On June 28, the Securities Exchange Commission (“SEC” or “Commission”) voted to propose amendments to its whistleblower program. As SEC Chair Jay Clayton explained, the proposed changes would “strengthen the whistleblower program by bolstering the Commission’s ability to more appropriately and expeditiously reward those who provide critical information that leads to successful enforcement actions.” The SEC issued a press release outlining the proposed rules, which would: (1) provide the Commission with additional tools in making whistleblower awards; (2) clarify the requirements for anti-retaliation protection under the whistleblower statute; (3) provide interpretive guidance to help clarify the meaning of “independent analysis”; (4) increase efficiencies in the whistleblower claims review process; and (5) clarify various miscellaneous policies and procedures.
Additional Tools in Award Determinations
Currently, the Commission’s whistleblower rules do not address whether the Commission may pay a “related action” award when an eligible whistleblower voluntarily provides original information that leads to a deferred prosecution agreement or non-prosecution agreement entered into by the DOJ or a state attorney general in a criminal proceeding. The revised rules would allow the Commission to make awards based on these types of agreements, as well as in cases where the Commission enters into settlement agreement outside of a judicial or administrative proceeding to address securities laws violations.
Likewise, the proposals would authorize the Commission to adjust the award percentage (subject to the 30% statutory maximum) to an amount of up to $2 million under certain circumstances because “[h]istorically, over 60% of the awards given out in our whistleblower program have been less than $2 million.” In exercising its discretion to increase an award, the Commission would consider whether the increase helps to better achieve the program’s objectives of rewarding meritorious whistleblowers and sufficiently incentivizing future whistleblowers who might otherwise be concerned about the low dollar amount of a potential award. The proposed rules also include a general inquiry for public comment regarding whether the Commission should establish a potential discretionary award mechanism for Commission enforcement actions that do not qualify as covered actions 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.
Further, the SEC’s proposed rules tackle exceedingly large awards. As it explained in its press release, “Forty percent of the aggregate funds paid by the Commission to whistleblowers have been paid out in only three awards.” The proposed rules would authorize the Commission to adjust the award percentage downwards (subject to the 10% statutory minimum) when total collected monetary sanctions are at least $100 million. However, in no event would the award be adjusted below $30 million. Similarly, the proposed rules would eliminate the potential for double recovery under the current definition of “related action.”
Uniform Definition of “Whistleblower”
In the wake of Digital Realty Trust, Inc. v. Somers, the SEC has acquiesced to the Supreme Court’s ruling that internal complaints are not covered under Dodd-Frank. As part of the proposed rule amendments, the SEC would establish a uniform definition of “whistleblower” that would apply to all aspects of Section 21F: the award program, the heightened confidentiality requirements, and the employment anti-retaliation protections. Further, for purposes of retaliation protection, an individual would be required to report information to the Commission in writing.
Interpretive Guidance on “Independent Analysis”
The Commission is also publishing proposed interpretive guidance to clarify the meaning of “independent analysis.” Under the proposed guidance, a whistleblower’s submission must provide evaluation, assessment, or insight beyond what would be reasonably apparent to the Commission from publicly available information.
Increased Efficiency in Claims Review Process
The SEC has also proposed two amendments to increase the Commission’s efficiency in processing whistleblower award applications. One amendment would clarify the Commission’s ability to bar individuals from submitting whistleblower award applications where the individuals have submitted false information to the Commission or repeatedly made frivolous award claims. Another amendment would allow the Commission summary disposition authority to dispose of certain types of likely denials, such as untimely award applications and applications that involve a tip that was not provided to the Commission in the form and manner that the rules require. Under the current rules, claimants are able to contest a preliminary denial of their claim before the Commission makes a final determination.
Clarification and Enhancement of Various Policies and Procedures
Finally, the proposed amendments would clarify and enhance a bevy of policies, practices, and procedures, such as:
- Clarifying the definition of “monetary sanctions” so that it codifies the Commission’s current understanding and application of that term.
- Providing the Commission with additional flexibility to modify the manner in which individuals may submit Form TCR.
- Providing the Commission with additional flexibility regarding the forms used in connection with the whistleblower program.
- Clarifying the list of materials that the Commission may rely upon in making an award determination.
- Clarifying the materials that may comprise the administrative record for purposes of judicial review.
The public comment period for the proposed rules will be open for 60 days following publication in the Federal Register. Interestingly enough, practitioners will remember that the CFTC amended its rules in 2017 to align more closely with the SEC’s. If the SEC’s new proposals proceed, the CFTC may update its regulation as well.