Over and above increased activity by Financial Industry Regulatory Authority (FINRA) and other self-regulatory organizations (SROs), investment managers are increasingly coming into the crosshairs of the Securities and Exchange Commission’s [SEC] Division of Enforcement, as I recently noted in this article for the National Association of Active Investment Managers (NAAIM). In 2010, the SEC created its Asset Management Unit—of which I was an Assistant Director and a founding member until July 2011—which solely focuses its investigative and enforcement efforts on investment companies, investment advisers, mutual funds, hedge funds and private equity funds. According to the recently released 2011 Performance and Accountability Report, the success of this new unit is already well established. The Report notes that the SEC brought numerous successful enforcement actions against investment advisors, including against such prominent firms as Charles Schwab, Merrill Lynch, AXA Rosenberg Group, and TD Ameritrade. But the biggest game changer may be the SEC’s revolutionary whistleblower program, which was enacted under Dodd-Frank. The program offers large monetary awards and protection from workplace retaliation to individuals who come forward and report possible violations of the US securities laws.  Although the program was only formally implemented in August 2011, the SEC released a report in November 2011, which underscores significant whistleblower activity. The combination of enhanced regulatory scrutiny and significant incentives and protections for whistleblowers adds up to a new and potent enforcement reality for investment managers, who must be ever more vigilant in preventing violations, reporting them when they occur, and protecting those that do come forward to report misconduct.

Check out my guest post over at Fred Abrams’ Asset Search Blog discussing the impact of human intelligence and the locating of hidden assets on the prosecution of securities violations under the Securities and Exchange Commission’s [SEC] new whistleblower program. The program, enacted under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, encourages whistleblowers to come forward by offering significant monetary awards and strong anti-retaliation provisions. One of the factors considered by the SEC in determining the size of the award is the whistleblower’s effort in assisting the authorities in recovering the fruits and instrumentalities of the violations. Thus, a whistleblower with both the knowledge of the violation and the ability to help locate hidden assets will be in a position to maximize his or her recovery.

Even though it only became effective in August, the Securities and Exchange Commission’s (SEC) new whistleblower program is already having a powerful impact, according to the Annual Report on the Whistleblower Program released by the SEC this month. According to the report, the SEC received 334 whistleblower tips in the seven weeks since the program became effective on August 12, 2011, to September 30, 2011, the end of the fiscal year. Tips came from individuals in 37 states, as well as from several foreign countries, including China and the United Kingdom, demonstrating the global reach of this innovative new program. It is too early to identify and specific trends or provide amounts of monetary awards paid to whistleblowers. But considering the significant monetary awards and anti-retaliation protections offered, and based on the early numbers, it is clear that the whistleblower program will be a powerful new tool in investigating and prosecuting violations of the securities laws.

In-house corporate compliance programs have recently undergone a positive transformation, including the growth of strong and independent compliance functions. But as I argue in a recent New York Law Journal article, to remain successful and scandal-free in this era of corporate wrongdoing, organizations must be more forward-looking and establish a culture of integrity that deters misconduct from occurring in the first place. Indeed, most of the organizations that were the subject of major scandals over the last decade had well-funded compliance programs, yet the fraud went on. Now with the establishment of the Securities and Exchange Commission’s (SEC) new whistleblower program, enacted as part of Dodd-Frank, the need for such a strong ethical platform has never been more critical. In this new program, the federal government has essentially deputized virtually every company employee to serve as their foot soldiers in the fight against fraud and corruption. Legal and compliance officers have new and compelling arguments for increased resources and support in establishing strong ethical cultures and state-of-the-art compliance programs.