Securities Law Blog

SEC Issues 100th Whistleblower Award Just Days after Adopting Amendments to Whistleblower Program

The New Rules are Designed to Add Clarity, Efficiency and Transparency to the SEC’s Already Successful Whistleblower Award Program

100th Whistleblower Award

On September 28, 2020, the Securities and Exchange Commission announced that it awarded $1.8 million to an unnamed “company outsider,” representing the 100th whistleblower award granted to an individual in the history of the SEC’s whistleblower program. The whistleblower received the award for reporting significant information to the SEC about ongoing securities law violations that resulted in a successful enforcement action. With additional awards reported by the SEC on September 30 2020, the SEC whistleblower program made a total of 39 awards during its fiscal year. Despite the challenges presented by the COVID-19 pandemic, the SEC processed more claims than in any previous year.

With this latest award, the SEC’s whistleblower program has now paid more than $562 million to 106 whistleblowers under the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010. All payments are made out of an investor protection fund established by Congress that is financed through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards.

Congress established the whistleblower program to incentivize whistleblowers with specific, timely and credible information about federal securities law violations to report such improprieties to the SEC. The whistleblower program has proven to be successful in generating high-quality information regarding securities laws violations that have enabled the SEC to terminate fraud schemes and protect investors. Since the program’s inception, enforcement actions resulting from whistleblower tips have resulted in orders for more than $2.5 billion in financial remedies, much of which has been, or is scheduled to be, returned to harmed investors.

New Whistleblower Program Rules

On September 23, 2020, the SEC issued a press release announcing that it voted to adopt amendments to the rules governing its whistleblower program, which were first proposed in June 2018, that are designed to provide greater clarity to whistleblowers and increase the program’s transparency and efficiency. The goal of the amendments is to ensure that whistleblowers are properly incentivized, and to continue to properly award whistleblowers to the maximum extent appropriate and with maximum efficiency or, as SEC Chairman Jay Clayton said, “[the] rule amendments will help us get more money into the hands of whistleblowers, and at a faster pace”. In addition, the SEC’s Office of the Whistleblower published guidance regarding the process for determining award amounts for eligible whistleblowers.

Congress mandated the SEC’s whistleblower program in July 2010 by adding Section 21F to the Exchange Act, which, among other things, directs the SEC to pay awards to whistleblowers who voluntarily provide the SEC with original information about a violation of the securities laws that leads to the successful enforcement of a covered judicial or administrative action. Awards range from 10 percent to 30 percent of the monetary sanctions collected in excess of $1 million. Rule 21F-6 sets forth the criteria for determining the amount of the award. Positive award criteria justifying a higher award include the significance of the information provided, the assistance provided by the whistleblower, the law-enforcement interest in deterring the underlying violations, and the participation of the whistleblower in the culpable entity’s internal compliance and reporting system. Negative factors that could lower an award include culpability of the whistleblower, unreasonable delay in reporting the securities law violations, and interfering with the entity’s internal compliance and reporting systems.

Pursuant to the amendments, whistleblowers with potential awards of less than $5 million, which historically have represented nearly 75% of all whistleblower awards, subject to certain criteria, will qualify for a presumption that they will receive the maximum statutory award amount where none of the negative factors are present. In addition to providing potential whistleblowers with greater transparency and certainty, this presumption is intended to increase efficiency in the award review process.

Additional amendments include:

• Allowing awards based on deferred prosecution agreements or non-prosecution agreement entered into by the U.S. Department of Justice or a settlement agreement entered into by the SEC outside of a judicial or administrative setting to address violations of securities laws and clarifying that any money required to be paid under such an agreement is a “monetary sanction” for purposes of calculating an award;

• Clarifying the definition of “related action” to make clear that recovery for law-enforcement or separate regulatory actions that do not qualify as “related actions” is not available where the SEC determines that there is a separate award scheme that more appropriately applies to such action;

• Clarifying the SEC’s broad discretion when applying the award factors in Rule 21F-6and setting award amounts, including the discretion to consider the award factors in percentage terms, dollar terms or some combination thereof; and

• Revising the SEC’s definition of “whistleblower” in light of the Supreme Court’s 2018 decision in Digital Realty Trust, Inc. v. Somer to specify that in order to qualify as a whistleblower, a person must provide information to the SEC in writing before experiencing any retaliation;

• Barring applicants who submit materially false, fictitious, or fraudulent statements in their whistleblower submission, in their other dealings with the SEC, or in related actions and providing the SEC with the ability to permanently bar any applicant from seeking an award after the SEC determines that the applicant has abused the process by submitting three frivolous award applications.

In addition to the foregoing amendments, the SEC adopted several other amendments to its whistleblower rules, as well as interpretive guidance, intended to clarify and enhance certain policies, practices, and procedures in implementing the whistleblower program. A proposed soft-cap on larger award amounts was not adopted by the SEC.

The amendments are not without controversy. The SEC’s position that it has discretion to reduce the largest whistleblower awards based upon their size has generated substantial opposition from the plaintiffs’ bar and within the SEC, which approved the amendments by a vote of three to two. First introduced two years ago, the vote on the amendments finally came to fruition after being postponed twice previously while the commissioners attempted to reach agreement. Critics, including the two dissenting Democratic commissioners, contend that the amendments will dissuade potential whistleblowers from reporting violations of the securities laws by potentially reducing awards and requiring written reports of violation to receive SEC protection against retaliation, and result in a lack of predictability for whistleblowers in assessing the viability of their claims and potential awards by requiring information that is “not generally known or available to the public”.

The amendments to the whistleblower rules become effective 30 days after publication in the Federal Register.