The New SEC Whistleblower Rules: Improving A Successful Program or Undermining It? (Part I)
This is the first of two posts which will review the new amendments to the SEC’s whistleblower rules. This post reviews the background and the proposed amendments to the rule. The second installments, which will be posted on Friday, will analyze the comment letters and the final rule amendments.
Introduction
The U.S. Securities and Exchange Commission’s (“Commission” or “SEC”) whistleblower program has, by all accounts, been a huge success. Added to the Securities Exchange Act of 1934 (“Exchange Act”) as Section 21F by the Dodd-Frank Act in 2010, and implemented by rules adopted in May 2011, the program has received over 22,000 submissions. Information obtained from those tips has aided the agency in securing over $2.5 billion in financial remedies, portions of which have been returned to investors.
The program has also benefitted 97 individuals who have collectively been awarded about $523 million. See, e.g., SEC Press Release (Sept. 23, 2020)(here). The most recent award, announced on September 28. 2020, was in the amount of $1.8 million (here). Clearly there will be more.
The agency has also taken aggressive steps to protect whistleblowers and the program. A series of enforcement actions against those who would impede a whistleblower have been filed. See, e.g In the Matter of HomeStreet, Inc. Adm. Proc. File No. 3-17802 (Jan. 19, 2017)(settled with cease and desist order based on Exchange Act Sections 21F, 13(b)(2)(A) and 13(b)(2)(B) and a penalty of $500,000 paid by firm); but see Digital Realty v. Sommers, 138 S.Ct. 767 (2018)(cannot be a whistleblower under the statute unless first report to SEC, not internally).
On September 23, 2020, the Commission adopted amendments to the whistleblower program (“Proposing Release”). Many feared the proposals might undermine the program. Those amendments, along with the initial proposals and select comments on the proposals, are analyzed below.
The Proposed Amendments
In 2018 the Commission announced proposed amendments to the whistleblower rules. While the stated purpose was to improve and strengthen the program may viewed the proposals through a skeptical lens. Those proposals are built on four key substantive areas: 1) permitting awards to be based on non-prosecution agreements (“NDAs”) and deferred prosecution agreements (“DPAs”); 2) modifications granting the agency certain discretion tied to the amount of small and very large awards; 3) modifying the “related actions” guidance; and 4) addressed Digital Realty (“Proposed Release” at 9-11”)(here). A number of other proposals clarify certain issues and codify internal agency procedures.
NPAs/DPAs: A key proposal sought to expand the type of actions that the Commission might consider when making awards. Specifically, the Proposed Release detailed provisions that would permit the Commission to make awards based on U.S. Department of Justice (“DOJ”) or state attorney generals matters resolved with either a deferred prosecution agreement (“DPA”) or a non-prosecution agreements (“NPA”) in criminal cases. This proposal also permits certain SEC actions that were outside the context of a judicial or administrative proceeding to be considered.
The existing whistleblower rules under Exchange Act Section 21F did not specifically authorize awards for DPA, NPAs or even the type of SEC matters cited. By amending the definition of the word “action” in Exchange Act Rule 21F-4(d) and the phrase “monetary sanctions” in Rule 21F-4(e) the program was expanded to include these matters.
Award amount: Proposals that related to the amount of awards were perhaps the most controversial and least understood based on an analysis of the comment letters. The proposals focused on the amounts awarded under Rule F-6. For small awards the proposals would give the Commission the discretion to adjust the amount upward to $2 million (changed to $5 million in the final release) but to no more than the statutory maximum of 30%, based on the particular facts and circumstances.
For certain large awards essentially the reverse process was proposed. Specifically, for matters that involved at least $100 million of total collected monetary sanctions – the predicate for awards – the Commission would have the discretion to adjust the amount of the award downward to effect program goals.
Related actions: A third key point focused on Rule 21F-3 regarding related actions. Here a whistleblower who receives an award from the Commission may also be eligible for one based on monetary sanctions collected in a related action. The proposal called for an addition to Rule 21F-3(b) and the repeal of the original provision. Under the new provision a claimant would only be entitled to one award.
Digital Realty: The Proposed Rules also addressed The High Court’s ruling. There the Court held that Exchange Act Section 21F – (a)(6) required an individual report a securities law violation to the Commission to be eligible for employment protection. Proposed Rule 21F-2 “comports with the Court’s holding by, among other things, promulgating a uniform definition of ‘whistleblower’ that would apply to all aspects of Exchange Act Section 21F,” according to the Proposing Release.
Other provisions: The Proposing Release also included a series of other proposals focused on increasing efficiency and correcting technical points. Those include: 1) Rule 21F-4(e)(clarify the term “monetary sanctions”); 2) Rule 21F – 9 (add flexibility to modify how Form TCR which is used to submit an award request is tendered); 3) Rule 21F – 8 (modify forms for program); Rule 21F-8 (clarify materials relied on in making an award); add paragraph (e) to Rule 21F-8 (bar individuals from submitting false applications).
Guidance: Finally, the Proposing Release contained a section which would offer guidance on the overall program. A key point involved the definition of the phrase “independent analysis.” It focused delimiting the use of public information in the context of furnishing factual material to support an award claim.
Friday: Section II