Posted On: April 20, 2012 by Shepherd Smith Edwards & Kantas LTD LLP

SEC Institutional Round Up: Whistleblower Bounty Program May Be Reviving Internal Fraud Reporting Mechanisms and Investor Advocacy Group Wants Ban on Accounts Allowing Dually Registered Advisers and Brokers to Give Advice

Per BDO Consulting and Network Inc.’s Quarterly Corporate Fraud Index, the Securities and Exchange Commission's new whistleblower bounty program may be indirectly leading to a resurgence in corporate internal reporting mechanisms. The index recently reported that during 2011’s fourth quarter, there was a jump in internal reports from employees about fraud incidents. This represented about 21.6% of all compliance issues that are reported internally.

Reports related to fraud involve possible asset misuse, audit and accounting improprieties, and violations of the Foreign Corrupt Practices Act. Network CEO Luis Ramos told BNA that these high reporting numbers may be a result of overhauled processes that the organizations implemented in the wake of the establishment of the whistleblower bounty program, which was mandated by the the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act mandated. Changes have included revisions to anti-retaliation policies and better communication with the employees making the complaints. Many organizations also have now implemented predetermined investigative templates and processes, which allow them to more swiftly respond to a complaint.

Fear of punishment by an employer is one reason many employees prefer to report alleged wrongdoing to an outside source rather than internally. Also, the whistleblower bounty program aims to reward 10-30% of monetary penalties to the person who filed the initial report when the penalty against the offending party is greater than $1 million, which is proving to be additional incentive for going to the SEC. However, it is not a good idea to attempt to pursue your whistleblower case on your own. Our whistleblower recovery lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP will be happy to provide you with a no obligation consultation. You can also visit our SEC Whistleblower Recovery Center online today.

In other SEC-related news, The Derivatives Project, which is an investor advocacy group, is petitioning the Commission to get brokerage firms to stop offering wrap accounts in which investment advisers and broker-dealers that are dually registered are both allowed to offer investment advice. The group says that this is leading to an “abuse of legal rights” for retail retirement investors, who are left “without a legal due process” that would allow them to use the Investment Advisers Act to make valid breach of fiduciary duty claims. It wants the SEC to bar mandatory arbitration clauses for any retail retirement accounts and implement a private right of action for account holders.

The Derivatives Project also believes that there are deficiencies in the Financial Industry Regulatory Authority’s enforcement structure and that this has led to securities law violations. For example, the investor advocacy group has problems with the SRO’s “arbitrary” decision to stop enforcing the fiduciary standard when it comes to investment advice involving Wrap Accounts that are dually registered. They believe that FINRA’s position is a violation of an appeals court’s ruling in Financial Planning Association v. SEC. There, the DC court found that the SEC went outside its authority when it introduced a rule that exempts broker-dealers that give investment advice to fee-based account clients from regulation under the Advisers Act.

SEC Whistleblower Recovery Center

Quarterly Fraud Index

The Derivative Project's Petition (PDF)

The Derivative Project


More Blog Posts:
SEC’s Office of the Whistleblower In Early Phase of Evaluating Reward Claims, Institutional Investor Securities Blog, March 23, 2012

SEC Looking at Other Ways to Communicate with Whistleblowers, Institutional Investor Securities Blog, September 14, 2011

ISS Probes Allegations that a Boston Employee Sold Shareholder Information, Stockbroker Fraud Blog, February 21, 2012

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