On Friday, the SEC, without holding an open meeting, adopted two amendments to the whistleblower program that had been proposed in February. The vote was three to two. Under the SEC's whistleblower program, the SEC may "make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions exceeding $1 million and certain successful related actions." Awards must be in the range of 10% to 30% of the monetary sanctions collected. The two new amendments relate to changes that had been adopted in 2020 regarding awards under related programs and award amounts. According to SEC Chair Gary Gensler, the amendments will "help enhance the whistleblower program. The first amendment expands the circumstances in which a whistleblower who assisted in a related action can receive an award from the Commission for that related action rather than from the other agency's whistleblower program. The second amendment concerns the Commission's authority to consider and adjust the dollar amount of a potential award. Under today's amendments, when the Commission considers the size of the would-be award as grounds to change the award amount, it can do so only to increase the award, and not to decrease it. This will give whistleblowers additional comfort knowing that the Commission would not decrease awards based on their size....I think that these rules will strengthen our whistleblower program. That helps protect investors." The amendments to the whistleblower rule will become effective 30 days after publication in the Federal Register.

Here is the press release, the fact sheet and the final rule.

In September 2020, the SEC adopted a number of amendments to the whistleblower rules, some of which were quite controversial. (See this PubCo post.) In August 2021, Gensler issued a statement indicating that he had directed the SEC staff to revisit the whistleblower rules, in particular, two of the amendments that had been adopted in 2020. Gensler observed that concerns had been raised, including by whistleblowers as well as by Commissioners Allison Herren Lee and Caroline Crenshaw, that those amendments "could discourage whistleblowers from coming forward." One of the 2020 amendments at issue precluded the SEC from, in some cases, making an award to a whistleblower that is potentially also covered by an alternative, separate award program that "more appropriately applies" to the related action. The second 2020 amendment permitted the SEC to take into consideration the dollar amount of a potential award when making an award determination, allowing the SEC, as Gensler phrased it, "to lower an award because of the size of the award in absolute terms." Gensler directed the staff to draft potential revisions to permit the SEC "to make awards for related actions that might otherwise be covered by an alternative whistleblower program that is not comparable to the SEC's own program, and to clarify that the Commission will not lower an award based on its dollar amount." Those amendments were then proposed in February. (See this PubCo post.)

The fact sheet describes how the amendment to Rule 21F-3 regarding award claims for alternative programs will apply:

  • "Under Exchange Act Section 21F(b) and Rule 21F-11, a whistleblower who obtains an award based on a Commission covered action also may be eligible for an award based on monetary sanctions that are collected in an action brought by other statutorily-identified authorities.
  • The amendments allow the Commission to make an award for a related action that might otherwise be covered by an alternative whistleblower program even where the alternative whistleblower program has the more direct or relevant connection to the related action in certain circumstances.
  • If a claimant files a related-action award application, and the alternative award program is not comparable to the Commission's program, the Commission will treat the non-Commission action as 'related' for purposes of the Commission's award program (regardless of whether the alternative award program has a more direct or relevant connection to the action). Under the amendment, a program is not comparable if that program's statutory award range is more limited, its awards are subject to an award cap, or it is discretionary and not mandatory. Further, the Commission will make an award on a potential related action without regard to which program had the more direct or relevant connection to the action if the maximum award that the Commission could pay on the action would not exceed $5 million.
  • Under the amendments, a whistleblower will be required to make an irrevocable waiver of any claim to an award from the other whistleblower award program."

In addition, the fact sheet describes how the amendment to Rule 21F-6 regarding SEC consideration of the amount of a potential award will apply:

  • "In 2020, amendments added language to Rule 21F-6 stating that the Commission has discretion to consider the dollar amount of a potential award when making an award determination.
  • The amendments affirm the Commission's authority to consider the dollar amount of a potential award for the limited purpose of increasing the award amount but eliminate the Commission's authority to consider the dollar amount of a potential award for the purpose of decreasing an award."

In her dissenting statement, Commissioner Hester Peirce acknowledged that the amendments were actually "inconsequential and unlikely to inhibit" the success of the whistleblower program, but she was still concerned that they "nonetheless carry harmful consequences both for the whistleblower program and for the Commission's rulemaking processes." In support of her argument that the amendments were inconsequential, she pointed to the economic analysis, which showed that, had the amendment to Rule 21F-3 been in effect since 2010, the additional payout to whistleblowers would have been less than $10.5 million. By comparison, the SEC's whistleblower program has paid over $1.1 billion since 2010. Similarly, the economic analysis for the amendment to Rule 21F-6, which was designed to encourage high-quality tips, "admits that the Commission 'cannot determine with any reasonable degree of certainty if the revisions to Rule 21F-6 will affect a whistleblower's willingness to report a potential securities law violation.'" In addition, the authority eliminated is one that the SEC never used, she said. Although the amendments were, in her view, "inconsequential because they are not logical solutions to any existing problems, they nonetheless further complicate the already byzantine rules governing our whistleblower program," especially the changes to Rule 21F-3, which require a "needlessly complex analysis that rests on poorly defined terms." Finally, she was critical of the SEC's current practice of rewriting rules; she observed that these amendments "join the proxy advisor rules, shareholder proposal rules, and perhaps the resource extraction rules in being reopened even though the ink was barely dry on the last set of amendments."

Commissioner Mark Uyeda's dissenting statement echoed exactly that point—a concern that he had also just expressed regarding the proxy advisor rules. In his view, the SEC "is revisiting rules that were finalized a little over a year and a half ago. Reversing rules shortly after adoption, in the absence of a regulatory weakness or failure, sets a bad precedent, risks eroding the Commission's regulatory credibility, and increases costs for market participants by requiring frequent reevaluations of compliance obligations." And if there is a regulatory failure, it should be supported by "robust evidence." If not, the SEC "should monitor the effectiveness of recently adopted rules, with a view to refining any aspects that require adjustments, while avoiding destabilizing wholesale revisions."

In addition, he did not believe that the amendments were directed toward "remediating any known or identified weaknesses with the current whistleblower rules." Rather, he contended, the economic analysis showed that the program had been very successful at incentivizing claimants, but that any benefits that may result from the amendments were unclear. "Given that the prior amendments were only recently adopted," he suggested, the SEC "should have continued to monitor the whistleblower rules, rather than revise them without corresponding data substantiating the need for such amendments." A better approach might have been the promotion of "greater visibility into its claims and award determinations, and increasing the number of high-quality tips from unrepresented persons. Such a review could also evaluate the role played by lawyers representing whistleblowers on a contingency fee basis and how they present tips to the Commission." That type of review might address in part "recent scrutiny" of the program for "lack of transparency," in light of the $1.1 billion that it has paid out to claimants.

SideBar

The "recent scrutiny" to which Uyeda's statement alludes refers to a recent academic paper and a recent lengthy article in Bloomberg that were highly critical of the SEC's whistleblower program. The academic paper observed that the SEC receives an average of 49 whistleblower tips every workday, and examined the "role played by private whistleblower attorneys in the tip-sifting process." The author concluded that "tipsters represented by lawyers significantly outperform unrepresented ones, repeat-player lawyers outperform first-timers, and lawyers who used to work at the SEC outperform just about everybody. The upshot is that the SEC and CFTC have effectively privatized the tip-sifting function that is at the core of the WBPs. Private lawyers have likely extracted hundreds of millions of dollars in fees and expenses from these programs, with a disproportionate share going to a concentrated group of well-connected, repeat players. Unlike traditional plaintiffs' side securities attorneys and attorneys who represent clients seeking government payments in many other contexts, private whistleblower lawyers operate free from virtually all public accountability, transparency, or regulation." (See also this article in the WSJ.) Similarly, a Bloomberg Law investigation found that the SEC whistleblower program "often ignores its own rules, shields much of its work from the public, and has been a financial boon for law firms that hired former agency officials."

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