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SEC Amends Whistleblower Rules

By any measure, the SEC’s whistleblower program has been a success.  Since its inception about 10 years ago, the SEC has collected $2.5 billion in financial recoveries based on whistleblower tips.  A large portion of this money has been returned to victim investors.

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 21F to the Securities Exchange Act of 1934 (the “Exchange Act”), establishing the Commission’s whistleblower program.  Among other things, Section 21F authorizes the SEC to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions over $1 million.

Ninety-seven whistleblowers have received rewards.  The largest recovery has been $50 million received by two separate whistleblowers. 

Yet, the SEC recently adopted amendments to the SEC whistleblower program rules.  The changes were adopted after a contentious meeting among the commissioners culminating in a 3-2 vote to adopt the revised rules.  A copy of the amendments is here.

What was all the fuss about?

The changes address a number of issues designed to “provide greater clarity to whistleblowers and increase the program’s efficiency and transparency.”  In addition, to provide increased clarity, the SEC published guidance regarding the process for determining award amounts for eligible whistleblowers.

The rule amendments provide a mechanism for whistleblowers with potential awards of less than $5 million (approximately 75 percent of all whistleblower awards) to qualify for a presumption that they will receive the maximum statutory award amount.

In addition, the rule amendments attempt to clarify the SEC’s discretion to increase or decrease tentative awards based on its discretion.  The controversy surrounding this rule change reflected a disagreement over the SEC’s discretion to adjust award amounts based on a general discretion or exclusive application of discretionary factors – i.e. percentage terms, dollar terms or some combination.

The rule amendments  also expands the definitions for a covered resulting SEC enforcement action – e.g. settlement agreement, deferred prosecution agreement and non-prosecution agreement – would not affect whether the action qualifies for a whistleblower award.  This amendment will ensure that whistleblowers are not disadvantaged because of the particular form of an action that the Commission or DOJ may elect to pursue. 

Under the amendment, the Commission would be able to make award payments to whistleblowers based on money collected as a result of such DPAs and NPAs, as well as under settlement agreements entered into by the Commission outside of the context of a judicial or administrative proceeding to address violations of the securities laws.

The SEC also took steps to respond to the Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers to establish a uniform definition of “whistleblower” that will apply to all aspects of the whistleblower program, including awards, confidentiality requirements and the employment anti-retaliation protections.  The Supreme Court’s decision had interpreted the statute to require whistleblowers to report a concern to the SEC before qualifying for retaliation protection.  The SEC’s rule changes, in effect, eliminates the requirement that a whistleblower report a matter to the SEC before qualifying for retaliation protection.

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