe it signals an important shift in the financial services industry in recognizing the critical role of ethics in deterring
wrongdoing, protecting investors, and building stronger companies.
Earlier this week, the SEC’s Office of Compliance Inspections and Examinations (OCIE) released its 2016 examination priorities. The results of OCIE’s examinations of regulated entities are used
by the SEC to support rule-making, find and monitor risks, encourage compliance, and prevent and pursue misconduct. Since OCIE also regularly refers
matters to the SEC’s Enforcement Division, its priorities are an important and early indicator of the type of cases the Enforcement Division will bring
in future years.
This year’s priorities, like those announced in 2015, are organized around three thematic areas:
- Protecting retail investors, including those saving for retirement
- Assessing issues related to marketwide risks
- Utilizing data analytics to identify and examine potential illegal activity
While the general themes of the examinations are carried over from 2015, OCIE’s 2016 priorities include several new areas of focus, including:
- Liquidity controls: In assessing marketwide risk, the SEC will examine exposure to potentially illiquid securities as well as examine liquidity providers
in the market.
- Public pension advisers: In 2014, the SEC brought its first case under pay-to-play rules for investment advisers, and the current examination priorities call for a focus on pay-to-play
and other risk areas related to public pension advisers.
- Promotion of products: Given the increase of new, complex and high-risk products available in the market, the SEC plans to focus on the promotion of
and sales practices related to these products to identify potential suitability and fiduciary obligation issues.
- Exchange Traded Funds and Variable Annuities: The SEC will examine sales strategies, trading practices, disclosure, and other issues related to these
These new areas of focus encompass some of the most common and critical issues currently facing investors, demonstrating the SEC’s continued commitment
to protecting and promoting the healthy and fair operation of our financial markets. To read the complete examination priorities from OCIE, please
Today, the SEC announced that two J.P. Morgan wealth management subsidiaries
agreed to pay $267 million to settle charges in an enforcement action initiated by information brought to the SEC by a Labaton Sucharow client, a J.P.
Morgan executive. The enforcement is one of the largest and highest profile actions initiated by an SEC whistleblower since the establishment of the
The SEC’s investigation uncovered that J.P. Morgan’s investment advisory business and its nationally chartered bank were steering clients to more expensive
in-house investments without proper disclosures of conflicts of interests. The troubling actions in this case occurred over several years, and deprived
JPMorgan's clients of necessary information to make informed investment decisions.
This case powerfully demonstrates the vast potential of the SEC Whistleblower Program to find and eradicate wrongdoing early and often. Because of
the unique protections and incentives of the program, our client chose to report the securities violations at J.P. Morgan to the SEC. In doing so,
the individual was able to protect J.P. Morgan clients and improve the sales culture of the organization, while avoiding retaliation and blacklisting.
And as awareness of the SEC Whistleblower Program grows, so does the likelihood that more individuals will step forward to reveal violations. The program’s
broad international reach and ability to report anonymously provide enormous opportunities to uncover misconduct wherever it occurs. In designing this
innovative program, the SEC understood that employees represent a critical first line of defense against wrongdoing. To learn more about the SEC Whistleblower
Program, please see here.
Working at the forefront of whistleblower advocacy, we have previously discussed the numerous
ways companies hinder or actively retaliate against individuals who choose to bring corporate misconduct to light. In fact, according to the Ethics
and Compliance Initiative’s National Business Ethics Survey,
more than 1 in 5 respondents said they experienced retaliation after reporting internally. We also continue to witness companies developing new and sophisticated strategies to discourage employees from reporting possible violations.
To be sure, though, the majority of companies want to behave ethically, and are potentially stymied by antiquated internal policies or a lack of guidance
regarding appropriate and effective compliance measures.
As part of its continued dedication to improving the current state of corporate ethics, last week the ECI released a new report which examines key characteristics of high-quality compliance and ethics programs. According to the report, common practices of organizations with
strong ethics and compliance cultures include:
- Creating an environment in which employees are encouraged and able to speak up. Management in such organizations not only offers ample opportunity
for employees to voice concerns, but also takes retaliation seriously through actively engaged HR, legal and compliance departments.
- Acting quickly and maintaining accountability when misconduct occurs. These organizations develop a plan of action in which suspicions are
thoroughly investigated, and confirmed misconduct leads to consistent consequences, regardless of the employee’s position.
- Treating compliance programs as central to business strategy. Misconduct poses dire business risks. As a result, an organization that is serious
about ethics will ensure that the compliance department is not only responsible for meeting legal requirements, but also works to help management
understand and establish integrity to benefit the organization’s overall mission.
It is apparent that companies must demonstrate greater leadership in building ethical cultures, and we applaud the focus and continued work by the ECI
to help advance this goal. In our ongoing effort to root out misconduct in the workplace, the ECI’s report provides a solid foundation of principles
and practices on which we can continue to build.
In addition to the case we described in an earlier post, in which the Commission filed an amicus brief on behalf of an internal whistleblower, in a significant move to protect whistleblowers at large, this month the SEC issued interpretive guidance to clarify that Dodd-Frank anti-retaliation provisions apply equally to those whistleblowers who report potential violations internally.
The SEC’s expansive view on whistleblower protections essentially confirms that to qualify for Dodd-Frank anti-retaliation protections, a whistleblower may report potential violations to the SEC directly or internally through an employer’s compliance channels. According to the SEC, the clarification “avoids a two-tiered structure of employment retaliation protection that might discourage some individuals from first reporting internally in appropriate circumstances and, thus, jeopardize the investor-protection and law-enforcement benefits that can result from internal reporting.”
While many organizations work hard to build credible ethical cultures, over the last few years, we have witnessed increasing efforts by some organizations to dismantle and deter the landmark reforms of Dodd-Frank. Indeed, through the use of secrecy agreements, legal bullying, and the creation of omerta cultures, some companies aggressively discourage whistleblowers from reporting misconduct.
This must stop.
Last year, we, along with the Government Accountability Project and 250 other organizations, submitted a petition urging the SEC to, among other things, engage in rule-making to clarify and strengthen whistleblower protections. By issuing this guidance on internal reporting, the SEC has sent a clear message that it will do just that. We applaud this action by the SEC and its clear aim to protect and encourage whistleblowers.
Together with the University of Notre Dame, today we released the findings of a collaborative and historic survey of financial services professionals across the U.S. and UK. The Street, The Bull and The Crisis is the most expansive analysis of its kind, probing the ethical views of a broad spectrum of the industry, from young professionals to senior executives, investment bankers, and investment managers, from San Francisco to Scotland.
Despite sweeping reform efforts and headline-making consequences of corporate misconduct, the findings make clear that attitudes toward corruption within the industry have not changed for the better. Indeed, nearly half those polled find it likely that their competitors have engaged in misconduct in order to gain an edge in the market. On an individual level, 32 percent of professionals with less than a decade in the business would engage in insider trading if they could get away with it. That’s twice the figure (14 percent) for employees with more than two decades in the industry. What does this mean for the future of the industry and how will it impact the fragile confidence of investors?
We are most concerned by findings relating to the widespread use of secrecy policies and agreements—a full 25 percent of individuals earning $500,000+ per annum have been asking to sign a confidentiality agreement that would prohibit reporting illegal or unethical activities to the authorities. As federal agencies and Congress has made clear, corporate entities cannot obstruct an individual’s fundamental right to freely engage with his or her government.
For more information on our findings, please see the full report here or see select highlights in this infographic.
In a landmark action that demonstrated the strength and reach of the SEC whistleblower program, the agency announced a sizable bounty to a former company officer, a Labaton Sucharow client, who provided law enforcement with key information about a securities fraud that resulted in a successful enforcement action. What makes this matter so unique is the fact that corporate officers are typically ineligible for awards. Typically. Among other exceptions, if a company had knowledge of a possible securities violation and compliance or other responsible parties failed to act within 120 days of learning of the misconduct, a company officer may come forward. This marks the first time the SEC issued an award in such a matter. Most importantly, this matter shows the remarkable power of the program to embolden high-level insiders to come forward and take a stand against corporate wrongdoing.
If you missed the NYC stop on the Government Accountability Project’s Whistleblower Tour last month, you’re in luck. Baruch has shared a fantastic recording of the panel on which I was honored to speak alongside Enron Whistleblower Sherron Watkins, Jon Oberg, Louis Clark and Jennifer Pacella.
American Whistleblowers Live at Baruch from kokobaz on Vimeo.
This week, eight leading Democrats on the House Oversight and Government Reform and House Financial Services Committees sent a letter to SEC Chair Mary Jo White calling on the Commission to ensure corporations do not enact measures meant to stymie whistleblowers. The letter pointed to a recent Washington Post article, which outlined numerous ways companies have restricted employees from reporting misconduct.
The letter echoes concerns that we, along with the Government Accountability Project, first raised in a July Op-Ed in the New York Times DealBook. Along with GAP and 250 other organizations, we have submitted a petition, urging the SEC to hold a series of hearings around the country to discuss the problem of workplace retaliation and explore new ways to increase reporting, internally and externally. It also asks the agency to create an advisory committee on whistleblower reporting and protection; to recommend program improvements and best practices; and engage in appropriate rule-making to clarify and strengthen whistleblower protections. This is a serious issue and we are glad Congress has taken notice of our efforts.
Please feel free to view the petition here - and, as always, don’t hesitate to reach out with any questions or concerns.