September 2, 2020

No agreement at SEC on whistleblower amendments

The US Securities and Exchange Commission has, according to reports, postponed its vote on a rule proposed in June 2018 amending the rules implementing the whistleblower award program established in 2011 pursuant to Section 21F of the Securities Exchange Act of 1934.  The Whistleblower Program itself was created in July 2010 pursuant to Section 922 of the Dodd-Frank Act, to incentivize individuals to report high quality tips to the SEC.

Section 21F of the Exchange Act directs the SEC to pay awards, subject to certain limitations and conditions, to whistleblowers who voluntarily provide the agency with original information about a violation of the securities laws, that leads to a successful enforcement action.  Awards may range between ten and thirty percent of resolution amounts over $1 million.  Under the program to-date, the SEC has awarded approximately $510 million to 92 individuals.

The changes comprise substantive, procedural and technical amendments to the existing rules, and would:

  • Allow awards based on deferred prosecution agreements and non-prosecutions with the US Department of Justice or state attorney general, or an SEC settlement outside the context of a judicial or administrative proceeding, so as not to disadvantage whistleblowers based on the type of proceeding brought;
  • Allow awards of less than $2 million to be adjusted upward, subject to the 30% statutory maximum and a $2 million cap;
  • Potentially establish a discretionary award mechanism for enforcement actions that do not meet the $1 million threshold;
  • Authorize the SEC to adjust the award percentage downward in high-dollar resolutions, subject to the 10% statutory minimum and a $30 million minimum;
  • Eliminate the potential for a whistleblower to recover twice for the same information;
  • Impose a uniform interpretation of “whistleblower” under Section 21F that would require individuals to report securities laws violations to the SEC in writing in a specified format in order to be eligible for whistleblower confidentiality protection and whistleblower awards, so as to comport with the US Supreme Court ruling in Digital Realty Trust, Inc. v. Somers, 138 S.Ct. 767 (2018);
  • Enable the SEC to bar individuals from submitting whistleblower award applications if they have submitted false information or three frivolous claims;
  • Establish a summary disposition procedure for claims likely to be denied on grounds such as untimeliness or incorrect form and manner of submission;
  • Clarify the definition of “monetary sanctions”;
  • Allow the SEC greater flexibility in defining the manner in which individuals may submit Tip, Complaint or Referral (TCR) forms and other forms used in connection with the whistleblower program, and;
  • Clarify the list of materials that may be relied upon by the SEC in making a reward, and the material that may comprise the administrative record for judicial review.

In addition to these proposed changes, the SEC published interpretive guidance to clarify the meaning of the term “independent analysis” under Rule 21F-4 to require a higher level of evaluation, assessment or insight than would be available to the SEC from public sources.

During the two years since the rule was proposed, the SEC has received thousands of comments and held dozens of meetings on the subject, but as yet has not been able to finalize the rule.

Proposed Rule