SEC Amends Whistleblower Award Program Rules

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With a vote split down party lines, on September 23, 2020, the Securities and Exchange Commission (SEC) approved several amendments to rules governing its Whistleblower Program. The purpose of the amendments, according to the SEC, is “to provide greater clarity to whistleblowers and increase the program’s efficiency and transparency.”1  Largely criticized by whistleblower representatives, the amendments become effective 30 days after publication in the Federal Register.

Background

The SEC’s Whistleblower Program was established in 2011 following the enactment of Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Among other things, the Program authorizes the SEC to make monetary awards to eligible individuals who voluntarily provide “original information” to the SEC leading to a successful enforcement action. Where the SEC orders the recovery of over $1 million in sanctions, the eligible individual who provided the information is entitled to receive an award under the Program of between 10% and 30% of the money collected.

Maximum Statutory Award Amount Presumption for Awards Less than $5 Million

One of the key new amendments includes a mechanism for whistleblowers with potential awards of less than $5 million to qualify, subject to certain criteria, for a presumption they will receive the maximum statutory 30% award amount. Since the Program’s inception, nearly 75% of all whistleblower awards given out have been for $5 million or less. Specifically, the SEC is adding Exchange Act Rule 21F-6(c) to “provide a presumption that the Commission will pay a meritorious claimant the statutory maximum amount where none of the negative award criteria specified in Rule 21F-6(b)2 are present, subject to certain limited exceptions.”3 The goal of this amendment is to increase the pace with which the SEC processes smaller awards.

Discretion in Determining Percentage Terms, Dollar Terms, Combination

Notably, the SEC excluded from the new rules a 2018 proposal that would have granted the SEC discretion to reduce the highest monetary awards—more than $30 million—to whistleblowers so that awards would not exceed what is “reasonably necessary” to reward tipsters and incentivize future whistleblowing. This amendment was staunchly criticized following its 2018 proposal because whistleblower representatives believed this would effectively result in a cap on larger awards.

Instead, the SEC has taken a nuanced, alternative approach, which gives it discretion to take into account the award amount in determining percentage terms, dollar terms, or some combination, without any particular monetary floor. The amendments also allow the SEC to consider only the enumerated award factors set forth in the rule when determining the award amount. “In other words, there is not a separate (post application of the award factors) assessment of whether award amounts are too small or too large.”4 Two commissioners who voted against the amendments strongly opposed this change.

Allowing Awards Based on DPAs, NPAs, or Settlement Agreements

Another amendment refines the definition of “action” to include deferred prosecution agreements, non-prosecution agreements, and settlement agreements entered into by the SEC outside of the context of a judicial or administrative proceeding to address violations of the securities laws. This amendment is intended to “ensure that whistleblowers are not disadvantaged because of the particular form of an action that the SEC or DOJ may elect to pursue.”5 

Definition of “Whistleblower” Mandates Complaining in Writing

In another significant amendment, the SEC responded to the Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767, 776, 200 L. Ed. 2d 15 (2018), to clarify that, for purposes of retaliation protection under Dodd-Frank, an individual is required to report information about possible securities laws violations to the SEC “in writing” before experiencing the retaliation. Commissioner Caroline Crenshaw, who voted against the amendments, voiced concern that by limiting the anti-retaliation protections to whistleblowers who submit information in writing, the SEC “fail[s] to do all [they] can to protect those who cooperate with our exams and investigations.”6 In other words, Commissioner Crenshaw said, “[I]f a whistleblower provides information to the [SEC] through interviews or testimony, that whistleblower does not necessarily get the benefits of the anti-relation provision.” For this very reason, this amendment, in particular, is important for employers when evaluating the procedural propriety of whistleblower complaints lodged against them.

“Independent Analysis”

The SEC also published interpretive guidance to help clarify the meaning of “independent analysis” as that term is used in award applications. Under the guidance, to qualify as “independent analysis,” a whistleblower’s submission must provide evaluation, assessment, or insight beyond what would be reasonably apparent to the SEC from publicly available information. This amendment can also be seen as a benefit to employers in how it deters would-be whistleblowers who only seek to provide publicly available information to the SEC to receive a monetary award. It is also another one of the amendments with which the two commissioners who voted against the amendments took issue. Commissioner Caroline Crenshaw claimed, “this guidance will inadvertently impact the perception of the type of information the Commission considers valuable.”7 Critics of the rule believe it could lead to the SEC rejecting whistleblower claims by concluding the SEC could have detected the violation on its own with the benefit of hindsight.

Other Notable Amendments

The SEC may now permanently bar any applicant from seeking a whistleblower award if the SEC determines the applicant has abused the process by submitting three frivolous award applications. This amendment serves to discourage individuals simply looking for a quick payday.

The SEC may also now utilize a summary disposition procedure for certain types of common denials, such as untimely award applications, applications that involve a tip that was not provided to the SEC in the form and manner that the rules require, and applications where the claimant’s information was never provided to or used by staff responsible for the investigation. This amendment should also benefit employers that face whistleblower complaints that fail to pass procedural muster.

What Critics Are Saying

As noted, critics of the amendments include many attorneys who represent whistleblowers. These lawyers argue that rather than adding clarity, efficiency, and transparency, the amendments largely seek to limit whistleblowers’ ability to recover awards or awards of certain amounts. These critics generally echo the sentiments expressed by Commissioners Caroline Crenshaw and Allison Herren Lee, who voted against the amendments, focusing on the “in writing” amendment; the “discretion” in large awards amendment; and the “independent analysis” amendment.

Program Statistics

The purpose of the SEC’s Whistleblower Program is to “incentivize individuals to report high-quality tips to the Commission and assist the agency in its efforts to combat wrongdoing and, as a result, better protect investors and the marketplace.”8 The Program’s purpose has been largely realized. With the benefit of whistleblowers’ tips, to date the SEC has recovered over $2.5 billion in financial remedies in the last 10 years, most of which has been, or is scheduled to be, returned to harmed investors. In addition, the SEC has awarded approximately $523 million to 97 whistleblowers during the same period.

 

Footnotes

1 See Press Release, U.S. Securities and Exchange Commission, SEC Adds Clarity, Efficiency and Transparency to Its Successful Whistleblower Award Program (Sept. 23, 2020).

2 The negative award criteria include: the culpability or involvement of the whistleblower in matters associated with the Commission’s action or related actions; whether the whistleblower unreasonably delayed reporting the securities violations; and whether the whistleblower undermined the integrity of such system.

3 See SEC Press Release, supra note 1.

4 Id.

5 Id.

6 Id.

7 See U.S. Securities and Exchange Commission, Statement of Commissioner Caroline Crenshaw on Whistleblower Program Rule Amendments (Sept. 23, 2020).

8 See SEC Press Release, supra note 1.

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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