Blog: SEC amends rules for whistleblower program

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On Wednesday, the SEC voted (by a vote of three to two) to adopt amendments to the rules related to its whistleblower program. The program provides for awards in an amount between 10% and 30% of the monetary sanctions collected in the SEC action based on the whistleblower’s original information. It is widely acknowledged that the program, which has been in place for about ten years, has been a resounding success. According to the press release, since inception, the SEC has obtained over $2.5 billion in financial remedies based on whistleblower tips. Most of those funds have been, or are scheduled to be, returned to affected investors. In addition, since inception, the SEC has awarded approximately $523 million to 97 individuals in whistleblower awards, with the five largest awards—two at $50 million, and one each at $39 million, $37 million and $33 million—made in the past three and a half years. So why mess with success? The press release indicates that the amendments “are intended to provide greater transparency, efficiency and clarity, and to strengthen and bolster the program in several ways.  The rule amendments increase efficiencies around the review and processing of whistleblower award claims, and provide the Commission with additional tools to appropriately reward meritorious whistleblowers for their efforts and contributions to a successful matter.” The SEC also adopted interpretive guidance regarding the meaning of “independent analysis” as used in the definition of “original information,” and the SEC’s whistleblower office released guidance for award determinations. Although the final amendments may sound anodyne, the discussion at the SEC’s open meeting was quite contentious.  The amendments to the whistleblower rules become effective 30 days after publication in the Federal Register.

Briefly, the changes to the whistleblower program include a new provision allowing awards with a statutory maximum of less than $5 million (which historically have represented nearly 75% of all whistleblower awards) to qualify for a presumption that they will receive the maximum statutory percentage award of 30%, subject to the absence of whistleblower culpability or other negative award criteria. According to the press release, other larger awards “will continue to be evaluated consistent with past practice.” The amendments also “clarify”—a term that, in the view of some of the Commissioners, might be doing a lot of work—the SEC’s “broad discretion” when applying the award factors set forth in the whistleblower rules, including the discretion to consider the award factors in percentage terms, dollar terms or some combination. As described in the press release, “[i]n other words, there is not a separate (post application of the award factors) assessment of whether award amounts are too small or too large.”  In addition, the program will now permit awards based on deferred prosecution agreements and non-prosecution agreements as well as SEC settlements. Further, the amendments modify the current definition of related action “to make clear that recovery from the Commission for the related action is not available where the Commission determines that a separate whistleblower award program more appropriately applies to the non-Commission action.” Further, the SEC may bar applicants who submit materially false, fictitious or fraudulent statements in their whistleblower or other submissions to the SEC. The SEC may also waive compliance with the requirements to timely file a Form TCR (Tip, Complaint or Referral) “if a whistleblower complies with the requirements within 30 days of first providing the information or of first obtaining actual or constructive notice of the TCR filing requirements.”  Finally, the amendments revise the SEC’s definition of “whistleblower” and modify certain requirements for anti-retaliation protection to conform to SCOTUS’s decision in Digital Realty v. Somers (see this PubCo post).

Notably, the SEC did not adopt proposed Rule 21F-6(d)(2). Under that proposed rule, the SEC would have been able to determine that an award that, by application of the assessment criteria, would have been over $100 million “was not reasonably necessary to fulfill the purposes of the program” and exercise its discretion to reduce the award to an appropriate amount, so long as it was not reduced below $30 million or the 10% minimum statutory floor. Apparently, however, many commenters objected to the SEC’s exercise of discretion to reduce the size of awards, and the SEC acknowledged as much in the adopting release, observing that its “exercise of discretion in determining Award Amounts, and the manner in which the Commission exercises that discretion, was a focus for many commenters.” Essentially, the SEC said, the proposed rule was “misperceived” as grant of authority to exercise discretion to reduce the size of big awards, when, according to the SEC, it was really intended only as a clarification of the SEC’s existing authority. Instead, the SEC “is adopting a provision that clarifies the Commission’s broad discretion when applying the Award Factors and determining the Award Amount, including the discretion to consider and apply the Award Factors in percentage terms, dollar terms or some combination of percentage terms and dollar terms when determining the Award Amount.”

In his statement, SEC Chair Jay Clayton expressed appreciation to “whistleblowers who, sometimes at great risk to their livelihood, report suspected securities laws violations to the SEC,” attributing the success of the whistleblower program to their efforts.  In his view, the final amendments will enhance the ability of the SEC to make awards that encourage more whistleblowers to report, provide additional transparency into the award determination process and make the process faster and more efficient. He then turned to a discussion of a couple of the amendments. First, with regard to the presumption applicable to awards where the statutory maximum is $5 million, the SEC looked at the historical patterns and assessed the data, concluding that “1) in roughly 75% of cases, we were limited to awarding $5 million or less by statute, and (2) in most of our cases, it turned out that after analyzing the award factors, we awarded amounts in the top quarter of the range.  How, then, could we take this information and use it to help us get money to these whistleblowers faster?” The answer was the new presumption that the award should be set at the statutory maximum, subject to certain limitations. This presumption is expected to provide greater transparency and certainty, as well as reduce the amount of time the SEC would otherwise need to spend to determine the precise award amounts.

For awards where the statutory maximum is greater than $5 million, he observed, the SEC will continue to apply the same framework as in the past to determine award amounts—that is, discretion to set the amounts according to prescribed factors, within a range of 10% to 30% of monetary sanctions collected. Consistent with past and current practice, Clayton expects that most of the awards with a statutory maximum of $5 million or more, where no negative factors are present, “will continue to be in the top third of the statutory award range.” 

Clayton also acknowledged that there was “public confusion about the Commission’s discretion” in applying the factors used to determine award amounts.  The amendments “recognize the responsibility that Congress gave us to determine the amount of awards, subject to the statutory minimum and maximum…. Also, to be clear, in determining the award amounts, we apply the factors and only the factors, to determine the amount. There is no separate (post application of the award factors) assessment of whether award amounts are too small or too large or any type of a cap apart from the statutory maximum established by Congress. “

Commissioner Allison Lee, whose statement is still not posted on the SEC’s website (so this discussion is based on my notes), dissented principally because of the treatment in the new rules given to SEC use of discretion if the dollar amount of an award is too high.  She began by saying how important whistleblowers are, both as key resources and by confirming that the rule of law matters and that no one should be above the law. She feared, however, that the new rules did not serve whistleblowers well. 

She than went on to explain a potential reason why there was “public confusion about the Commission’s discretion”—because the proposing release indicated that, in the absence of proposed new Rule 21F-6(d)(2), the SEC did not have authority to reduce the amount of the award it considered too high. In particular, she pointed to language in the proposing release surrounding a hypothetical award of $240 million, which stated that

“[c]ritically, under the existing framework of Rule 21F-6—without proposed paragraph (d)—the Commission in setting the appropriate amount of an award would be unable to consider the extraordinarily large dollar amounts that would be associated with any assessments and adjustments made when applying the existing award factors of Rule 21F-6; the Commission would also lack the authority to adjust the award amount downward if it found that amount unnecessarily large for purposes of achieving the whistleblower program’s goals. …What paragraph (d) would do…is to afford the Commission the discretion to determine whether such an extraordinarily large payout is actually necessary to further the whistleblower program’s goals of rewarding whistleblowers and incentivizing future whistleblowers, and if not, proposed paragraph (d) would afford the Commission the ability to adjust the actual payout to an award amount that is closer to the $80 million minimum….”

Where does the final rule land, she asks? “Remarkably,” she says, the adopting release claims that the entire premise of the hypothetical was mistaken and did not reflect the SEC’s prevailing understanding of its discretion or its historical practice.  According to the adopting release,

“the statement that the Commission would be unable to consider the dollar amount, and rather only the percentage amount, in the context of the hypothetical was incorrect and did not reflect the Commission’s prevailing understanding of its discretion or its practice in considering and applying the Award Factors and setting Award Amounts. The Commission has had and continues to have broad discretion in applying the Award Factors and setting the Award Amount, including the discretion to consider and apply the Award Factors in percentage terms, dollar terms or some combination thereof.”

In effect, the broad discretion to adjust the dollar amount of awards existed all along, despite the 2018 rule proposal, and the SEC is now just reclaiming that right. The SEC, she observes, now claims an even broader authority to adjust award amounts up or down for awards of any size.  In support, the staff confirmed to her that the implication of the new language in the rule allowing the SEC to consider awards in dollar amounts is that, in two identical scenarios involving the same whistleblower where the only difference is the amount of the monetary sanctions ($10 million v. $500 million), the SEC could award different percentages for the two claims.  As a result, in her view, the new rule was actually more problematic than the old proposal (which she wouldn’t have supported either): it allows for two different outcomes based on the same set of facts, offers no transparency or accountability and no way for a whistleblower to contest the outcome. She also had numerous concerns about other policy choices, including the position regarding awards in related actions, as well as the definition of “independent analysis” and the requirement under the retaliation provisions that the whistleblower submit the information in writing.

Commissioner Caroline Crenshaw, who also dissented, agreed that the new amendments “takes steps towards increasing efficiency” and certainty, but believed that “there are still aspects of the rule that leave inefficiencies and create uncertainties for potential whistleblowers.”  First, she shared Commissioner Lee’s concern regarding the exercise of discretion.  She also worried that the new interpretive guidance on the meaning of “independent analysis” will lead to an inaccurate perception of the type of information the SEC considers valuable.  Finally, she was  concerned about protection for whistleblowers against retaliation. In Digital Realty, she said, SCOTUS expressly gave the SEC discretion to determine the “manner” in which whistleblowers provide information to the SEC. However, “by limiting the anti-retaliation protections to whistleblowers who submit information in writing, we fail to do all we can to protect those who cooperate with our exams and investigations. In other words, if a whistleblower provides information to the Commission through interviews or testimony, that whistleblower does not necessarily get the benefits of the anti-relation provision.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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