SEC Proposes Amendments to Whistleblower Rules

July 2, 2018
On June 28, the Securities and Exchange Commission proposed amendments to the rules that the Commission adopted in 2011 establishing its whistleblower program.  According to the Commission, these proposed changes are designed to build on the success of the program by “encourag[ing] individuals to come forward and by permitting [the Commission] to more efficiently process award applications.”  The proposals, among other things, would:
  • Allow whistleblower awards based on DPAs and NPAs, and SEC settlements outside the context of a formal proceeding.  The proposed rules would allow the SEC to make award payments to whistleblowers based on money collected as a result of a deferred prosecution agreement (“DPA”) and non-prosecution agreement (“NPA”) entered into by the U.S. Department of Justice or a state attorney general in a criminal case, as well as a settlement agreement entered into by the SEC outside of the context of a judicial or administrative proceeding.  The current whistleblower rules do not address whether the SEC may pay a related-action award in those circumstances.
     
  • Provide the SEC with the discretion to adjust the amount of “small and exceedingly large awards.”
     
    • With respect to small awards—more than 60% of the whistleblower awards have been amounts less than $2 million—the proposed rules would authorize the SEC in its discretion to adjust the award percentage upward (subject to the 30% statutory maximum) to an amount up to $2 million.  In exercising its discretion to increase an award amount, the SEC would consider whether the increase would help reward meritorious whistleblowers and incentivize future whistleblowers.
       
    • With respect to large awards—under the proposed amendment, awards linked to tips that result in monetary sanctions of at least $100 million—the proposed rules would authorize the SEC in its discretion 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.”  The floor for such large awards would be no less than $30 million.  The SEC noted that 40% of the total bounties paid under the whistleblower program have been paid out in only three awards.  (In March, the SEC announced its largest-ever whistleblower awards, with two persons jointly sharing a nearly $50 million award and a third person receiving more than $33 million.  The tipsters helped the SEC reach a $415 million settlement with Bank of America.)
       
  • Modify Rule 21F-2 to respond to Digital Realty Trust, Inc. v. Somers.  In Digital Realty, the Supreme Court held that Dodd-Frank anti-retaliation provision only protects a whistleblower who reports a possible securities law violation to the SEC.  The proposed rule would modify SEC Rule 21F-2 so that it comports with that holding, and uses the same definition of “whistleblower” for all aspects of Section 21F – i.e., the award program, the heightened confidentiality requirements, and the anti-retaliation provision.  Moreover, in Digital Realty, the Supreme Court specifically noted that the Commission had the authority under Dodd-Frank to specify in what “manner” a whistleblower could report information to the Commission to qualify for that statute’s anti-retaliation provisions.  Pursuant to that authority, the SEC is proposing that an individual provide information to the Commission “in writing” to qualify for Dodd-Frank’s anti-retaliation provisions.  In making that proposal, the Commission specifically noted that “additional manners of reporting . . . such as placing a telephone call” might “ensnare” the Commission staff in disputes over what information “was provided to whom on what dates” and “[r]equiring that any reporting be done in writing obviates these difficulties.” 
     
  • Clarify the definition of “related action” to eliminate potential double recovery.  The proposed amendment would clarify that a law enforcement or separate regulatory action would not qualify as a “related action” if the SEC determines that the whistleblower should be more appropriately awarded under a different whistleblower program.
     
  • Change the manner in which certain award applications are processed.  The proposed amendments would allow the SEC to bar individuals from submitting whistleblower award applications where they are found to have submitted false information, as well as the ability to bar individuals who repeatedly make frivolous award claims.  They would also create a new rule allowing the SEC to adopt a summary disposition procedure for certain types of likely denials, such as untimely award applications, applications that involve a tip that was not provided to the SEC in the form and manner that the rules require, and applications where the claimant’s information was never provided to or used by staff responsible for the investigation. 
In addition to proposing specific rules, the Commission asked for public comment regarding whether it could establish a potential discretionary award for enforcement actions that do not qualify for the award program, whether because they do not meet the more than $1 million threshold requirement, are based on publicly available information, or where the monetary sanctions collected are de minimis.

The SEC also published proposed interpretive guidance concerning the term “independent analysis.”  Under SEC Rule 21F, in order for a whistleblower submission to be considered “original information,” it must be derived from the tipper’s “independent knowledge or independent analysis.”  The proposed guidance states that in order 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 SEC’s two Democratic commissioners, Robert Jackson and Kara Stein, voted against the proposal.  In doing so, both Commissioners expressed concern that the proposal to give the SEC the discretion to downsize large whistleblower awards may weaken the whistleblower program by decreasing the incentives for whistleblowers to come forward.

The SEC’s press release addressing these proposed changes and guidance is available at https://www.sec.gov/news/press-release/2018-120.   The public comment period is open for 60 days following the publication of the proposing release in the Federal Register.

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