Changes Coming to SEC Whistleblower Program
July 18, 2018
Changes and Improvements are Being Proposed for SEC Whistleblower Program
The Securities and Exchange Commission (SEC) is exploring ways to improve its whistleblower program in its first major overhaul since inception. The agency recently announced proposed rules would, among other things, provide the SEC with additional tools in making whistleblower awards, increase efficiencies in the whistleblower claims review process, and clarify the requirements for anti-retaliation protection under the whistleblower statute. The proposed changes come in the wake of the U.S. Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers, which held that Dodd-Frank’s anti-retaliation provision for “whistleblowers” does not extend to individuals who have not reported alleged misconduct to the SEC.
SEC Whistleblower Program
First launched in 2011, the SEC’s whistleblower program, provides a monetary incentive to corporate insiders and others having relevant information concerning potential securities violations to report their information to the Commission. Those who provide high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million are eligible for awards ranging from 10 percent to 30 percent of the money collected by the agency. The SEC’s latest whistleblower report, the SEC has ordered wrongdoers in enforcement matters to pay over $975 million in total monetary sanctions, including more than $671 million in disgorgement of ill-gotten gains and interest.
Proposed Changes to Whistleblower Program
The SEC’s proposed changes will strengthen the program, as well as clarify existing rules.“Whistleblowers have made significant contributions to the SEC’s enforcement efforts, and the value of our whistleblower program is clear,” said SEC Chairman Jay Clayton. “The proposed rules are intended to help strengthen the whistleblower program by bolstering the Commission’s ability to more appropriately and expeditiously reward those who provide critical information that leads to successful enforcement actions. I look forward to public feedback and encourage everyone with an interest to give us their ideas on the proposed rules.”
Key changes proposed by the SEC include:
- Inclusion of DPAs and NPAs: Allow awards based on deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs) entered into by the U.S. Department of Justice (DOJ) or a state attorney general in a criminal case, or a settlement agreement entered into by the Commission outside of the context of a judicial or administrative proceeding to address violations of the securities laws. This proposed amendment will “ensure that whistleblowers are not disadvantaged because of the particular form of an action that the Commission, DOJ, or a state attorney general acting in a criminal case may elect to pursue.” Currently, the SEC’s whistleblower rules do not address whether the agency may pay a related-action award when an eligible whistleblower voluntarily provides original information that leads to a DPA or NPA entered into by DOJ or a state attorney general in a criminal proceeding.
- Relatively Small Awards: Because more than 60 percent of its whistleblower awards have been less than $2 million, the SEC proposed rules would authorize the Commission in its discretion to adjust the award percentage upward under certain circumstances (subject to the 30 percent statutory maximum) to an amount up to $2 million. In exercising its discretion to increase an award, the Commission would consider “whether the increase helps to better achieve the program’s objectives of rewarding meritorious whistleblowers and sufficiently incentivizing future whistleblowers who might otherwise be concerned about the low dollar amount of a potential award.”
- Exceedingly Large Awards: The SEC proposes to authorize the Commission to exercise discretion with regard to potential awards that could yield total collected monetary sanctions of at least $100 million. Noting that 40 percent of the aggregate funds paid by the Commission to whistleblowers have been paid out in only three awards, the proposed rules would authorize the Commission in its discretion to reduce the award percentage for exceedingly large awards of at least $100 million so that it would yield a payout (subject to the 10% statutory minimum) that does not exceed an amount that is reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers. However, in no event would the award be adjusted below $30 million.
- Whistleblower Definition: The SEC is creating a uniform definition of “whistleblower” that comports with the Supreme Court’s recent decision in Digital Realty Trust. The proposed rules would specifically modify Rule 21F-2 so that it comports with the Court’s holding by establishing a uniform definition of “whistleblower” that would apply to all aspects of Exchange Act Section 21F—i.e., the award program, the heightened confidentiality requirements, and the employment anti-retaliation protections. For purposes of retaliation protection, an individual would be required to report information about possible securities laws violations to the Commission “in writing.” To be eligible for an award or to obtain heightened confidentiality protection, the additional existing requirement that a whistleblower submit information on Form TCR or through the Commission’s online tips portal would remain in place.
If you have questions, please contact us
We will continue to track the status of the proposed rules and provide updates as they become available. If you have any questions or if you would like to discuss the matter further, please contact me, Paul Lieberman, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.