Up and Running: Developments with the SEC Whistleblower Program

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June 25, 2013

5:30 p.m. Registration

6:00 p.m. Panel Discussion

7:00 p.m. Cocktail Reception

Moderator

Mary Hansen, Partner, Drinker Biddle

Panelists

Sean McKessy, Chief of the SEC’s Office of the Whistleblower Stephen Stroup, Counsel, Drinker Biddle

Up and Running:

Developments with the

SEC Whistleblower

Program

1 Up and Running:

Developments with the SEC

Whistleblower Program

June 25, 2013

5:30 pm Registration 6:00 pm Panel Discussion 7:00 pm Cocktail Reception

Up and Running: Developments with the SEC Whistleblower Program | 2

Panelists

• Sean X. McKessy

Chief, Office of the Whistleblower

Securities and Exchange Commission

• Mary P. Hansen

Partner

Drinker Biddle & Reath LLP

• Stephen G. Stroup

Counsel

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2 Overview of Discussion

• Summary of whistleblower provisions and the bounty program

• Recent statistics

• Expectations vs. reality

• Impact of whistleblower provisions on internal compliance

programs

• SEC staff’s handling of whistleblower complaints

• Handling internal reports of misconduct

• Anti-retaliation provisions

Payment of Awards

The Commission will pay an award or awards to one or more

whistleblowers who:

1) Voluntarily provide the Commission

2) With original information

3) That leads to the successful enforcement by the Commission

of a federal court or administrative action

4) In which the Commission obtains monetary sanctions totaling

more than $1,000,000

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3 Original Information

“Original information” means information that:

(1) is derived from the independent knowledge or analysis of a

whistleblower;

(2) is not known to the Commission from any other source;

(3) is not exclusively derived from an allegation made in a judicial

or administrative hearing, in a governmental report, hearing,

audit, or investigation, or from the news media, unless the

whistleblower is a source of the information; and

(4) is provided to the Commission for the first time after July 21,

2010.

See Section 21F(a)(3) and Rule 21F-4(b).

Amount of Award

• Amount of the award will be at least 10% and no more than

30% of the monetary sanctions that the Commission and other

authorities are able to collect

• Determination of the amount is in the discretion of the

Commission

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4 Criteria for Determining

Amount of Award

• The Commission will consider the following factors in

determining the appropriate award percentage:

• Significance of the information provided by the whistleblower

• Assistance provided by the whistleblower

• Law enforcement interest

• Participation in internal compliance systems

See Rule 21F-6.

Factors that May Decrease an Award:

Interference with Internal Systems

• Did the whistleblower interfere with the entity’s established

legal, compliance or audit procedures to prevent or delay

detection of the violation?

• Did the whistleblower make any material false, fictitious or

fraudulent statements that hindered an entity’s efforts to detect,

investigate or remediate the violation?

• Did the whistleblower provide any false writing or document that

hindered an entity’s efforts to detect, investigate or remediate

the violation?

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5 Whistleblower Awards

• August 21, 2012:

• Whistleblower who helped the SEC stop an ongoing

multi-million dollar fraud received an award of 30% of the amount

collected in the SEC’s action

• June 12, 2013:

• Three whistleblowers who provided information about an

ongoing fraudulent scheme that resulted in investor losses of

$2.7 million were awarded a total of 15% of the amount

collected in the SEC’s action against a “sham” hedge fund and

its CEO

See Whistleblower Award Proceedings, File Nos. 2012-1, 2013-1.

Whistleblower Statistics

FY 2012

• 3,001 whistleblower TCRs received from all 50 states, D.C. and

Puerto Rico, as well as 49 countries outside of the U.S.

• Most common complaints:

• Corporate disclosures and financials (18.2%) • Offering fraud (15.5%)

• Manipulation (15.2%)

• Complaints also related to:

• Insider trading (6.3%) • Trading and pricing (4.8%) • FCPA (3.8%)

• Municipal securities (2.1%)

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6 The 120-Day Rule

• Employees who report wrongdoing internally first and, within

120 days, then report the wrongdoing to the SEC, will be

deemed to have reported the information to the SEC on the

date they reported internally, thereby preserving their place in

line in terms of when the information was provided to the SEC

and giving the whistleblower credit for information uncovered by

the company in connection with its internal investigation

See Rule 21F-4(7).

Participation in Internal

Compliance Systems

• The Commission will consider whether the whistleblower

reported the possible securities violations internally and

whether the whistleblower assisted with any internal

investigation

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7 Limitations on Information

• Information obtained through communications subject to

attorney-client privilege generally cannot be used, in order not

to weaken the benefits that consultation with counsel often

contributes to an effective compliance program and the

development of corporate best practices

See Rule 21F-4(b)(4)(i).

Staff Communications

with Whistleblowers

• No person may take any action to impede an individual from

communicating with the Commission staff about a potential

securities law violation

• If the whistleblower is a director, officer, member, agent, or

employee of an entity that has counsel, the staff is authorized

to communicate directly with the whistleblower regarding the

possible securities law violations without seeking consent of the

entity’s counsel

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8 No Amnesty

• Securities Whistleblower Incentives and Protection provisions

do not provide amnesty to individuals who provide information

to the SEC

• Providing information to the SEC does not preclude the SEC

from bringing an action against a whistleblower based on his

conduct

See Rule 21F-15.

Anonymous Whistleblowers

• A whistleblower may submit information to the SEC

anonymously, provided that the whistleblower is represented by

counsel in connection with the submission of information and

claim for an award

• Before the SEC will pay any award to a whistleblower, the

whistleblower must disclose his identity to the SEC

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9 Summary of Seaboard Factors

• Self-policing prior to the discovery of the misconduct, including establishing effective compliance procedures and appropriate tone at the top • Self-reporting of misconduct when it is discovered, including conducting a

thorough review of the nature, extent, origins and consequences of the misconduct, and promptly, completely, and effectively disclosing the misconduct to the public, to regulators

• Remediation, including dismissing or appropriately disciplining wrongdoers, modifying and improving internal controls and procedures to prevent recurrence of the misconduct, and appropriately compensating those adversely affected

• Cooperation with law enforcement authorities, including providing the Commission staff with all information relevant to the underlying violations and the company’s remedial efforts

See Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions (Oct. 23, 2001).

Prohibition Against Retaliation

• No employer may discharge, demote, suspend, threaten,

harass, directly or indirectly, or in any other manner

discriminate against, a whistleblower in the terms and

conditions of employment because of any lawful act done by

the whistleblower

• Whistleblower has a private right of action and the

Commission may bring an action based upon retaliation in an

action or proceeding

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10

Albany 321 Great Oaks Blvd. Albany, NY 12203-5971 (518) 452-8787 phone (518) 452-8767 fax Chicago 191 N. Wacker Dr., Ste. 3700 Chicago, IL 60606-1698 (310) 569-1000 phone (312) 569-3000 fax Florham Park 500 Campus Dr. Florham Park, NJ 07932-1047 (973) 549-7000 phone (973) 360-9831 fax London

Drinker Biddle & Reath (U.K.) LLC 50 Mark Lane, 5th Floor London, EC3R 7QR

+44 (0)20 3405 3444 phone +44 (0)20 7942 8217 fax

Los Angeles

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(518) 452-8787 phone (518) 452-8767 fax

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777 E. Wisconsin Ave., Ste. 2000 Milwaukee, WI 53202-5319

(310) 569-1000 phone (312) 569-3000 fax

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(212) 248-3140 phone (212) 248-3141 fax

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(215) 988-2700 phone (215) 988-2757 fax

Princeton 105 College Road East P.O. Box 627 Princeton, NJ 08542-0627 (609) 716-6500 phone (609) 799-7000 fax San Francisco 50 Fremont St., 20th Floor San Francisco, CA 94105-2235 (415) 591-7500 phone (415) 591-7510 fax Washington, D.C. 1500 K Street, N.W. Washington, DC 20005-1209 (202) 842-8800 phone (202) 842-8465 fax Wilmington 1100 N. Market St., Ste. 1000 Wilmington, DE 19801-1254 (302) 467-4200 phone (302) 467-4201 fax

Thank You for Coming

Mary P. Hansen

Partner

Drinker Biddle & Reath LLP (215) 988-3317

[email protected]

Stephen G. Stroup

Counsel

Drinker Biddle & Reath LLP (215) 988-2547

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Speech by SEC Staff:

Remarks at Georgetown University

by

Sean X. McKessy

Chief, Office of the Whistleblower

U.S. Securities and Exchange Commission

Washington, D.C.

August 11, 2011

The Securities and Exchange Commission, as a matter of policy,

disclaims responsibility for any private publication or statement by any of

its employees. The views expressed herein are those of the author and

do not necessarily reflect the views of the Commission, or of the author's

colleagues upon the staff of the Commission.

Thank you for that kind introduction and for inviting me here today.

As many of you know, the Securities and Exchange Commission serves to

protect investors from fraud and ensure our markets operate fairly.

We are a relatively small agency responsible for regulating more than

35,000 entities – from investment advisers to corporate filers to national

exchanges. In fact, our entire operating budget is smaller than the amount

that some individual financial firms spend on their IT systems alone.

Because we simply cannot be everywhere, our Chairman Mary Schapiro

-- constantly urges us to find new ways to leverage the resources of others

to fulfill our mission.

That is why the new whistleblower program authorized by last year’s

financial reform legislation is so crucial to our work. It will help us to more

quickly identify and pursue frauds that we might not have otherwise found

on our own. It will strengthen our ability to carry our mission. And, it will

save us much time and resources in the process.

To summarize, the WB program provides a monetary incentive of between

10 and 30 percent of sanctions we collect for WB who voluntarily provide us

with original information that lead to a successful SEC action with sanctions

exceeding $1 million.

This speech on the whistleblower program is particularly timely now

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program go into effect. So I am excited to be here and to announce the

launch tomorrow of our new Office of the Whistleblower website tomorrow

morning, which I hope you will check out.

And, as the first Chief of the SEC’s Office of the Whistleblower, I am excited

about the promise that this program holds.

Since the Final Rules were adopted by the Commission in May, I have

focused my efforts on reaching out to various sectors and constituencies to

let people know about the benefits of the whistleblower program and the

way the rules work.

It has been the part of this job that I have enjoyed the most, as it helps me

put a face to the names of people who will be directly affected by this new

program –whistleblowers, in-house compliance officers and lawyers.

I have been impressed at how thoughtful many have been in parsing

through the rules to try to understand what they require and how they may

play out. But, my outreach efforts -- and review of the widely distributed

commentary on the rules -- have led me to conclude that there still exists

some misunderstanding about certain hotly debated issues related to the

whistleblower program. So I’d like to try to address three of them here

today. As I do so, please keep in mind that my remarks represent my own

views and not necessarily those of the Commission, the staff or any of the

Commissioners.

Issue Number 1:The Whistleblower program will bolster, not

hamper, the internal compliance systems at companies across the

country.

This seems rather apparent to me, yet no topic has been, and continues to

be, more heavily debated than this one. The fact is that the SEC

whistleblower program is the first and only such program in the country

that makes available a monetary award from the government to an

individual that reports possible wrongdoing internally. Put another way, the

SEC’s WB program is the only one in the country that extends significant

benefits to individuals that report internally that enhance the opportunity

for a whistleblower award, and possibly an award at a higher end of the

allowable range.

Here’s how: the rules specify that employees who report wrongdoing

internally first and, within 120 days, then report the wrongdoing to the

SEC, benefit in two significant ways.

First, those employees will be deemed to have reported the information to

the SEC on the date they reported internally. This preserves their place in

line in terms of when information was provided to the SEC.

Second, the employees who report internally first receive the benefit of all

the information uncovered by the company in connection with its own

internal investigation of the alleged wrongdoing.

These are not hypothetical or inconsequential benefits. Under this scenario,

an employee who reports information internally that itself might not have

warranted an SEC investigation, could nonetheless become eligible for an

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award if the internal investigation uncovers such information that does lead

to an SEC investigation. For example, imagine an employee who, based on

his experience, knows but does not have sufficient proof to substantiate

that something is amiss with the company’s accounting for a certain

matter. That “gut feeling” in and of itself, may not be sufficiently timely,

specific and credible to cause the SEC to open an investigation if it were

reported to us. If, however, the employee were to report that gut feeling

internally, and the company’s subsequent investigation were to uncover

specific, timely and credible information that is reported to us, the reporting

employee – who might not have otherwise even qualified for an award –

would then be eligible.

Additionally, the employee gets the benefit of all the facts and details

uncovered and reported to us by the company in connection with its

internal investigation of the issue. So, the percentage of the award to the

employee could be increased based on the enhanced quality and value of

the information uncovered by the company’s internal investigation. So the

same employee that reported the “tip of the iceberg” – something is wrong

– gets the benefit of the full iceberg – everything that the internal

investigation uncovered. That employee’s award will be based on the whole

iceberg – likely a higher award than if just the tip were uncovered. The

rules also require that cooperation with internal compliance programs be

considered as a positive factor that could increase a whistleblower award,

and interference with such programs as a negative factor that could

decrease an award.

These significant benefits to those who report internally first offer a great

opportunity for companies and their compliance officers and personnel.

Rather than undermining or weakening internal compliance programs, I

believe the whistleblower program actually should empower internal

compliance personnel to advocate for stronger and more transparent

internal compliance programs. Why? Because the rules leave it to the

employee to decide whether to report internally first – or to contact the SEC

-- and those companies that best ensure that their employees view internal

reporting as a viable and credible option to address possible securities law

violations are more likely to have the wrongdoing reported internally first.

In my view, the net effect of the incentives for reporting internally is a

rising tide that should lift all boats when it comes to the strength and

effectiveness of internal compliance programs.

Issue Number 2: The final rules recognize that in most instances,

attorneys, compliance personnel and external auditors should not

be allowed to become whistleblowers.

Some have argued that by failing to adopt an absolute exclusion on

attorneys, auditors and compliance officials, the final rules provide negative

“incentives” – that is to say, it encourages these individuals to abandon

their professional responsibilities in favor of a potential bounty award. But I

don’t believe the rules have created any negative incentives.

The best way to address this issue is to take a step back and consider the

purpose of the whistleblower award program. While I certainly hope and

expect that the SEC will end up paying awards to individuals who have

provided information, such payment is the end result, but not the purpose,

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of the whistleblower program. Instead, the program was created to add a

tool to the SEC’s arsenal to identify wrongdoing, prevent or stop it and, if

appropriate, punish those responsible. By providing for the possibility of a

whistleblower award to attorneys, compliance officials and auditors, the

final rules recognize that we may in some narrow circumstances, need

these individuals to come forward, in order to accomplish that goal. And I

believe that, in the narrow circumstances described below, these individuals

can and should be eligible for an award.

But, make no mistake, those circumstances are limited. In essence, a

monetary incentive is provided to these types of professionals to report to

the Commission only when

i. it is necessary to prevent imminent or ongoing misconduct; or,

ii. the misconduct has been identified and reported, but not remediated

in a timely fashion.

Let’s consider each group and the rationale to understand why these

exceptions that allow for the possibility of an award are appropriate.

Attorneys . With respect to attorneys, the final rules are very clear that

attorneys may not break their attorney-client privilege for the purposes of

reporting wrongdoing and receiving an award. Indeed, the rules specifically

exclude from the definitions of “independent knowledge” or “independent

analysis” (required to be eligible for an award) any information obtained

through a communication subject to the attorney-client privilege.

However, the final rules make reference to policy determinations -- made

long before the whistleblower program was created -- that permit attorneys

to come forward with potentially privileged information under very limited

parameters.

First, the rules provide for the possibility of an award to an attorney if

disclosing the information is permitted under the Commission’s attorney

conduct rules adopted in connection with the Sarbanes-Oxley Act of 2002.

Those rules – adopted in 2003 -- are limited to the issuer context and

permit attorneys to disclose information only if they reasonably believe that

disclosure is necessary:

i. to prevent the issuer from committing a material violation that is

likely to cause substantial injury to the financial interest or property

of the issuer or investors;

ii. to prevent the issuer from interfering with an ongoing Commission or

investigation or

iii. to rectify the consequences of a material violation by the issuer that

caused, or may cause, substantial injury.

Similarly, the final rules do not preclude an award to an attorney who

provides information when disclosure is permitted by state attorney conduct

rules. These rules -- which pre-date the creation of the whistleblower

program by decades -- vary by state but generally permit attorneys to

disclose information:

i. to prevent reasonably certain death or substantial bodily harm;

ii. to prevent a client from committing a crime or fraud; or,

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iii . to prevent, mitigate or rectify substantial injury to the financial

interests that is reasonably certain to result or has resulted from the

client’s commission or a crime or fraud.

By allowing for the possibility of an award to an attorney who reports under

these circumstances, the final rules have created no negative incentives for

attorneys. Think about the circumstances I just described. If the ultimate

goal is to ferret out wrongdoing, how is it negative to provide for the

possibility of an award to attorneys when severe harm is imminent?

Compliance and Internal Audit Personnel. As for compliance and

internal auditors, some claim the final rules allow for the possibility of an

award to these professionals merely for doing what the company is paying

them to do.

But, as with attorneys, an employee with compliance or internal auditor

responsibilities may only be eligible for a whistleblower award under the

same limited circumstances as attorneys; that is if they have a reasonable

belief that reporting is necessary to prevent actions that will result in

imminent harm or impede an investigation.

For the same reasons as with attorneys, allowing for the possibility of a

whistleblower award under these circumstances does not encourage a

breach of their responsibilities – it rewards them for taking those

obligations seriously.

The third circumstance under which there is a possibility of an award to

compliance or internal audit personnel occurs only when more than 120

days have passed since the information was reported to certain officials –

including the entity’s audit committee, chief legal officer, chief compliance

officer or supervisor.

In this case, an award is possible only after these professionals have done

what they are paid to do: They reported wrongdoing internally with a view

of having it addressed -- – but, for whatever reason, the entity failed to

take timely remedial action.

Keeping in mind the ultimate goal to prevent or stop possible violations of

the securities laws, I see nothing wrong with incentivizing compliance and

internal audit employees to come forward when the internal compliance

process has failed.

External Auditors. And, with respect to external auditors, their eligibility

is also limited to narrow circumstance. In their case, it’s where the auditors

have a reasonable basis to believe that their employer (the audit firm)

failed to make the required disclosures of the audit client’s wrongdoing

under Section 10A of the Exchange Act. In these rare instances, the

eligibility for an award is limited to the reporting of misconduct that has

been detected but not reported to us.

Issue Number 3: The whistleblower program ensures that efforts to

address misconduct are sped up, not delayed.

Of course, I’ve heard the claim that employees will delay reporting ongoing

misconduct to increase the size of the potential award. The theory is that

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since the whistleblower award percentage is calculated against the

monetary sanctions obtained, whistleblowers will be incentivized to allow

misconduct to grow so the sanctions will be greater. However, this theory

ignores some significant aspects of the final rules.

First, to be eligible for an award, a whistleblower must provide the SEC with

“original” information – that is, information not already known. This

requirement is a natural and powerful disincentive for an individual to “sit

on” information about ongoing misconduct – because doing so means

someone else may come forward first.

Second, information reported to us must be specific, credible and timely if it

is to lead us to open an investigation. So an individual who delays reporting

risks that the information will not lead to an investigation -- a no

investigation, no case, and no case, no award.

Third, the final rules include an ‘unreasonable delay’ as one of the factors

that might decrease the size of an award. So, the whistleblower who waits

may end up with a lesser percentage than he or she might have gotten if

he or she had report promptly.

Additionally, I’ve also heard some claim that wrongdoing reported by a

whistleblower will be allowed to continue because the SEC will needlessly

keep management in the dark about the report, depriving the company of

the opportunity to take swift responsive action. This theory rests on the

assumption that because a whistleblower is involved, the SEC cannot or will

not involve the company in the investigation.

In fact, the SEC has been working with insiders and whistleblowers long

before the whistleblower award program was established, and, when

appropriate, we have included the company in efforts to investigate and

punish wrongdoing most effectively and efficiently.

Companies should expect that the SEC’s practice of involving them where

appropriate will continue. The possibility that there could be a monetary

award paid to the whistleblower at the conclusion of a successful action

should in no way alter this historic practice.

* * * * *

While the final rules go into effect tomorrow, we have already seen an

increase in the quality of the tips we have received since the passage of

Dodd-Frank in July 2010. Long letters that include detailed information

about potential violations. It’s information like this that can save our

attorneys months of investigation and allow us to stop a fraud earlier in the

process.

Violations of the securities laws have far-reaching consequences even

beyond those directly affected by the wrong. Surely, the enormous losses

suffered by investors are tragic enough, but perhaps a greater harm is the

loss of confidence by the public in the fairness of the investment process.

While the vast majority of companies and securities professionals are

honest and law-abiding, the actions of a few rotten apples can unfairly taint

the entire industry in the minds of much of the public.

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It is in the interest of all of us -

investors, companies, securities

-professionals, regulators and whistleblowers -- to stop those who seek to

violate the securities laws, manipulate the markets and cheat investors. At

the same time, we also understand the need to ensure that the heavy hand

of government does not place an undue burden on the proper functioning of

our markets and the capital formation process.

The Whistleblower Program is a balanced approach designed to aid the SEC'

by encouraging those aware of misconduct to come forward while at the

same time incentivizing those individuals to report their suspicions of

misconduct to their companies first – so the companies take appropriate

action to remedy it.

The Whistleblower Program recognizes that we all have a stake in

eliminating wrongdoing and that only when we act together can we

effectively stop those who seek to take unfair advantage of the vast

majority of investors and companies that play by the rules.

Thank you for your time and attention and I will be pleased to take any

questions.

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U.S. Securities and Exchange Commission

Annual Report on the Dodd-Frank

Whistleblower Program

Fiscal Year 2012

This is a Report of the Staff of the

U.S. Securities and Exchange Commission.

The Commission has expressed no view regarding

the analysis, findings, or conclusions contained herein.

_____________________________________

November 2012

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I. Introduction ... 1

II. Activities of The Office of The Whistleblower ... 2

III. Whistleblower Tips Received During Fiscal Year 2012 ... 4

IV. Processing of Whistleblower Tips During Fiscal Year 2012 ... 5

V. Whistleblower Incentive Awards Made During Fiscal Year 2012 ... 6

VI. Securities and Exchange Commission Investor Protection Fund ... 9

Appendix A: Whistleblower Tips by Allegation Type – Fiscal Year 2012

Appendix B: Whistleblower Tips Received by Geographic Location – United States and its

Territories – Fiscal Year 2012

Appendix C: Whistleblower Tips Received by Geographic Location – International – Fiscal Year

2012

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1

I. Introduction

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the

“Dodd-Frank Act”),

1

amended the Securities Exchange Act of 1934 (the “Exchange Act”)

2

by,

among other things, adding Section 21F,

3

entitled “Securities Whistleblower Incentives and

Protection.” Section 21F directs the Commission to make monetary awards to eligible individuals

who voluntarily provide original information that leads to successful Commission enforcement

actions resulting in the imposition of monetary sanctions over $1,000,000, and certain successful

related actions. Awards are required to be made in the amount of 10% to 30% of the monetary

sanctions collected. Awards will be paid from the Commission’s Investor Protection Fund (the

“Fund”). In addition, § 924(d) of the Dodd-Frank Act directs the Commission to establish a separate

office within the Commission to administer and to effectuate the whistleblower program.

Section 924(d) of the Dodd-Frank Act requires the Commission’s Office of the

Whistleblower (the “Office” or “OWB”) to report annually to Congress on OWB’s activities,

whistleblower complaints, and the response of the Commission to such complaints. In addition,

Exchange Act § 21F(g)(5) requires the Commission to submit an annual report to Congress that

addresses the following subjects:

• the whistleblower award program, including a description of the number of awards

granted and the types of cases in which awards were granted during the preceding fiscal

year;

• the balance of the Fund at the beginning of the preceding fiscal year;

• the amounts deposited into or credited to the Fund during the preceding fiscal year;

1_{Pub. L. No. 111-203, § 922(a), 124 Stat 1841 (2010).}

2_{15 U.S.C. § 78a et seq.}

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2

• the amount of earnings on investments made under Section 21F(g)(4) during the

preceding fiscal year;

• the amount paid from the Fund during the preceding fiscal year to whistleblowers

pursuant to Section 21F(b);

• the balance of the Fund at the end of the preceding fiscal year; and

• a complete set of audited financial statements, including a balance sheet, income

statement and cash flow analysis.

This report has been prepared by OWB to satisfy the reporting obligations of Dodd-Frank

Act § 924(d) and Exchange Act § 21F(g)(5). Parts II, III, and IV of this report primarily address the

requirements of Dodd-Frank Act § 924(d), and Parts V and VI of this report, along with the financial

statements of the Investor Protection Fund that are included in the Commission’s annual Agency

Financial Report, primarily address the requirements of Exchange Act § 21F(g)(5).

II. Activities of The Office of The Whistleblower

Section 924(d) of the Dodd-Frank Act directs the Commission to establish a separate office

within the Commission to administer and to enforce the provisions of Exchange Act § 21F. On

February 18, 2011, the Commission announced the appointment of Sean X. McKessy to head OWB

in the Division of Enforcement (“Enforcement”).

4

On January 17, 2012, the Commission named

Jane A. Norberg as the Office’s Deputy Chief.

5

In addition to Mr. McKessy and Ms. Norberg, the

Office is currently staffed by eight attorneys, three paralegals, and one program support specialist.

6

4_{http://www.sec.gov/news/press/2011/2011-47.htm}_. 5

http://www.sec.gov/news/press/2012/2012-10.htm.

6_{Additionally, as of the date of this report, the Office has extended an offer to one additional attorney who is expected}

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3 Since its establishment, OWB has focused primarily on establishing the office and

implementing the whistleblower program. During Fiscal Year 2012, the Office’s activities included

the following:

• Communicating with whistleblowers who have sent tips, additional information, claims

for awards, and other correspondence to OWB. OWB also meets with whistleblowers,

potential whistleblowers and their counsel, and consults with the staff in Enforcement to

provide guidance to whistleblowers and their counsel concerning expectations and follow

up;

• Reviewing and processing applications for awards;

• Working with staff in Enforcement to identify and track all enforcement cases potentially

involving a whistleblower to assist in the documentation of the whistleblower’s

information and cooperation in anticipation of an eventual claim for award;

• Maintaining and updating the OWB website to better inform the public about the

whistleblower program (www.sec.gov/whistleblower). The website includes two videos

by Mr. McKessy providing an overview of the program and information about how tips,

complaints and referrals are handled. The website also contains detailed information

about the program, copies of the forms required to submit a tip or claim an award, notices

of covered actions, links to helpful resources, and answers to frequently asked questions;

• Supporting the initiative of the Residential Mortgage Backed Securities (RMBS) Fraud

Working Group, a working group of the Financial Fraud Enforcement Task Force

established by President Obama in November 2009, by establishing an online link to the

OWB website from the member agencies of the RMBS Fraud Working Group for the

public to submit tips and complaints about possible illegal activity in the offering and sale

of residential mortgage-backed securities. The OWB website was also updated in

connection with this initiative to include a page providing an overview of the RMBS

Fraud Working Group and a direct link to report RMBS fraud. OWB further supported

the initiative by helping to implement procedures, consistent with the confidentiality

requirements of Exchange Act § 21F(h)(2), to permit the Enforcement staff to share

whistleblower tips with the member agencies of the RMBS Fraud Working Group;

• Providing extensive training on the Dodd-Frank Act and the Commission’s implementing

rules (the “Final Rules”)

7

to the Commission’s staff. This included in-person training

and educational sessions in seven of the eleven Regional Offices, video-linked training to

the entire Enforcement staff, as well as training in the Home Office;

(24)

4

• Establishing and implementing internal policies, procedures, and protocols;

• Manning a publicly-available whistleblower hotline for members of the public to call

with questions about the program. OWB attorneys return all calls within 24 business

hours. During the 2012 fiscal year, the Office returned over 3,050 phone calls from

members of the public;

8

• Reviewing and entering whistleblower tips received by mail and fax into the

Commission’s Tips, Complaints, and Referrals System (the “TCR System”);

• Conferring with regulators from other agencies’ whistleblower offices, including the

Internal Revenue Service, Commodity Futures Trading Commission, Department of

Justice, and Department of Labor (OSHA), to discuss best practices and experiences;

• Publicizing the program actively through participation in webinars, media interviews,

presentations, press releases, and other public communications;

9

and

• Providing ongoing guidance to Commission staff regarding various aspects of the

program, including the development of internal policies for the handling of confidential

whistleblower identifying information.

III. Whistleblower Tips Received During Fiscal Year 2012

The Final Rules specify that individuals who would like to be considered for a whistleblower

award must submit their tip to OWB on Form-TCR either via facsimile or mail or via the

Commission’s online TCR questionnaire portal. All whistleblower tips received by the Commission

are entered into the TCR System, the Commission’s centralized database for the prioritization,

assignment, and tracking of TCRs received from the public.

In Fiscal Year 2012, 3,001 whistleblower TCRs were received. Appendix A lists, by subject

matter and month, the number of whistleblower tips received during the 2012 fiscal year. The most

common complaint categories reported by whistleblowers were Corporate Disclosures and

8

Since the hotline was established in May 2011, the Office returned approximately 3,700 phone calls from members of the public through the end of the 2012 fiscal year.

(25)

5 Financials (18.2%), Offering Fraud (15.5%), and Manipulation (15.2%).

10

The Commission

received whistleblower submissions from individuals in all 50 states, the District of Columbia and

the U.S. territory of Puerto Rico, as well as 49 countries outside the United States. Appendices B

and C set forth tabular presentations of the sources of foreign and domestic whistleblower tips.

IV. Processing of Whistleblower Tips During Fiscal Year 2012

OWB currently leverages the resources and expertise of the Commission’s Office of Market

Intelligence (“OMI”) to evaluate incoming whistleblower TCRs and to assign specific, timely, and

credible TCRs to members of the Enforcement staff for further investigation.

During the evaluation process, both staff and supervisors in OMI examine each tip to identify

those that are sufficiently specific, timely, and credible to warrant the further allocation of

Commission resources. Tips that relate to an existing investigation are generally forwarded to the

staff working the existing matter. Tips that could benefit from the specific expertise of another

Division or Office within the Commission are generally forwarded to staff in that Division or Office

for further analysis. When appropriate, tips that fall within the jurisdiction of another federal or state

agency are forwarded to the Commission contact at that agency, provided this can be done consistent

with the confidentiality requirements of Exchange Act § 21F(h)(2). Tips that relate to the financial

affairs of an individual investor or a discrete investor group, and that are determined not to be strong

candidates for further expenditure of the Commission’s investigative resources, are usually

forwarded to the Office of Investor Education and Advocacy (“OIEA”). Comments or questions

about agency practice or the federal securities laws are also forwarded to OIEA.

10

The Commission also receives TCRs from individuals who do not wish or are not eligible to be considered for an award under the whistleblower program. The data in this report is limited to those TCRs that include the required whistleblower declaration and does not reflect all TCRs received by the Commission during the fiscal year.

(26)

6 OWB supports the tip allocation and investigative processes in several ways. When

whistleblowers submit tips on Form TCR in hard copy via mail or fax, OWB enters this information

into the TCR System so it can be evaluated.

11

During the evaluation process, OWB may assist by

contacting the whistleblower to obtain additional information, or may participate in the qualitative

assessment of the best course of action to take in response to a whistleblower tip. During an

investigation, OWB is available as needed to serve as a liaison between the whistleblower (and his

or her counsel) and investigative staff. On occasion, OWB arranges meetings between

whistleblowers and subject matter experts on the Enforcement staff to assist in better understanding

the whistleblowers’ submissions and developing the facts of specific cases. OWB staff also

communicates frequently with Enforcement staff with respect to the timely documentation of

information regarding the staff’s interactions with whistleblowers, the value of the information

provided by whistleblowers, and the assistance provided by whistleblowers as the potential securities

law violation is being investigated.

V. Whistleblower Incentive Awards Made During Fiscal Year 2012

OWB posts a Notice of Covered Action for each Commission enforcement action where a

final judgment or order, by itself or together with other prior judgments or orders in the same action

issued after July 21, 2010, results in monetary sanctions exceeding $1 million. Once a Notice of

Covered Action is posted, individuals have 90 calendar days to apply for an award by submitting a

completed Form WB-APP to OWB by the claim due date listed for that action.

Timely submitted applications are reviewed by the staff designated by the Director of

Enforcement (“Claims Review Staff”) in accordance with the criteria set forth in the Dodd-Frank

11_{Tips that are submitted by whistleblowers through the Commission’s online Tips, Complaints and Referrals}

(27)

7 Act and Final Rules. The Claims Review Staff is currently comprised of four senior officers in

Enforcement and a senior attorney in the Office of the General Counsel. To assist the Claims

Review Staff in its review, OWB prepares a binder of relevant documents and a recommendation

concerning the appropriate disposition of the award claim. The Claims Review Staff then makes a

Preliminary Determination setting forth its assessment as to whether the claim should be allowed or

denied and, if allowed, setting forth the proposed award percentage amount. If a claim is denied and

the applicant does not object, then the Preliminary Determination of the Claims Review Staff

becomes the Final Order of the Commission. However, an applicant can ask for reconsideration of

the Preliminary Determination, in which event the Claims Review Staff considers the issues and

grounds advanced in the applicant’s response, along with any supporting documentation provided.

After this additional review, the Claims Review Staff issues a Proposed Final Determination, and the

matter is forwarded to the Commission for its decision. In addition, all Preliminary Determinations

of the Claims Review Staff that involve an award of money are forwarded to the Commission as

Proposed Final Determinations irrespective of whether the applicant objected to the Preliminary

Determination. These procedures ensure that all claims for which a monetary award is

recommended and all preliminary denials of claims to which the applicant objects are put before the

Commission for final decision. Within 30 days of receiving notice of the Proposed Final

Determination, any Commissioner may request that the Proposed Final Determination be reviewed

by the full Commission. If no Commissioner requests such a review within the 30-day period, then

the Proposed Final Determination will become the Final Order of the Commission. In the event a

Commissioner requests a review, the Commission reviews the record that the Claims Review Staff

relied upon in making its determinations and issues its Final Order.

(28)

8 During Fiscal Year 2012, the Commission made its first award under the whistleblower

program. On August 21, 2012, a whistleblower who had helped the Commission stop an ongoing

multi-million dollar fraud received an award of 30 percent -- the maximum percentage payout

allowed by law -- of the amount collected in the Commission’s enforcement action against the

perpetrators of the scheme.

12

The award recipient in this matter submitted a tip concerning the fraud

and then provided documents and other significant information that allowed the Commission’s

investigation to move at an accelerated pace and ultimately led to the filing of an emergency action

in federal court to prevent the defendants from ensnaring additional victims and further dissipating

investor funds.

13

The whistleblower’s assistance led to the court ordering more than $1 million in

sanctions, of which approximately $150,000 had been collected by the end of the fiscal year. In

accordance with the 30 percent award determination, on August 21, 2012, the whistleblower was

paid nearly $50,000. Motions for additional judgments are currently pending before the court and

any additional collections or increase in the sanctions ordered and collected will increase the amount

paid to the whistleblower.

14

As noted below, whistleblowers receive their awards from the

Securities and Exchange Commission Investor Protection Fund (“Fund”) established pursuant to

Section 922 of the Dodd-Frank Act.

During the 2012 fiscal year, OWB posted 143 Notices of Covered Action for enforcement

judgments and orders issued during the applicable period that included the imposition of sanctions

12_{Exchange Act Release No. 67698 (Aug. 21, 2012). The Commission also denied a claim from a second individual}

seeking an award in this same matter because the information provided did not lead or significantly contribute to the Commission’s successful enforcement action, as required under the Dodd-Frank Act and the Final Rules for a whistleblower award.

13_{The statutory obligation under the Dodd-Frank Act to protect the identity of whistleblowers under the program}

precludes us from providing additional details as to the whistleblower who was paid and the covered action to which payment related.

14_{An additional payment of over $500 was made to the whistleblower in September, 2012, representing 30 percent of}

(29)

9 exceeding the statutory threshold of $1 million.

15

OWB is continuing to review and process

applications for awards received during the 2012 fiscal year.

VI. Securities and Exchange Commission Investor Protection Fund

Section 922 of the Dodd-Frank Act established the Fund to provide funding for the

Commission's whistleblower award program, including the payment of awards in related actions.

16

In addition, the Fund is used to finance the operations of the SEC Office of the Inspector General’s

suggestion program.

17

The suggestion program is intended for the receipt of suggestions from

Commission employees for improvements in the work efficiency, effectiveness, and productivity,

and use of resources at the Commission, as well as allegations by Commission employees of waste,

abuse, misconduct, or mismanagement within the Commission.

18

The following table provides certain of the information required by Exchange Act

§ 21F(g)(5) for the 2012 fiscal year (October 1, 2011 through September 30, 2012). As of

15_{By posting a Notice of Covered Action for a particular case, the Commission is not making any determinations either}

that (i) a whistleblower tip, complaint or referral led to the Commission opening an investigation or filing an action with respect to the case or (ii) an award to a whistleblower will be paid in connection with the case.

16_{See Exchange Act §21F(g)(2)(A).}

17_{See Exchange Act §21F(g)(2)(B), which provides that the Fund shall be available to the Commission for “funding the}

activities of the Inspector General of the Commission under section 4(i).” The Office of the General Counsel has interpreted section 21F(g)(2)(B) to refer to Section 4D of the Exchange Act, which establishes the Inspector General's suggestion program. Subsection (e) of that section provides that the “activities of the Inspector General under this subsection shall be funded by the Securities and Exchange Commission Investor Protection Fund established under Section 21F.”

(30)

10 September 30, 2012, the Fund was fully funded, with an ending balance of $453,429,825.58.

FY 2012

Balance of Fund at beginning of fiscal

year

$452,788,043.74

Amounts deposited into or credited to

Fund during fiscal year

$0.00

19

Amount of earnings on investments

during fiscal year

$757,248.07

Amount paid from Fund during fiscal year

to whistleblowers

($45,739.16)

Amount disbursed to Office of the

Inspector General during fiscal year

($69,727.07)

Balance of Fund at end of the fiscal year

$453,429,825.58

The audited financial statements for the Fund, including a balance sheet, income statement,

and cash flow analysis are included in the Commission’s Agency Financial Report, separately

submitted to Congress and accessible at http://www.sec.gov/about/secafr2012.shtml.

19_{Pursuant to Exchange Act § 21F(g)(3), no monetary sanctions are deposited into or credited to the Fund if the balance}

(31)

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"Other" indicates that the submitter has identified their WB TCR as not fitting into any allegation category that is listed on the online questiom1aire.

(32)

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The total number ofWB TCRs originating within the United States and its tenitories for Fiscal Year 2012 was 2507, which constitutes 83.5% of total WB TCRs

received for tllis period. Additionally, 170 WB TCRs constituting 5. 7% of total WB TCRs received for Fiscal Year 2012 were subnlitted without any foreign or

(33)

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(34)

SEC Announces Whistleblower Action

The Securities and Exchange Commission issued an order on June 12, 2013

awarding three whistleblowers a total of 15 percent of the money that the SEC ultimately collects from its enforcement action against sham hedge fund Locust Offshore Management LLC and its CEO Andrey C. Hicks, who defrauded investors of $2.7 million. To date, the SEC has not collected any amounts on these judgments, so no immediate payments will be made to the whistleblowers.

In March 2012, the United States District Court for the District of Massachusetts entered default judgments against Locust and Hicks and ordered them to pay approximately $7.5 million in disgorgement and penalties. Hicks also pled guilty to criminal fraud charges in 2012 and he was sentenced to 40 months in prison. Although the SEC obtained an asset freeze on the defendants' assets, it has not collected any amounts on these judgments to date. Instead, the Department of Justice in its related action collected approximately $800,000 from Hicks to date. The whistleblowers will be entitled to apply to the SEC for a whistleblower award based on the amounts collected by the Department of Justice.

As with the first SEC whistleblower award order last year, this order does not identify the whistleblowers but stated that two of them provided information that prompted the SEC to open an investigation and stop the scheme before more investors were harmed. The third whistleblower confirmed much of the information the others had provided and identified key witnesses. A fourth application for an award was denied because the information provided did not lead to or significantly contribute to its enforcement action, as required by law.

The awards stem from the SEC's October 2011 lawsuit and emergency asset freeze, in which the SEC alleged that Hicks misled investors about his credentials and diverted investor assets to his personal bank account, rather than the hedge fund that Hicks purported to run.

The awards are the second made under the SEC's whistleblower program, which began operating in August 2011. The SEC issued its first

whistleblower award in August 2012.

Congress authorized the whistleblower program in the 2010 Dodd-Frank Act to reward individuals who offer high-quality original information that leads to an SEC enforcement action resulting in sanctions of more than $1 million. Awards can range from 10 percent to 30 percent of the money collected. The law also includes provisions to protect whistleblowers from being identified and safeguard them from retaliation.

* * *

(35)

InsideCounsel

Regulatory: Companies should take action on

employee tips in light of the SEC whistleblower

program

Reporting internally first benefits both whistleblowers and companies

BY MARY P. HANSEN, WILLIAM L. CARR June 5, 2013

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted by Congress in 2010, brought significant changes to financial regulation in the U.S. Among these changes was the establishment of the Office of the Whistleblower within the Securities and Exchange Commission (SEC). The Office of the Whistleblower is responsible for, among other things, administering a bounty program that permits individual whistleblowers who meet certain requirements to receive awards for information they submit to the SEC regarding securities law violations.

During its first year, the Office of the Whistleblower received more than 3,000 tips, complaints and referrals (TCRs) from whistleblowers in all 50 states, the District of Columbia, Puerto Rico and 49 countries outside the U.S. More than one-third of the TCRs reported by whistleblowers related to issuer disclosures, with almost 20 percent categorized as corporate disclosures and financials and more than 15 percent categorized as offering fraud.

It is not surprising, as noted by the SEC’s Office of the Inspector General in its Jan. 18 “Evaluation of the SEC’s Whistleblower Program,” that “the primary demographic for prospective whistleblowers include middle management personnel, controllers, finance department personnel, and other

employees who are involved in international transactions.” It is surprising, however, that the majority of whistleblowers were employees who reported their concerns to management, but were ignored.

In fact, the relevant provisions of Dodd-Frank provide incentives for companies to establish internal compliance systems and to work with employee-whistleblowers to address illegal conduct. For example, employees who report potential wrongdoing internally first are deemed to have reported to the SEC on the date they reported it internally. This preserves their place in line in terms of when information was provided to the SEC, and it allows the company to investigate and collect additional evidence for 120 days before the employee brings the information to the SEC. Moreover, one of the considerations the Office of the Whistleblower undertakes when determining the percentage award to recommend is whether the whistleblower cooperated with the company’s internal compliance system. By encouraging employees to report potential violations internally, a company can fully assess the allegations; conduct an internal investigation, if appropriate; and present its findings to the SEC at the same time the employee presents his or her concerns to the SEC. As a result, any subsequent investigation by the staff will likely be more focused, and the company may earn credit for its cooperation.

To date, one TCR has resulted in an award to a whistleblower. The whistleblower has been identified as a bookkeeper of the company she reported as engaging in a multi-million dollar Ponzi scheme. Following a successful enforcement action, the SEC awarded the whistleblower 30 percent of the recovery, the maximum allowed under the law.

(36)

The fact that the SEC has paid only one award under the new regulations, however, is likely not a good indication of the quality of the information the Office of the Whistleblower has received or will receive. First, not every TCR results in an award, even if it results in successful enforcement. Under the regulations, a whistleblower is only entitled to an award if he or she voluntarily provides the SEC with original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million. Second, the time from the TCR to collection of any eventual judgment is generally more than two years, nearly as long as the time the Office of the Whistleblower has been in operation.

In recent public statements, Stephen Cohen, an associate director in the Division of Enforcement in D.C., recently explained that TCRs from whistleblowers make investigations more efficient and more effective. Because the whistleblower usually is from inside the organization, his or her TCR helps to pinpoint the illegal conduct and potentially narrow the SEC’s investigation into the conduct.

The SEC’s whistleblower program is just getting started, and we should expect an increase in activity as the program develops. Given that the majority of TCRs are initiated by employees, the time has come for corporations that do not have internal compliance systems to develop them. And for companies that already have compliance systems, this is a good time to review them and ensure that there are appropriate policies and procedures for fully addressing employees’ reports of potential wrongdoing or violations.

About the Authors

Mary Hansen is a partner on the Drinker Biddle's White Collar Criminal Defense & Corporate Investigations team, where she focuses her practice on defending clients in regulatory investigations as well as white collar criminal proceedings in the securities industry. Prior to joining the firm, Mary was an Assistant Director of the U.S. Securities & Exchange Commission's Division of Enforcement, where she was a member of the division's Market Abuse and Municipal Securities and Public Pensions units.

William L. Carr is a member of the Commercial Litigation Practice Group at Drinker Biddle. He focuses his practice on Securities and Exchange Commission (SEC) regulatory investigations and enforcement actions; internal investigations; and construction, land use, and real estate litigation. After law school, William served as a law clerk to the Hon. Joseph J. Rodriguez, U.S.D.J., in the United States District Court for the District of New Jersey.

Printed with permission by InsideCounsel.

Up and Running: Developments with the SEC Whistleblower Program

June 25, 2013

Up and Running:

Developments with the

SEC Whistleblower

Program

Table of Contents

1

Up and Running:

Developments with the SEC

Whistleblower Program

June 25, 2013

Panelists

• Sean X. McKessy

Chief, Office of the Whistleblower

Securities and Exchange Commission

• Mary P. Hansen

Partner

Drinker Biddle & Reath LLP

• Stephen G. Stroup

Counsel

2

Overview of Discussion

• Summary of whistleblower provisions and the bounty program

• Recent statistics

• Expectations vs. reality

• Impact of whistleblower provisions on internal compliance

programs

• SEC staff’s handling of whistleblower complaints

• Handling internal reports of misconduct

• Anti-retaliation provisions

Payment of Awards

The Commission will pay an award or awards to one or more

whistleblowers who:

1) Voluntarily provide the Commission

2) With original information

3) That leads to the successful enforcement by the Commission

of a federal court or administrative action

4) In which the Commission obtains monetary sanctions totaling

more than $1,000,000

3

Original Information

“Original information” means information that:

(1) is derived from the independent knowledge or analysis of a

whistleblower;

(2) is not known to the Commission from any other source;

(3) is not exclusively derived from an allegation made in a judicial

or administrative hearing, in a governmental report, hearing,

audit, or investigation, or from the news media, unless the

whistleblower is a source of the information; and

(4) is provided to the Commission for the first time after July 21,

2010.

Amount of Award

• Amount of the award will be at least 10% and no more than

30% of the monetary sanctions that the Commission and other

authorities are able to collect

• Determination of the amount is in the discretion of the

Commission

4

Criteria for Determining

Amount of Award

• The Commission will consider the following factors in

determining the appropriate award percentage:

•

Significance of the information provided by the whistleblower

•

Assistance provided by the whistleblower

•

Law enforcement interest

•

Participation in internal compliance systems

Factors that May Decrease an Award:

Interference with Internal Systems

•

Did the whistleblower interfere with the entity’s established

legal, compliance or audit procedures to prevent or delay

detection of the violation?

•

Did the whistleblower make any material false, fictitious or

fraudulent statements that hindered an entity’s efforts to detect,