BakerHostetler

The new Chairman of the Securities and Exchange Commission (“SEC”), Gary Gensler has wasted little time in revisiting some of the policies enacted under his predecessor. On August 2, 2021, Chairman Gensler issued a public statement calling on the staff of the SEC to propose potential changes to two whistleblower rules that the Commission had just amended in September 2020.[1] The amendments have drawn significant criticism for potentially discouraging whistleblowers from making reports. One of these 2020 amendments precludes the SEC in certain instances from making an award in related enforcement actions brought by other law-enforcement and regulatory authorities if a second, alternative whistleblower award program might also apply to the action. The other 2020 amendment at issue permits the SEC to consider the potential dollar amount of an award when making an award determination. As foreshadowing of the rulemaking to come, the SEC released a policy statement on August 5, 2021 that sets forth interim procedures that it will apply to whistleblowers during the period that the staff is preparing, and the Commission is considering, the changes called for by Chairman Gensler. [2] These interim procedures are designed to further the goal of encouraging whistleblowers to come forward to report violations of federal securities laws.

Over the past few years and particularly so far in 2021, responding to pandemic-related whistleblower tips,[3] there has been a dramatic uptick in whistleblower awards. The trends are very likely to continue under the leadership of new Chairman Gensler, who stated in his confirmation hearings that he intends to “examine whether and how the [SEC’s whistleblower] program could be strengthened to ensure that misconduct within the remit of the SEC is identified, addressed and stopped.”[4] According to a recent SEC press release, since the program’s inception in 2010, it has paid out $956 million in total awards to 195 individuals.[5] FY 2020 was a record year – the program paid out approximately $175 million to 39 individuals, triple the number of individuals who were given awards in 2018.[6] The program also received over 6,900 whistleblower tips, a 31% increase from FY 2018, the second-highest tip year.[7] The 2021 FY is set to eclipse those numbers, already awarding approximately $377 million to 75 individuals,[8] including a $114 million payout to an individual, the largest in program history.[9]

Under the Dodd-Frank Act, qualified whistleblowers are entitled to a monetary award of 10%-30% of funds recovered by the SEC in a successful action that recovers greater than $1 million. Additionally, under the related-action provisions, when a whistleblower’s disclosure to the SEC also leads to a successful enforcement action by another agency, the whistleblower is entitled to an additional award of 10%-30% of funds recovered in that action. On September 23, 2020, the SEC voted to adopt amendments to the rules governing its whistleblower programs, which, among other things, brought about changes to the rules implementing those two provisions.

One change explained that the SEC has discretion to consider the potential dollar amount of the final award payout as a factor in calculating the award, which would potentially allow it to lower whistleblower award amounts. The other stated that the agency may not pay an award for a related action if another agency’s whistleblower program had the “more direct or relevant connection” to the related action. According to the SEC’s recent policy update, this amendment serves to potentially limit awards, given that it would include situations where “the alternative whistleblower program has an award cap or award range that could disadvantage the particular claimant.”[10] Both amendments have come under severe criticism for their potential to significantly limit whistleblower recovery and to disincentivize would-be tipsters.

As part of its new August 5th policy statement, the Commission clarified that it anticipates only using its discretion to consider final award amounts to raise awards, not to reduce them. Regarding related-action awards, the policy statement gives the agency the ability to use its exemptive authority to nullify the amendment limiting such awards if: (i) the alternative whistleblower program has an award cap or range that could disadvantage the particular whistleblower; or (ii) the SEC is aware or the whistleblower demonstrates a likelihood that a condition or exclusion would apply to his or her award claim under the alternative award program and the SEC determines that the whistleblower would likely obtain an award were he or she permitted to proceed under the SEC’s program. Under other circumstances where the SEC determines that an alternative whistleblower program has a “more or direct connection” to the potential related action than the SEC’s program does, whistleblowers may request an abeyance of their award claim for the duration of the “interim policy-review period” during which SEC staff will be continuing to review the two amendments.

Amid an already well-utilized SEC whistleblower program, these rollbacks will further incentivize individuals to come forward to the agency with reports of potential misconduct. Corporate compliance officers should act now to review their company’s compliance programs to ensure that they create a culture of and have the procedures in place to encourage internal reporting. This includes reviewing whistleblower and anti-retaliation policies and confirming that they are sufficiently robust and clearly communicated to all employees. Compliance officers should also review their training programs and the manner in which they investigate whistleblower complaints. It is key that the company’s internal policies for addressing whistleblower reports are well-defined and provide for prompt and thorough investigations of whistleblower complaints.


[1] Public Statement, Chair Gary Gensler, Statement in Connection with the SEC’s Whistleblower Program, U.S. Sec. & Exch. Comm’n, (Aug. 2, 2021), available at https://www.sec.gov/news/public-statement/gensler-sec-whistleblower-program-2021-08-02.

[2] U.S. Sec. & Exch. Comm’n, Rel. No. 81207, Procs. for the Comm’n’s Use of Certain Auths. Under Rule 21F-3(B)(3) and Rule 21F-6 of the Secs. Exchange Act of 1934, (Aug. 5, 2021), available at https://www.sec.gov/rules/policy/2021/34-92565.pdf.

[3] John J. Carney, Ryan A. Cates, Joseph C. Devine, Lauren P. Lyster, BakerHostetler, Will the SEC’s Record Whistleblower Awards and COVID-19 Lead to More Whistleblower Complaints?, (May 15, 2020), available at https://www.bakerlaw.com/alerts/will-the-secs-record-whistleblower-awards-and-covid-19-lead-to-more-whistleblower-complaints; Ryan A. Cates, Joseph C. Devine, Lauren P. Lyster, BakerHostetler, Whistleblower Complaints Are Skyrocketing Due to COVID-19, (Sept. 28, 2020), available at https://www.bakerlaw.com/alerts/whistleblower-complaints-are-skyrocketing-due-to-covid-19.

[4] Questions for the Honorable Gary Gensler, of Maryland, to be a Member of the Securities and Exchange Commission, from Senator Chuck Grassley, available at https://whistleblowersblog.org/wp-content/uploads/2021/03/Senator-Grassley-questions-3.17.214.pdf.

[5] Press Release, SEC Issues Nearly $6 Million in Whistleblower Awards, U.S. Sec. & Exch. Comm’n, (Aug. 10, 2021), available at https://www.sec.gov/news/press-release/2021-149.

[6] Jonathan B. New, Patrick T. Campbell, and Lauren Lyster, Developments in Federal Whistleblowing Programs: What Compliance Officers Need to Know, 28 BUS. CRIMES BULLETIN, (June 2021), available at https://www.bakerlaw.com/webfiles/Litigation/2021/Articles/New_Campbell_Lyster_Whistleblower.pdf.

[7] Id.

[8] Press Release, SEC Issues Nearly $6 Million in Whistleblower Awards.

[9] Press Release, SEC Issues Record $114 Million Whistleblower Award, U.S. Sec. & Exch. Comm’n, (Oct. 22, 2020), available at https://www.sec.gov/news/press-release/2020-266.

[10] Procs. for the Comm’n’s Use of Certain Auths. Under Rule 21F-3(B)(3) and Rule 21F-6 of the Secs. Exchange Act of 1934.

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