On September 23, 2020, the Securities and Exchange Commission (“SEC” or the “Commission”) voted 3-2 to adopt a series of long-awaited amendments to the rules governing its Whistleblower Program. SEC Chairman Jay Clayton along with Republican Commissioners Elad L. Roisman and Hester M. Peirce voted in favor of amendment, while Democratic Commissioners Allison Herren Lee and Caroline A. Crenshaw opposed it. The amendments will take effect 30 days after publication in the Federal Register.
The stated purpose of the amendments is to add clarity, efficiency and transparency to the program, which “will further incentivize whistleblowers, enhance the whistleblower award program and benefit investors and our markets,” said SEC Chairman Clayton in a press release.1 “Today’s rule amendments will help us get more money into the hands of whistleblowers, and at a faster pace.”2
Codified as Section 21F of the Securities Exchange Act of 1934 (the “Exchange Act”), the Whistleblower Program authorizes monetary awards for original information that leads to successful SEC enforcement actions resulting in sanctions of $1 million or more, with certain limitations. Awards range between a statutory minimum and maximum of 10-30% of the monetary sanctions collected in the SEC enforcement action and any related actions by certain regulatory or law enforcement authorities.
Since its July 21, 2010 inception, the Whistleblower Program has spurred enforcement actions resulting in over $2.5 billion in financial remedies, and the SEC has awarded approximately $523 million to 97 whistleblowers. The SEC granted the largest of such awards recently, awarding sums of $50 million, $39 million, $37 million and $33 million to individual whistleblowers within the past four years.3
The SEC first proposed the newly adopted amendments in 2018. The amendments elicited numerous comments, and the Commission set and canceled votes on the amendments in 2019 and again earlier this year.4 This post highlights and summarizes key amendments.
Presumption of Maximum Statutory Amounts for Awards of $5 Million or Less
The amendments added Rule 21F-6(c), which creates a presumption that the Commission will award eligible whistleblowers the 30% statutory maximum of all sanctions collected for awards amounting to $5 million or less, so long as none of the Rule 21F-6(b) negative award factors are present. The amendment will affect a substantial portion of whistleblower awards as approximately 75% of awards to date have been for $5 million or less. The presumption will also speed up payments to whistleblowers as it will reduce the time the Commission would otherwise spend assessing factors to determine a precise award.
Adjusting small awards upwards in certain circumstances will “further incentivize prospective whistleblowers … especially in cases in which the dollar amount of the fraud may be relatively small,” according to Commissioner Roisman in a public statement.5
The amendments will not affect awards over $5 million as the Commission decided not to adopt proposed Rule 21F-6(d)(2). The controversial proposal would have instituted what critics called a soft cap on awards issued in large enforcement actions by creating an enhanced review process allowing for reductions based on award size. Although the Commission did not adopt the enhanced review process, amendments to Rule 21F-6 clarified that it has discretion to apply award factors in percentage terms, dollar terms or some combination thereof, causing some commentators to query whether the SEC will exercise its discretion to reduce large awards. In its press release announcing the amendments, the Commission signaled that it will not do so – noting that “if none of the negative criteria specified in Rule 21F-6(b) are present, the award amount would be expected to be in the top third of the award range” for awards over $5 million.6 Only time will tell.
Awards Based on Deferred Prosecution Agreements, Non-Prosecution Agreements and Settlement Agreements
The Commission expanded the definition of what constitutes an “action” as defined in Rule 21F-4(d) to include deferred prosecution agreements (“DPAs”) and non-prosecution agreements (“NPAs”) entered by the U.S. Department of Justice (“DOJ”), as well as settlement agreements entered by the Commission outside of the context of a judicial or administrative proceeding. Including DPAs, NPAs and the specified settlement agreements ensures that awards will not vary depending on the discretion that the Commission or DOJ exercises in pursuing a particular form of action.
To promote equitable treatment for past awards, the amendment applies retroactively to any NPAs, DPAs, or settlement agreements entered into after July 21, 2010. Eligible individuals have 90 days from the effective date of the amendments to apply for an award based on any such agreements.
Clarifying the Definition of “Monetary Sanctions” and “Related Actions”
The amendments clarified the definitions of two other critical terms – “monetary sanctions” in Rule 21F-4(e) and “related action” in Rule 21F-3(b) – to codify the Commission’s current interpretation and application of those terms.
The amended Rule 21F-4(e) defines “monetary sanctions” to mean “[a]n order to pay money … which is either: (i) Expressly designated as penalty, disgorgement, or interest; or (ii) Otherwise ordered as relief for the violations that are the subject of the covered action or related action ….” This definition comports with the Commission’s existing practicing of requiring that if a payment is not expressly designated a disgorgement, penalty or interest, then it must have been ordered as relief for violations charged in order to constitute a monetary sanction under the Whistleblower Program.
Similarly, the Commission amended the definition of “related action” to align with its current practices in evaluating allegedly related actions. Under amended Rule 21F-(b), a separate action does not constitute a related action if the Commission determines that a separate award scheme is available and more appropriately applies to the action. While the Commission contends that the amendment merely codifies its approach to determining whether an action is related, critics have argued that the amendment gives the Commission discretion beyond that which Congress granted.
Increasing Efficiency in the Claims Review Process
In addition to creating the statutory maximum presumption for awards of $5 million or less, the Commission adopted two other amendments intended to increase efficiency in the claims review process.
First, newly added Rule 21F-18 creates a summary disposition procedure to streamline the processing of commonly denied applications (e.g., untimely applications, tips submitted outside the program’s framework, and applications premised on information that was never used). While applicants may contest preliminary denials, the Commission hopes that the summary disposition procedure will free up resources to focus on, and more quickly process, potentially meritorious claims.
Second, subparagraph (e) of Rule 21F-8 now codifies the Commission’s practice of barring claimants who submit false, fictitious or fraudulent information, or who abuse the process by repeatedly submitting frivolous applications. Under this new rule, the Commissioner may permanently bar any applicant who submits three frivolous award applications. The Office of the Whistleblower must notify the claimant if it determines an application is frivolous and give the claimant an opportunity to withdraw its application. Like the summary disposition procedure, barring repeat offenders should free up SEC resources that the agency would otherwise have to dedicate to assessing frivolous award applications.
Flexibility in Applying the Form TCR (Tip, Complaint or Referral) Requirement
As amended, Rule 21F-9 expressly permits the Commission to waive the requirement that a claimant strictly adhere to Rule 21F-9(a)-(b) and file a Form TCR. The SEC has previously waived the Form TCR requirement in certain matters. The amendment, however, provides a formal mechanism for such waiver when a claimant would otherwise qualify for an award and submits a Form TCR either (i) within 30 days of first providing the original information, or (ii) within 30 days of obtaining actual or constructive notice of the submission requirements. Moreover, waiver is automatic once the whistleblower establishes that it has met the requisite conditions.
Uniform Definition of Whistleblower Status
In response to the Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers 139 S. Ct. 767 (2018), which held that the definition of whistleblower requires a written report to the SEC for retaliation protections to apply, the SEC amended Rule 21F-2(a) to provide a uniform definition of “whistleblower.”
The amended rule keeps the written report requirement and grants whistleblower status to any individual who “provide[s] the Commission with information in writing that relates to a possible violation of the federal securities laws (including any law, rule, or regulation subject to the jurisdiction of the Commission) that has occurred, is ongoing, or is about to occur.”
Responding to concerns that the written report requirement places an onerous burden on whistleblowers, the Commission cited in its Final Rule the various mechanisms available to satisfy the “in writing” requirement, including online submission, email, facsimile, or U.S. Mail.7 The Commission also noted that requiring written, as opposed to oral, reports fosters administrative efficiency and reliability as the agency receives reports from across the country and around the globe.8
Interpretive Guidance on What Constitutes “Independent Analysis”
In addition to adopting the above rule amendments, the Commission voted to publish interpretive guidance to clarify when a submission qualifies as “independent analysis” under Rule 21F-4(b)(3), which defines “analysis” to mean “examination and evaluation of information that may be publicly available, but which reveals information that is not generally known or available to the public.”
According to the guidance, a submission must include evaluation, assessment or insight beyond what would be reasonably apparent to the Commission from publically available information. The Commission further instructed that for a whistleblower’s examination and evaluation of publicly available information to constitute independent analysis, it must contribute “significant independent information” that “bridges the gap” between the publicly available information and the potential securities law violations.9
1. SEC Press Release, “SEC Adds Clarity, Efficiency and Transparency to Its Successful Whistleblower Award Program,” Sept. 23, 2020, available at https://www.sec.gov/news/press-release/2020-219.
2. Id.
3. Id.
4. The 191-page Final Rule is available at https://www.sec.gov/rules/final/2020/34-89963.pdf.
5. See Commissioner Elad L. Roisman “Statement on the Commission’s New and improved Whistleblower Program Rules,” Sept. 23, 2020, available at https://www.sec.gov/news/public-statement/roisman-whistleblower-2020-09-23 .
6. SEC Press Release, “SEC Adds Clarity, Efficiency and Transparency to Its Successful Whistleblower Award Program,” Sept. 23, 2020, available at https://www.sec.gov/news/press-release/2020-219.
7. See Final Rule, page 75, available at https://www.sec.gov/rules/final/2020/34-89963.pdf.
8. Id. at 76.
9. Id. at 160.
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