Despite the immense success of, and corresponding public interest in, the Securities and Exchange Commission (SEC) Whistleblower Program, one element of the program remains little understood: whistleblowers who report misconduct to self-regulatory organizations (SROs) may be covered under the program, as long as they follow certain procedures.

The whistleblower provisions of the Dodd-Frank Act, which was passed in 2010, allow individuals to report violations of federal securities laws to the SEC and authorizes the SEC to pay monetary awards to qualified whistleblowers whose information leads to enforcement actions resulting in monetary sanctions of over $1 million. The program has been highly successful, incentivizing insiders to come forward with high-quality information about securities fraud by providing whistleblowers with the opportunity to receive awards for their information while remaining anonymous, ensuring confidentiality, and providing protection from retaliation. In the fewer than fifteen years that the SEC Whistleblower Program has existed, the Commission has received more than 80,000 whistleblower tips. To date, the SEC Whistleblower Program has awarded over 400 whistleblowers a total of over $2 billion.

And yet, even with the vast accomplishments of the SEC Whistleblower Program, many individuals turn to SROs to uphold industry regulations and standards. SROs, such as the Financial Industry Regulatory Authority (FINRA) and the New York Stock Exchange (NYSE), may have direct regulatory authority over misconduct a whistleblower is looking to report.

Whistleblowers may not be aware that reporting violations to an SRO makes them eligible for whistleblower awards and protections under the SEC Whistleblower Program if they follow the correct reporting procedures. Any investor, company insider, or individual who makes a report of a potential securities law violation to an SRO and to the SEC may qualify for whistleblower status. It is important to understand that while a whistleblower may be able to obtain an award if they report only to an SRO, reporting directly to the SEC is necessary to obtain whistleblower status for purposes of the anti-retaliation provisions.

To qualify for an award under the SEC Whistleblower Program after reporting to an SRO, however, whistleblowers must adhere to specific rules. Failure to comply with these rules may result in disqualification, even if their information leads to significant enforcement actions. It is essential that whistleblowers know the rules and requirements of the SEC to qualify.

What is a Self-Regulatory Organization?

Section 3(a)(26) of the Securities Exchange Act defines an SRO as “any national securities exchange, registered securities association, or registered clearing agency.” A national securities exchange is a type of securities exchange that is registered with the SEC under Section 6 of the Exchange Act. A clearing agency serves as an intermediary that helps facilitate the payment of funds and the delivery of securities.

Although SROs are private organizations that set and enforce standards for their members and participants, they are also subject to government-imposed regulations. SROs are not arms of the government and do not exercise government authority. Instead, they are considered to be private organizations enforcing membership standards.

Examples of SROs:

• The NYSE
• The Depository Trust Company
• Municipal Securities Rulemaking Board (MSRB)
• FINRA

120 Day Rule

Under SEC Rule 21F-4, if an individual provides information to an SRO, they must, within 120 days, give the same information to the Commission to be considered for an award. However, the SEC will consider the date the information is reported to the SRO as the date it was given to the Commission as long as the whistleblower provides the information to the SEC within 120 days. This is important for the purposes of the Commission in assessing the timeliness of the whistleblower’s information. It is the whistleblower’s obligation to determine and provide proof of the original disclosure date to the SRO.

Voluntary

SEC Rule 21F-4(a)(1)(ii) (17 CFR § 240.21F-4(a)(1)(ii)) requires that a whistleblower’s information must be provided voluntarily to be eligible for an award. An individual can bring securities violations to the SRO and still be considered a voluntary whistleblower under the following circumstances:

“Your submission of information is made voluntarily within the meaning of §§ 240.21F-1 through 240.21F-17 of this chapter if you provide your submission before a request, inquiry, or demand that relates to the subject matter of your submission is directed to you or anyone representing you (such as an attorney):

In connection with an investigation, inspection, or examination by the Public Company Accounting Oversight Board, or any self-regulatory organization;..”

The rule precludes a whistleblower’s information from being considered as ‘‘voluntary’’ if a previous request, as described, was directed to the whistleblower or his or her representative. For example, an examination request directed to a broker-dealer or an investment adviser would not necessarily foreclose whistleblower submissions related to the subject matter of the exam from all employees of the entity. However, if a firm employee were interviewed by examiners, the employee’s later submission related to the subject matter of the interview would not be considered ‘‘voluntary.’’

Original Information

Under SEC Rule 21F-4(b)(1)(ii), a whistleblower’s disclosure is considered “original information” if it is “not already known to the Commission from any other source, unless you are the original source of the information.”

Thus, if a whistleblower provides original information to an SRO and the SEC learns of this information through the SRO, the whistleblower will still be considered the original source of the information.

In order to be considered an original source of information that the SEC receives from any SRO, the individual must have voluntarily given the information to the SRO within the meaning of these rules and must also satisfy the 120-day rule. An individual must also establish his or her status as the original source of information to the SEC’s satisfaction. In determining whether a whistleblower is the original source of information, the SEC may seek assistance and confirmation from the SRO, or from another entity in the event that a whistleblower claims to be the original source of information that authority or another entity provided to the SEC.

Confidentiality

SEC Rule 21F-7 outlines the confidentiality requirements for reporting to an SRO while reporting to the Commission. The SEC can forward a whistleblower’s information to an SRO, and the SRO would be required to follow the same confidentiality and anonymity requirements as the Commission outlined in Rule 21F-7. However, if a whistleblower reports to the SRO first, and that information is later forwarded to the Commission, the SRO does not have to adhere to the confidentiality requirements of the Commission.

Related Action

A related action is a judicial or administrative action that is brought by an SRO or certain governmental entities other than the SEC that yields monetary sanctions and that is based upon the same original information that the whistleblower voluntarily provided to the SEC (either directly or through an SRO) and that led the Commission to obtain monetary sanctions totaling more than $1 million.

If the sanction of the SEC is more than $1 million and the SRO also sanctions the entity for its violation, the whistleblower is eligible to receive an award based on the SRO’s action as a related action. The whistleblower is eligible for a monetary award of 10-30% of the sanctions recovered by the SRO.

Ineligibility

Members, officers, and employees of SROs are ineligible to be whistleblowers under the SEC Whistleblower Program. A whistleblower will also be ineligible if they do not stick to the strict 120-day period to file with the SEC after reporting directly to the SRO.

Best Practice

In order to qualify for an award and to be protected under the Dodd-Frank Act’s anti-retaliation provisions, it is generally best to file directly with the SEC first. The SEC can share information with an SRO, and the SEC Whistleblower Program’s strong confidentiality and anonymity protection will remain in place. This helps ensure that the whistleblower is protected from retaliation to the extent an SRO does not have the same level of protection as the SEC. To remain confidential, a whistleblower should consider hiring a U.S.-licensed attorney to further protect themselves from identification and possible retaliation.

Reporting directly to the SEC also ensures that the whistleblower does not miss the deadline of 120 days to file with the SEC and ensures that the SEC receives the information, as an SRO is not mandated to share its information with the SEC. Reporting directly to the SEC helps ensure that eligible whistleblowers are rewarded for their information if the SEC sanctions an entity for a violation using the whistleblower’s information.

However, individuals who turn to an SRO to address misconduct under the SRO’s jurisdiction should also be aware that they can qualify for an award if they adhere to the specific guidelines under the Dodd-Frank Act’s whistleblower provisions and the SEC Whistleblower Program regulations. Most importantly, they must contact the SEC within 120 days of making their disclosure to the SRO. These guidelines may not be apparent under the SRO’s reporting platform. Still, it is important to understand these rules so a whistleblower can receive an award and the protections they are entitled to for their actions to hold industries to a higher standard of accountability.

This article was authored by Melissa Revuelta and Brooke Burkhart