SEC proposes changes to the whistleblower program
Published August 2, 2018
The Securities and Exchange Commission (SEC) is proposing amendments to its guidelines for reviewing whistleblower claims and handing out awards to people who report wrongdoing. Here’s an overview of the SEC whistleblower program and proposed changes to make the program more effective and efficient.
What is the whistleblower program?
In 2010, Congress established the whistleblower program for the SEC to administer under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The purpose of the program is to create a financial incentive for individuals to report high-quality tips to the SEC that help detect wrongdoing and protect the public markets.
The whistleblower program has significantly improved the SEC’s enforcement of federal securities laws. During the first seven years of the program’s operation, original information from whistleblowers has helped the SEC collect over $1.4 billion in financial remedies from enforcement actions.
In a nutshell, the program calls for the SEC to make monetary awards to individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions over $1 million. Whistleblower awards range from 10% to 30% of the monetary sanctions collected. Since the program’s inception, the SEC has ordered over $266 million in 50 awards to 55 whistleblowers, according to a recent SEC press release.
After several years of administering the whistleblower program, the SEC has identified various ways in which the program might benefit from technical amendments and modifications to the existing rules. So, in June 2018, the SEC published Release No. 34-83557, Amendments to the Commission’s Whistleblower Program 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.”
Specifically, the proposal would:
Provide additional tools in award determinations. Under the proposed changes, the SEC would be able to make award payments to whistleblowers based on money collected from deferred prosecution agreements (DPAs) and nonprosecution agreements (NPAs), as well as under settlement agreements the SEC enters into outside of the context of a judicial or administrative proceeding to address violations of the securities laws. DPAs and NPAs are often used in foreign bribery cases. This change would ensure that whistleblowers aren’t disadvantaged because of the form of action that the SEC, the U.S. Department of Justice or a state attorney general may elect to pursue.
Allow SEC discretion in relation to small and exceedingly large awards. The proposal would give the SEC discretion to adjust the award percentage upward under certain circumstances (subject to the 30% statutory maximum) to $2 million to help incentivize future whistleblowers. On the flipside, the proposal would give the SEC the discretion to adjust the award percentage downward so that a payout (subject to the 10% statutory minimum) doesn’t exceed an amount that’s reasonable to reward the whistleblower and incentivize future whistleblowers. The proposed changes also would eliminate potential double recovery if the same information is used to receive multiple recoveries from different whistleblower programs.
Clarify the “whistleblower” definition. The proposal would establish a uniform definition of “whistleblower.” Consistent with the U.S. Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers, to be eligible for an award or to obtain heightened confidentiality protection, a whistleblower must submit information on Form TCR or through the SEC’s online tips portal. The proposed rule would also clarify that whistleblower protection extends to any employee reporting information about possible securities laws violations to the SEC “in writing.”
Improve efficiency of the claims review process. The proposal would allow the SEC to bar individuals from submitting whistleblower award applications if they submit false information or repeatedly make frivolous award claims. Further, it would provide a summary disposition procedure for certain denials, such as untimely award applications, applications involving a tip that wasn’t submitted in the correct form or manner, and applications where the claimant’s information was never provided to or used by staff responsible for the investigation.
In addition, the proposal would clarify and enhance certain policies, practices and procedures in implementing the whistleblower program. And it includes some interpretive guidance that would classify any delay of more than 180 days in reporting wrongdoing to the SEC as unreasonable. The SEC is also providing interpretive guidance that explains how it views “independent analysis” of publicly available information that leads to a successful enforcement action.
SEC Release No. 34-83557 isn’t a sure win; the SEC approved the proposed amendment by a vote of 3 to 2. The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register, which normally occurs a few weeks after a rule is posted on the SEC’s website. After careful review of the comments, the SEC will consider what further action to take on the proposal.