In February, the U.S. Securities and Exchange Commission (SEC) announced proposed rule changes to its highly successful whistleblower program. One proposed rule addresses the payment of related action awards. On March 22, the whistleblower attorneys of Kohn, Kohn & Colapinto (KKC) sent a letter to the SEC voicing strong support for the proposed rule change and calling for a swift approval of the proposal.
According to the whistleblower attorneys’ letter, “[t]he SEC’s current related action rule violates the law, undermines statutory intent of the DFA, and disincentivizes whistleblowers – ultimately it harms investors and the willingness of whistleblowers to work with other federal agencies when filing Dodd-Frank claims. The proposed rule corrects these problems and should be quickly approved, as written.”
Through the SEC Whistleblower Program, qualified whistleblowers, individuals who voluntarily provide original information that leads to a successful enforcement action, are entitled to a monetary award of 10-30% of funds recouped by the government. Under the Dodd-Frank Act’s (DFA) related action provision, when the information provided to the SEC by a whistleblower also leads to a successful enforcement action by another agency, the whistleblower is entitled to an award based on the money recovered in this “related” enforcement action. The related action provision was designed to expand the scope of the DFA by incentivizing whistleblowers to cooperate with a number of different federal law enforcement agencies.
On September 23, 2020 the SEC Commissioners approved a number of rule changes to the whistleblower program in a 3-2 vote. One of the rule changes added restrictions to the related action provision of the DFA. Under the new rule, if another agency’s whistleblower program is determined to have a more “direct or relevant connection” to the related action, then the SEC will not pay a related action award.
On February 10, 2022, the SEC proposed a rule change reversing the 2020 related action rule and allowing the SEC to pay related action awards for enforcement actions taken by other entities even when those agencies have their own whistleblower reward programs with more direct connection to the action. According to SEC Chair Gary Gensler, this rule change “is designed to ensure that a whistleblower is not disadvantaged by another whistleblower program that would not give them as high an award as the SEC would offer.”
In their letter to the SEC, the whistleblower attorneys of KKC explain that the current related action rule, adopted in 2020, violates the plain statutory language of the Dodd-Frank Act. According the attorneys, “the related action requirements under the DFA are clearly set forth in the statute” and “[i]n light of the U.S. Supreme Court’s decision in Digital Realty v. Somers, 583 U.S. ___ (2018), the Commission is bound by the statutory definition and cannot approve any rule that is inconsistent with that definition.”
In the letter, the attorneys of KKC explain that the DFA clearly states that the SEC “shall pay an award” in “any… related action.” According to the letter, “in reviewing any proposal impacting the related action requirements the Commission must start with a strict reading of these statutory requirements, ensuring that nothing approved conflicts with the right of otherwise qualified whistleblowers to obtain a reward of 10-30% of each and every ‘related action’ case. Furthermore, the Commission cannot reduce the scope of proceedings covered under the ‘related action’ definition by rule.”
The whistleblower attorneys of KKC argue that the current rule violates the law and runs counter to the language of the DFA by altering the definition of “related action” and by granting the SEC the discretion to determine which whistleblower programs have more direct connection to a case. According to the attorneys, the new proposed rule fixes these issues and conforms the SEC’s rules to the Dodd-Frank Act.
Furthermore, the whistleblower attorneys support the proposed rule because, according to the letter, the current rule “has a chilling effect on whistleblowers and creates hardship by penalizing whistleblowers Congress wanted to award.” In the letter, the attorneys explain that many other whistleblower programs are deficient and would result in whistleblowers receiving far lower awards than they are entitled to under the related action provision of the DFA.
The KKC attorneys conclude the letter by reaffirming their support for the proposed rule change and offering to more fully explain their stances.