Last evening, I had the pleasure of participating in a panel discussion at the historic New York Stock Exchange. The discussion was part of a speaker series hosted by TAAAPS—The Association for Alternative Asset Professionals—with all proceeds being donated to charity. I was joined on the panel by Joseph Mecane, Executive Vice President at NYSE Euronext; Patrick Tominey, Vice President of FINRA Member Regulation; Harris Bogner, Managing Director of Compliance Consulting Solutions; and Stephen McShea, General Counsel at Larch Lane Advisors. The wide-ranging discussion focused on the trends, challenges and opportunities facing financial services companies in the alternative-asset management industry following the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). My distinguished co-panelists had very interesting thoughts on how these new regulations, enforcement initiatives, and increased scrutiny from governmental authorities and self-regulatory organizations, will impact fundraising, managing investments, and the expectations of investors. I was asked several questions by the panel and audience about the significant whistleblower protections and incentives in Dodd-Frank. I shared my deeply held belief that the SEC Whistleblower Program coupled with the establishment of the Asset Management Unit in the Enforcement Division, creation of the SEC Cooperation Program, and the more aggressive investigative techniques being used by the Department of Justice would revolutionize the ways the federal securities laws are enforced--and that responsible and well-run funds would benefit from these important initiatives. All of the panelists appeared to agree that, going forward, investment managers would be wise to focus more seriously on strengthening their existing compliance programs. In this regard, I emphasized the need for organizations to think beyond the traditional concepts of regulatory compliance and foster a culture of integrity where employees feel comfortable reporting misconduct, their concerns are appropriately addressed, and they are recognized/rewarded for reporting possible violations.
News 12 Connecticut sat down with Jordan Thomas early this year to discuss the SEC Whistleblower Program recently enacted under Dodd-Frank. The reforms carry heightened interest in regions that are home to large numbers of major corporate and financial services entities. Connecticut, specifically, has a high concentration of hedge funds, which Thomas explained face heightened scrutiny by federal regulators and law enforcement. Should this be a cause for concern for regions looking to entice business to stay and prosper, fostering jobs and commercial stimulus? Thomas remarked that reputable organizations have nothing to fear from recent legislative reform efforts and new enforcement initiatives. To the contrary, organizations should be motivated to examine their operations and build strong and transparent workplace environments; efforts that carry lasting and meaningful benefits for employees, shareholders and, of course, the public. The interview also addressed how individuals who may be complicit in workplace misconduct may come forward to cooperate with the authorities in the investigation of possible violations of the law. While at the SEC, Thomas played a leadership role in the development of both the Whistleblower Program and the Cooperation Program; both initiatives provide incentives and protections for individuals to work with authorities to expose misconduct, even if the individuals may have potential liability. For more in-depth analysis, see the television report below in its entirety:
In January, the Ethics Resource Center (ERC) released its biennial National Business Ethics Survey (NBES), widely recognized as a definitive measure of workplace ethics. A number of the key findings were positive. For instance, the survey found that 45% of respondents had witnessed workplace misconduct, a drop from 49% in 2009. Set against the degree of misconduct witnessed was a promising increase in its reporting; a record high of two-thirds of respondents had reported the misconduct of their peers. Nevertheless, the NBES had a number of key findings that sound the ethical alarm. The challenging economic times, among other factors, are believed to have contributed to an uptick to 13% of employees who perceived pressure to compromise their ethical standards to get the job done. Of equal concern, 22% of employees who reported bad behavior said they experienced some form of retaliation, a 10% spike over the prior survey’s results. Both of these statistics underscore a flawed and failing ethical culture, which we consistently highlight as an organization’s insurance policy against workplace misconduct. Indeed, the ERC survey found that the number of companies with perceived weak ethical cultures climbed to near record levels, with 42% of companies identified for their weak or “weak leaning” ethical culture. For our thoughts on practical ways organizations can mitigate the risk of misconduct and establish stronger corporate cultures driven by and rooted in integrity, click here.
"It's a new SEC," Jordan Thomas told Fox Business News in January, characterizing the agency’s renewed commitment and enhanced law enforcement capabilities under its new whistleblower program. With the significant employment protections and the possibility for substantial monetary awards, whistleblowers have new reasons to provide the SEC and other enforcement bodies with early and invaluable assistance in detecting and deterring violations of the federal securities laws. With actionable intelligence provided by whistleblowers, Thomas explained that enforcement authorities will be better positioned to investigate and prosecute senior executives at the helm of major fraud schemes. These high level fraudsters historically have been difficult for the authorities to identify and prosecute. In this way, whistleblowers will be a game changer, playing a critical and much needed role in preventing the serial misconduct that has eroded public trust and caused widespread harm to the global economy.
On December 11, 2011 Labaton Sucharow released the results of its nationwide Ethics and Action Survey. The Firm commissioned the survey in the wake of the Securities and Exchange Commission’s (SEC) new whistleblower program, which was enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The results were bittersweet. On one hand, the survey revealed that over one-third of those surveyed (34%) reported that they have observed or had firsthand knowledge of misconduct in the workplace, a disturbingly high number. Yet 78% of respondents said that they would report wrongdoing if it could be done anonymously, without retaliation, and result in a monetary award. This latter finding is significant because the SEC Whistleblower Program offers large monetary awards (from 10-30 percent of monetary sanctions collected) and powerful protections from workplace retaliation to individuals who come forward and report possible violations of the federal securities laws. Also, a whistleblower may report possible securities violations to the SEC, if represented by counsel.
Thus, it is clear that the whistleblower program has the potential to be a powerful tool in the SEC’s efforts to investigate and punish violators of the securities laws. As a result, in the coming years, I predict that many of the SEC’s most significant enforcement actions going forward will be the result of whistleblower tips. These findings are another reason for responsible corporations to reevaluate their internal reporting systems and to establish a culture of integrity in their organizations.
I was recently interviewed on Bloomberg TV to discuss the Securities and Exchange Commission’s (SEC) new program, enacted under Dodd-Frank, and the recently released Annual Report on the Whistleblower Program. The full interview can be seen here. As I discuss in the interview, in the seven weeks since the program went live to the end of the SEC’s fiscal year, the Annual Report reported 334 whistleblower submissions. Projecting that number out over a year, that is well over 2,000 whistleblower submissions. Considering that the SEC conducts less than 2,000 investigations in any given year, the amount of submissions so far is significant. It is no surprise. The program offers large monetary awards and powerful anti-retaliation protections to whistleblowers who come forward with original information that leads to a successful enforcement action. With these powerful incentives in place, it is assured that some of the biggest SEC enforcement actions going forward will be the result of whistleblower tips.
Over at Tom Fox’s FCPA Compliance and Ethics Blog, I recently authored a guest post examining the new – and revolutionary – Securities and Exchange Commission’s (SEC) Whistleblower Program, enacted under Dodd-Frank, and its impact on Foreign Corrupt Practices Act (FCPA) enforcement. As I point out in that piece, a qualified whistleblower can receive a monetary award of 10-30% of the monetary sanctions collected in a successful SEC enforcement action. Even better, if a parallel proceeding is brought by another regulatory or law enforcement body for the same FCPA violation, the whistleblower could receive 10-30% of any sanctions in that proceeding as well. This is significant because FCPA violations are often the subject of parallel civil and criminal proceedings. Also, sanctions in this area are often large and headline-grabbing. Moreover, with the program’s strong anti-retaliation provisions, employee whistleblowers can come forward safely and without fear of retaliation. All of this adds up to a potent new tool for law enforcement in combating the bribery of foreign officials. Companies doing business internationally, potential whistleblowers, and professionals with FCPA practices must all be on notice.
Late in 2011, Labaton Sucharow convened an esteemed panel to explore, for the benefit of the UK media, the effect of US financial reforms on international financial institutions. Panelists included Labaton Sucharow attorneys Jordan Thomas and Dominic Auld; Irving Henry of the British Bankers Association; and Simon Collins, from the Association of Professional Compliance Consultants. Following discussion of the regulatory environment in the US and, specifically, the mechanics of the SEC Whistleblower Program, panelists addressed such hot issues as the different enforcement approach in the US and abroad. Interestingly, there was widespread agreement that whether a jurisdiction favors a prudential approach like the UK or a more aggressive enforcement approach like the US, neither has effectively rooted out and deterred significant frauds in the financial services community because without actionable intelligence law enforcement organizations and regulatory authorities will always be at a disadvantage. As the UK and other nations watch the progress of Dodd-Frank reforms in practice, and launch corporate governance and financial overhauls in their local jurisdictions, panelists concurred that successful reforms will play a significant role in restoring and fostering stronger corporate cultures and will, ultimately, put public and investor trust back into the financial services industry. Please view a video of the October 2011 roundtable below:
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.