United States: SEC Proposes Changes To Its Whistleblower Program

Last Updated: July 13 2018
Article by Cydney Posner

Yesterday, the SEC voted (by a vote of three to two) to propose amendments to the rules related to its whistleblower program. According to Chair Clayton, the program has been a resounding success in providing incentives to individuals to blow the whistle on wrongdoing. The press release reports that "[o]riginal information provided by whistleblowers has led to enforcement actions in which the Commission has ordered over $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 is scheduled to be, returned to harmed investors." The proposal is intended to improve the program by increasing efficiencies and providing more tools and more flexibility to the SEC, enabling the SEC to adjust, within certain limitations, the amounts payable as awards under the program. The amendments also modify the requirements for anti-retaliation protection to conform to SCOTUS's recent decision in Digital Realty v. Somers (see this PubCo post).

SideBar

Digital Realty v. Somers addressed the issue of whether the anti-retaliation protections of the Dodd-Frank whistleblower provisions apply regardless of whether the whistleblower blows the whistle all the way to the SEC or just reports internally to the company. Dodd-Frank had established new incentives and protections for whistleblowers, including monetary awards for reporting information, confidentiality provisions and employment retaliation protections. The statute defined a "whistleblower" as a person who reports potential violations of the securities laws to the SEC. However, in its rulemaking under the statute, the SEC employed the definition of "whistleblower" in the statute in connection with the incentive award provisions, but, with regard to the anti-retaliation protections, adopted a broader definition, thereby allowing the protections to apply to internal company reporting even if the individual did not report to the SEC. The 9th Circuit panel had concluded that the definition of "whistleblower" as an employee who reports to the SEC "should not be dispositive of the scope of [Dodd-Frank's] later anti-retaliation provision." And, the 9th Circuit said, because of the statute's uncertainty, the SEC's rules were entitled to deference under the "Chevron doctrine," a two-step test used to determine whether deference should be accorded to federal administrative agency actions interpreting a statute, first articulated by SCOTUS in 1984 in Chevron v. Natural Resources Defense Council. (Generally, the doctrine established in that case mandates that, if there is ambiguity in the language of a statute, courts must accept an agency's interpretation of a law unless it is arbitrary or manifestly contrary to the statute.)

In her opinion, Justice Ginsburg. focused on interpreting the precise language of the Dodd-Frank provision, which, as she read it, determined the meaning of "whistleblower" unequivocally as someone who reports to the SEC. In addition, she said, the statute left no doubt that the definition applied throughout the entire whistleblower section of the statute. As a result, she held, an individual not within that definition was not entitled to anti-retaliation protection. Consequently, because the statute was clear, the Court did "not accord defer¬ence to the contrary view advanced by the SEC" in its rulemaking: the "statute's unambiguous whistleblower definition, in short, precludes the Commission from more expansively inter¬preting that term."

Among the changes proposed:

  • Allowing awards based on money collected under deferred prosecution agreements and non-prosecution agreements entered into by the DOJ or a state attorney general in a criminal case, or a settlement agreement entered into by the SEC outside of a judicial or administrative proceeding addressing violations of the securities laws.
  • Allowing the SEC to adjust upward awards that are under $2 million (subject to the 30% statutory maximum) to an amount up to $2 million.
  • In light of the fact that 40% of the aggregate funds paid by the SEC to whistleblowers have been paid in only three awards, allowing the SEC to make certain downward adjustments of 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 SEC to adjust the award percentage 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," subject to a floor of $30 million.
  • Elimination of potential double recovery under different whistleblower programs by amending the definition of "related action."
  • In response to Digital Realty, "modify Rule 21F-2 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 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."
  • Increasing efficiency in the claims review process by clarifying the SEC's authority to bar individuals who submit false information or who make repeated frivolous claims, and by providing the SEC with a summary disposition procedure for certain types of "likely denials," such as untimely applications, non-compliant submissions or where the claimant's information was not used. The claimant would have an opportunity to contest.
  • Clarify and enhance certain policies, practices and procedures in implementing the program by changing certain definitions and making certain procedures more flexible.
  • Providing interpretive guidance to help clarify that, to qualify as "independent analysis," a whistleblower's submission must provide evaluation, assessment or insight that is not "reasonably apparent" to the SEC from publicly available information.

(The following is based solely on notes, so standard caveats apply.)

Commissioners Stein and Jackson both voted against issuing the proposal. Commissioner Stein acknowledged the success of the program, which, since inception, had resulted in over 22,000 whistleblower tips. She was "deeply troubled" about providing authority to depart from the SEC's historic analysis based on specific factors to determine the amount of awards, particularly with respect to the possibility of reducing the award size. She was also concerned that the change would be inconsistent with the Congressional directive under the statute. Moreover, she saw no evidence of a problem with the current program. She also questioned why the $30 million floor had been determined to be the correct floor. In addition, with respect to the guidance proposed, she was uncertain that the proposed clarification really clarified anything. Commissioner Jackson, highlighting the risks that whistleblowers face, was critical of the injection of uncertainty—a kind of political uncertainty—into the award amounts as a result of the proposed change. Commissioner Piwowar, who supported the proposal, was pleased that the SEC had undertaken this type of retrospective review and viewed the proposed changes as incremental but meaningful. Similarly, Commissioner Peirce also appreciated the retrospective review and thought the amendments would help to provide more flexibility and remove an "unnecessarily restrictive straightjacket."

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