Alerts

A Divided SEC Tries To Turn Up the Heat on Financial Misconduct by Amending the Whistleblower Award Rules

Alerts / October 2, 2020

On Sept. 23, 2020, the Securities and Exchange Commission (SEC or Commission) adopted amendments to the rules that govern its whistleblower program in a 3-2 vote. Since the program’s inception 10 years ago, original information provided by whistleblowers has led to enforcement actions in which the SEC has obtained more than $2.5 billion in financial remedies. The Commission reports that most of this money has been, or is scheduled to be, returned to harmed investors. In addition, since the program began, the SEC has awarded approximately $523 million to 97 whistleblowers.

Chairman Jay Clayton spoke of the benefits of the whistleblower program to the SEC’s enforcement efforts, investors and the markets, noting the professional and reputational risks in reporting information to the SEC and the SEC’s commitment to reward whistleblowers. He further stated that he believes the amendments “will help [the SEC] get more money into the hands of whistleblowers, and at a faster pace. Experience demonstrates this added clarity, efficiency and transparency will further incentivize whistleblowers, enhance the whistleblower award program and benefit investors and our markets.”

Background

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) added Section 21F to the Securities Exchange Act of 1934 (Exchange Act), which established the SEC’s whistleblower program. Section 21F authorizes the SEC to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions greater than $1 million. The awards to whistleblowers must be an amount of at least 10 percent and not more than 30 percent of the monetary sanctions collected by the SEC. Congress established the Investor Protection Fund as a separate fund at the Treasury Department from which whistleblower awards are paid; whistleblower awards are not allocated from funds that could go to injured investors.

Rule Amendments and Interpretive Guidance

The whistleblower rules were amended or clarified as follows:

Award Determinations

  • Addition of a presumption that the statutory maximum award (30%) will be given in covered actions for an aggregate award of $5 million and less, provided none of the negative award criteria in Rule 21F-6(b) are present.
  • Addition of an expectation that for awards greater than $5 million that the award amount will be in the top third of the award range, provided none of the negative award criteria in Rule 21F-6(b) are present.
  • Amendment to the definition of “action” such that awards may be based on deferred prosecution agreements and non-prosecution agreements entered into by the U.S. Department of Justice or a settlement agreement entered into by the SEC outside the context of a judicial or administrative proceeding to address violations of the securities laws.
  • Clarification of the definition of “related action” to make clear that a law enforcement or separate regulatory action does not qualify as a related action if the SEC determines that a separate award scheme more appropriately applies to those actions.

Definition of ‘Whistleblower’

  • Modification to Rule 21F-2 to establish a uniform definition of whistleblower that will apply to the entirety of Exchange Act Section 21F – specifically, the award program, the heightened confidentiality requirements and the employment anti-retaliation protections.
  • Modification that to be eligible for an award or to obtain heightened confidentiality protection, the whistleblower must submit information on Form TCR or through the SEC’s online tips portal, but the SEC has the discretion to grant waivers.
  • Modification that for retaliation protection, the whistleblower is required to report information about possible securities violations in writing and before experiencing retaliation.

Claims Review Process

  • Addition of subparagraph (e) to Rule 21F-8 bars applicants who submit materially false, fictitious or fraudulent statements in their whistleblower submission in dealings with the SEC or in related actions.
  • Addition of Rule 21F-18 that sets forth summary disposition procedures for the SEC to more quickly dispose of common denials, such as untimely award applications, applications that involve a tip that was not provided to the SEC per its requirements and when the applicant’s information was not used by the SEC staff conducting the investigation.

Policies and Procedures Implementing the Program

  • Amendment to Rule 21F-4 to clarify the definition of “monetary sanctions.”
  • Amendment to Rule 21F-6 to clarify the SEC has discretion in applying the award factors and setting the award amount.
  • Amendment to Rule 21F-9 to provide the SEC with flexibility to change the manner in which individuals may submit Form TCR, as well as to clarify that compliance with Rule 21F-9(a) and (b) is waived for a meritorious whistleblower who provided a Form TCR within 30 days of providing the information to the SEC or within 30 days of obtaining notice of the requirements. The SEC maintains its separate exemptive authority under Rule 21F-8(a) and Exchange Act Section 36(a) for additional exemptions.
  • Amendment to Rule 21F-8 to provide the SEC with flexibility regarding the forms used related to the program.
  • Amendment to Rule 21F-12 to clarify the list of materials on which the SEC may rely when making an award determination.
  • Amendment to 21F-13 to clarify the materials that may comprise the administrative record for the purpose of judicial review.

SEC Interpretive Guidance

  • In addition to the rule amendments, the SEC published interpretive guidance as follows:
  • Defining the scope of retaliatory conduct prohibited by Section 21F(h)(1)(A), which includes any retaliatory activity by an employer against a whistleblower that a reasonable employee would conclude is materially adverse.
  • Clarifying the meaning of “independent analysis” in Rule 21F-4 such that to qualify, a whistleblower’s submission must provide evaluation, assessment or insight beyond what would be reasonably apparent to the SEC from publicly available information. In making this determination, the Commission will consider whether the whistleblower’s conclusion of possible securities violations is derived from multiple sources; whether the sources are not readily identifiable or accessible by a member of the public without specialized knowledge, unusual effort or substantial cost; and whether the sources together are indicative of a strong inference of a potential securities law violation that is not otherwise inferable from the individual sources.
Takeaways

Chairman Clayton believes that the amendments will enhance the effectiveness of the whistleblower program and, in particular, add certainty regarding the time and amount of awards in most cases given that, historically, about 75% of awards have been $5 million or less. But in the final vote, the Commission was split, with two Commissioners dissenting. While all the Commissioners are supportive of the whistleblower program, the two dissenting Commissioners expressed concern that some amendments may chill reporting, emphasizing their disagreement with the Commission’s discretion to consider the dollar amount of an award in making award determinations.

Overall, however, it is anticipated that these amendments will encourage whistleblower reporting to the SEC, particularly for cases that may allege less egregious wrongdoing that would result in awards that do not exceed $5 million. There is speculation, however, that the SEC may receive fewer whistleblower submissions for more significant allegations due to uncertainty as to whether the submission constitutes an independent analysis and the discretion that the SEC will exercise regarding the award based on the dollar amount.

Given the SEC’s renewed focus on incentivizing whistleblowers reporting allegations to the Commission, companies would be wise to review their whistleblower and anti-retaliation-related policies and procedures and ensure compliance with best practices. In-house legal departments would likewise be prudent to review their policies and procedures for compliance with the reporting obligations of 17 CFR Part 205. The amendments will take effect 30 days after publication in the Federal Register.

Authorship Credit: John J. Carney, Teresa Goody Guillén, Janet Spreen and Michelle N. Tanney

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