With years of experience under its belt, and acknowledging complications triggered by a recent Supreme Court decision, the Securities and Exchange Commission has released a proposal to amend rules that govern its whistleblower program.
The SEC’s whistleblower program was established in 2010 to incentivize individuals to report “high-quality tips” to the Commission and help the agency detect wrongdoing.
Section 922 of the Dodd-Frank Act added Section 21F to the Securities Exchange Act, establishing the program. It authorizes the SEC to pay monetary awards to eligible individuals who voluntarily provide original information that leads to successful enforcement actions resulting in monetary sanctions of more than $1 million. Awards are made in an amount equal to 10 to 30 percent of the monetary sanctions collected.
Congress established a separate fund at the Treasury Department, called the Investor Protection Fund, from which these whistleblower awards are paid.
Since the program’s inception, the Commission has ordered more than $266 million in 50 awards to 55 whistleblowers, including individuals filing jointly. Original information provided by whistleblowers has led to enforcement actions in which the Commission has ordered more than $1.4 billion in financial remedies, including more than $740 million in disgorgement of ill-gotten gains and interest, the majority of which has been, or will be, returned to harmed investors.
Additional tools in award determinations
One proposed change would allow awards based on deferred prosecution agreements and non-prosecution agreements entered into by the U.S. Department of Justice, a state attorney general in a criminal case, or a settlement agreement with the Commission outside of the context of a judicial or administrative proceeding to address violations of the securities laws.
Commissioners weigh in on proposed amendments
“The amendments we are considering draw from our experiences with those rules to ensure that the Commission is getting the most ‘bang for its buck’ through its whistleblower program,” said Commissioner Hester Peirce.
“By tweaking the rules as we propose to do today, we hope to better achieve the program’s goals of eliciting useful information and appropriately rewarding people who bring that information to our attention.”
She praised efforts to allow greater flexibility to ensure that payouts are appropriate.
“In adopting the existing rules, we put on an unnecessarily restrictive straightjacket,” Peirce said. “We deprived ourselves of the ability to exercise discretion to ensure that we are not shortchanging or overcompensating whistleblowers.”
Commissioner Kara Stein had concerns that some proposed changes could threaten the program’s ongoing success.
“I am deeply troubled that the proposal would give the Commission authority to depart from its normal analysis for determining the amount of an award in certain circumstances,” she said. “Under the proposed Rule, the Commission would, in certain circumstances, be able to consider not just the enumerated factors, but also the overall dollar amount of the award.”
“Practically speaking, this means the Commission can reduce the award if, in its sole discretion, it thinks the award is ‘too large.’ I am worried that this subjective determination will be used as a means to weaken the whistleblower program, she added.
Stein directly assailed one change as lacking needed analysis. “We do not have the necessary facts to show that $30 million, or any other number for that matter, is the point at which there magically starts to be diminishing returns for whistleblower awards,” she said. “I worry that we are creating a $30 million glass ceiling.”
Commissioner Robert Jackson was more emphatic with his concerns. “[This] proposal risks harming investors by adding two things to this exceptionally successful program that don't belong in the world of whistleblowers: uncertainty and politics,” he said. “Because I believe that American investors are already dealing with plenty of both, I respectfully dissent.”
This alteration is intended to ensure that whistleblowers are not disadvantaged because of the particular form or forum a prosecution may be considered.
Currently, the SEC’s whistleblower rules do not address whether the Commission may pay a related-action award when an eligible whistleblower voluntarily provides original information that leads to a DPA or NPA by the Justice Department or a state attorney general in a criminal proceeding. Under the proposed amendment, the Commission would be able to make award payments to whistleblowers based on this money collected, as well as under settlement agreements entered into by the Commission outside of the context of a judicial or administrative proceeding.
Small and exceedingly large awards
More than 60 percent of the awards given out in the SEC’s whistleblower program have been less than $2 million.
In the context of potential awards that could yield a payout of less than $2 million to a whistleblower, the proposed rules would authorize the Commission, in its discretion, to adjust the award percentage upward under certain circumstances to an amount up to $2 million (subject to the 30 percent statutory maximum).
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.”
Forty percent of the aggregate funds paid by the Commission to whistleblowers have been paid out in only three awards. In the context of potential awards, that could yield total collected monetary sanctions of at least $100 million.
The proposed rules would authorize the Commission in its discretion to adjust the award percentage so that it would yield a payout (subject to the 10 percent 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.
This proposed amendment is “intended to make sure that the Commission is a responsible steward of the public trust while continuing to provide strong whistleblower incentives.”
Elimination of potential double recovery
Another proposed amendment would prevent the “irrational result” that could occur if a whistleblower receives multiple recoveries for the same information from different whistleblower programs.
The proposed amendment would clarify that a law-enforcement or separate regulatory action would not qualify as a “related action” if the Commission determines that there is a separate whistleblower award scheme that more appropriately applies to the enforcement action.
Uniform definition of ‘whistleblower’
The Commission also proposed rule amendments in response to the Supreme Court’s recent decision in Digital Realty Trust, Inc. v. Somers.
In February the Court narrowed the definition of employees classified as “whistleblowers” and protected by anti-retaliation measures of the Dodd-Frank Act. The ruling placed limitations on the SEC’s whistleblower program, requiring reporting to the Commission before receiving protections and incentives.
Endeavoring to root out corporate fraud, Congress passed the Sarbanes-Oxley Act of 2002 and the 2010 Dodd-Frank Act. Both laws shield whistleblowers from retaliation, but differ in important respects. SOX applies to all “employees” who report misconduct to the SEC, any other federal agency, Congress, or an internal supervisor.
The SEC’s regulations implementing the Dodd-Frank provision, however, contain two discrete whistleblower definitions. For purposes of the award program, Rule 21F requires a whistleblower to “provide the Commission with information” relating to possible securities law violations. For purposes of the anti-retaliation protections, however, the rule did not require SEC reporting.
In Digital Realty, however, the Supreme Court ruled that a plaintiff was not technically a whistleblower for purposes of the rule and program because he did not alert the SEC prior to his termination.
The Court followed what it called “the plain meaning” of Dodd Frank: that whistleblowers are those who report to the SEC. It held that Dodd-Frank’s anti-retaliation provision does not extend to an individual who has not reported a violation of the securities laws to the SEC.
The decision was a win for employers, because it may make it much harder for an individual to establish a whistleblower retaliation claim under Dodd-Frank. On the other hand, compliance officers have reason for serious concern, because the decision could compel individuals to bypass internal compliance programs and protocols to go directly to the SEC.
The proposed amendment would modify the SE’s Rule 21F so that it comports with the Court’s holding by, among other things, establishing a uniform definition of “whistleblower” that would apply to all aspects of Exchange Act, including 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 and heightened confidentiality protection, there is the additional existing requirement that a whistleblower submit information on Form TCR, or through the Commission’s online tips portal.
Increased efficiency in claims review
Two proposed changes are designed to increase the Commission’s efficiency in processing whistleblower award applications.
A change to Exchange Act Rule 21F-8 would clarify the Commission’s ability to bar individuals from submitting whistleblower award applications if they are discovered to have submitted false information to the Commission. The SEC would also be empowered to bar individuals who repeatedly make frivolous award claims.
To prevent repeat submitters from abusing the award application process, the proposed changes would permit the Commission to permanently bar any applicant from seeking an award after the Commission determines that the applicant has abused the process by submitting three frivolous award applications.
The changes would afford the SEC a summary disposition procedure for certain types of likely denials, such as untimely award applications, and applications that involve a tip that was not provided to the agency in the form and manner that the rules require.
The new disposition procedures are intended to “help facilitate a timely resolution of relatively straightforward denials, while freeing up staff resources to focus on processing potentially meritorious award claims.”
As under current rules, claimants would have an opportunity to contest a preliminary denial of their claim before the Commission makes its final determination.
Clarification of policies and procedures
The proposed amendments would also clarify and enhance certain policies, practices, and procedures in implementing the program. These recommendations include the items listed below.
Proposed revisions to Exchange Act Rule 21F will provide the Commission with additional flexibility to modify the manner that individuals may submit Form TCR. There will also be additional flexibility regarding other forms used with the whistleblower program. Also clarified are the materials that may comprise the administrative record for purposes of judicial review.
In addition to the foregoing proposed rule amendments, the Commission is publishing proposed interpretive guidance to help clarify the meaning of “independent analysis” as that term is defined in Exchange Act Rule 21F and utilized in award applications.
Under the proposed guidance, to qualify as “independent analysis,” a whistleblower’s submission must provide evaluation, assessment, or insight beyond what would be reasonably apparent to the Commission from publicly available information.
The public comment period for the proposed amendments will remain open for 60 days following publication of the proposing release in the Federal Register.