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Security Exchange Commission (SEC) Rulemaking

Since the founding of the firm in 1984, the partners at Kohn, Kohn & Colapinto have worked tirelessly to write and amend rules to ensure SEC whistleblowers are protected and awarded.

The SEC whistleblower attorneys of Kohn, Kohn & Colapinto have been closely involved in the rulemaking process for the SEC Whistleblower Program since the program’s inception. KKC attorneys have filed numerous detailed comments with the agency and have met individually with SEC Chairs, Commissioners, and Enforcement staff.

At each step in the SEC’s rulemaking process, KKC attorneys have used their unmatched expertise and experience in whistleblower law to advocate for rules which protect and incentive whistleblowers and ensure that the SEC has a highly effective whistleblower program.

Initial SEC Whistleblower Program Rulemaking

After the passage of the Dodd-Frank Act in 2010, the SEC launched a formal rulemaking process for its whistleblower program. During the Dodd-Frank rulemaking process, Kohn, Kohn and Colapinto’s partners worked closely with the SEC to create an effective whistleblower program.

Our team met personally with each of the five SEC Commissioners and presented them with detailed reports and proposals setting forth rules that were essential to make the law work for whistleblowers as intended by Congress. KKC attorneys offered counter-arguments to comments made by corporate lobbyists and offered provision-by-provision analysis of the agency’s proposed rules.

The SEC adopted the key recommendations for enhancing its Whistleblower Program advocated by KKC partners, which included the following:

  • Establishing the right of corporate compliance officials and directors to obtain rewards;
  • Ensuring that employees who “participated” in fraud but did not “plan and initiate” the fraud, could receive rewards.

During this period, KKC attorneys were the principal authors of eight key comments to the SEC.

The final rules were approved and enacted on May 25, 2011 in a 3-2 vote.

Letter to SEC opposing corporate lobby position.

KKC filed a letter urging the SEC to deny rulemaking requests made by corporate lobbyists. KKC opposed the corproate lobby on a number issues and explicated why the corporate lobby’s requests would run counter to the purpose of the whistleblower program. KKC argued against the corporate lobby’s requests for rules requiring whistleblower to report internally before contacting the SEC, rules meant to punish whistleblowers for filing frivilous complaints, and rules restricing attorney fees.

Letter to SEC Chairman Schapiro explaining that proposed rules violate congressional intent.

KKC sent a letter to SEC Chairman Schapiro strongly opposing the agency’s proposed rules for the whistleblower program. The letter explains that the proposed rules violate Congressinoal intent and “signal to Wall Street that the SEC is more sympathetic to companies that violate the law than to employees who risk their careers, reputations and jobs to report wrongdoing.”

Formal rulemaking letter with report to the SEC on the Impact of Qui Tam Laws on Internal Compliance.

KKC filed a formal rulemaking letter to the SEC with dozens of detailed recommendations for whistleblower program rules. The letter takes issue with many aspects of the agency’s proposed rules due to the fact they are inconsistent with Congressional intent or otherwise potentially unlawful. The letter also included a copy of the National Whistleblower Center’s extensive report to the SEC “Impact of Qui Tam Laws on Internal Compliance.

Letter to Chairman Schapiro applying Chevron to proposed rules, and a marked-up version of proposed rules.

KKC sent a letter to SEC Chairman Schapiro applying the framework of Chevron v. National Resources Defense Council to assess whether the SEC’s proposed rules comply with Congressional intent. The letter outlines a number of ways in which the rules create exemptions to whistleblower awards which go beyond the exemptions laid out by Congress in the Dodd-Frank Act. The letter also included a marked-up of the proposed rules.

Letter to Commissioners explaining the proposed rules’ impact on the ability of US to enforce the Foreign Corrupt Practices Act.

KKC sent a letter to the Commissioners of the SEC explaining the detrimental impact a proposed rule would have on the ability of the U.S. to enforce the Foreign Corrupt Practices Act. According to the letter, a proposed rule excluding employees working for foreign governments from filing whistleblower complaints undermines the U.S.’s ability to receive key information on bribery payments.

Letter to Chairman Schapiro responding to Chamber of Commerce’s attacks on the NWC’s December 17, 2010 report.

KKC sent a letter to SEC Chairman responding to a letter sent by the Chamber of Commerce attacking the National Whistleblower Center’s December 2010 report “Impact of Qui Tam Laws on Internal Compliance.” KKC defended the report, noting that many of the Chamber of Commerce made many incorrect allegations and misinterpretations. In the letter, KKC emphasizes that the key to ensuring the effectiveness of corporate internal compliance programs is not to place restrictions on the benefits afforded whistleblowers.

Letter to SEC with provision-by-provision analysis of proposed rules with suggested revisions and justifications for revisions

KKC sent a letter to the SEC featuring detailed provision-by-provision analysis of the agency’s proposed rules. KKC suggested revisions to provisions and provided justification for each revision.

Letter to SEC Chairman Schapiro and CFTC Chairman Gensler regarding the impact of the first reported decision under the Dodd-Frank Act on the rulemaking process.

KKC sent a letter to SEC Chairman Schapiro and CFTC Chairman Gensler regarding the impact of the first reported court decision under the Dodd-Frank Act whistleblower protection provisions. Egan v. Tradingscreen raised the legal question of whether whistleblowers who report securities violations internally are afforded the anti-retaliation protections of the Dodd-Frank Act. In the letter, KKC argued that the CFTC and the SEC should follow the precedent set by the NRC and issue formal rules that establish the Commissions’ respective position that employees who contact internal compliance programs should be afforded equal protection to employees who contact governmental agencies.

2020 Amendments to SEC Whistleblower Program Rules

On June 28, 2018 the SEC announced a number of proposed amendments to the rules governing its whistleblower program. Over the next two years while the proposed rules were considered, KKC’s whistleblower attorneys once again led the campaign to protect the SEC Whistleblower Program, filing numerous detailed comments in tandem with the National Whistleblower Center and meeting with 4 of 5 SEC Commissioners (including the Chair) and the responsible staff members from the Office of General Counsel and the Whistleblower Office.

While the proposed rules covered many aspects and some offered minor technical fixes, there were a couple proposed amendments which threatened to undermine the success of the whistleblower program. Notably, the SEC’s proposal included rules instituting a 10% soft cap on large whistleblower awards and a strict TCR filing requirement which would disqualify otherwise qualified whistleblowers from receiving awards.

Comments filed with the SEC by KKC strongly opposed these detrimental provisions. KKC’s attorneys offered detailed analysis arguing for the importance of large whistleblower awards and explaining the ways a strict filing requirement would unjustly harm whistleblowers the program was designed to award.

Overall, the attorneys at KKC filed 12 comments during the rulemaking process and also met with SEC Commissioners and Enforcement staff.

On September 23, 2020, the SEC voted 3-2 to approve the rule changes. However, thanks in part to the advocacy of KKC’s attorneys, many of the anti-whistleblower provisions, including the 10% cap on large awards, were not included in the final rules. Furthermore, due to KKC attorneys’ focus on the TCR filing requirement, the final rule featured a less strict requirement which better serves whistleblowers.

Dodd-Frank Act Whistleblower Letter.

In response to the SEC’s proposed rule changes, KKC sent a letter to SEC Chairman Jay Clayton commenting on key features of the proposed rules. Most notably, KKC strongly argued against a proposal to cap large whistleblower awards at 10%. In light of the recent Supreme Court ruling in Digital Realty vs Somers, KKC also called for the removal of all provisions of the rules that promote internal reporting at the expense of directly reporting concerns to the Commission. KKC also called for the SEC to clearly define what constitutes a corporate compliance program, argued against a proposed related action rule, and advocated for rules prohibiting long delays in processing award claims.

The letter filed by Senator Grassley’s SEC referencing KKC’s concerns over Long Delays in reward decisions.

Senator Charles Grassley filed an official letter commenting on the SEC’s proposed rules which cites the letter sent in July by KKC. Like KKC, Grassley argues against a 10% cap on large awards notes that “the counsel of whistleblower advocates familiar with these cases is instructive.”

The letter filed by Stephen Kohn on behalf of National Whistleblower Center.

KKC’s Stephen Kohn filed this letter on behalf of the National Whistleblower Center arguing against the SEC’s proposed 10% cap on large whistleblower awards. Kohn pointed to empirical evidence showing that large awards incentivize whistleblowers and encourage robust compliance programs.

Dodd-Frank Act whistleblower letter filed.

KKC sent a letter to Chairman Clayton strongly opposing a proposed rule requiring that the whistleblowers must formally file a TCR with the SEC prior to any other contact with the agency in order to qualify for an award. KKC explained that such a strict rule would gravely undermine the success of the whistleblower program. KKC argued that the proposed requirement “is inconsistent with the goals of the Securities Exchange Act, the Congressional intent and statutory mandates of the Dodd-Frank Act, and will discourage they very behaviors which are at the core of the whistleblower program.”

Dodd-Frank Act whistleblower letter filed.

KKC filed a supplemental comment further arguing against the SEC’s proposed rule instituting a strict TCR filing requirement. According to KKC, the proposed rule “resurrects, for the first time in U.S. law, the key holding of a completely discredited line of cases which undermined the False Claims Act after that law was amended in 1943.” KKC outlines the history of this line of cases and how modern whistleblower laws have been carefully constructed to not include such strict filing requirements.

Third Supplemental Comment: Proposed Rule 21F-9(e)

KKC filed a third supplemental comment arguing against the SEC’s proposed ruled instituting a strict TCR filing requirement. In the letter, KKC extensively cites an IRS Tax Court ruling provides a clear analysis as to why the proposed rule is counter to the statutory language and legislative intent of the Dodd-Frank Act. The letter also includes suggested language to add to the proposed rule and counteract the problems of the proposal.

Fourth Supplemental Comment: Proposed Rule 21F-9(e)

KKC filed a fourth supplemental comment arguing against the SEC’s proposed ruled instituting a strict TCR filing requirement. In the letter, KKC explains that the SEC currently invites potential whistleblowers to alert the Commission about various violations by numerous methods, many of which are not associated with filing a TCR application. It would be unrealistic, counter-productive and counter to the mission of the SEC, KKC explains in the letter, to try to eliminate all of the alternative methods for “first filing” original information with the Commission regarding potential securities frauds.

Fifth Supplemental Comment: Proposed Rules 21F-6(d) and 21F-9(e)

KKC filed a fifth supplemental comment arguing against the SEC’s proposed ruled instituting a strict TCR filing requirement. In the letter, KKC argues for a “good cause” exception to the proposed rule. KKC argues that approving a reasonable “good cause” exception is consistent with prior decisions of the Commission, and consistent with the practices under the IRS whistleblower law and the False Claims Act.

Sixth Supplemental Comment Proposed Rule 21F-9(e)

KKC filed a sixth supplemental comment arguing against the SEC’s proposed ruled instituting a strict TCR filing requirement. In the letter, KKC points to a recent CFTC whistleblower case in the CFTC fully rewarded a whistleblower who filed a TCR after the Commission concluded the enforcement action. KKC argues that “given the similarities between the CFTC and SEC laws and regulations, and the need to harmonize the filing requirements under these two programs, this precedent is extremely significant and should be followed by the Commission.”

Seventh Supplemental Comment: Proposed Rules Overview

KKC filed a letter with the SEC providing language changes to “help guide the staff in finalizing the proposed rules in a manner consistent with the intent of the Commission to enhance the current program and ensure that whistleblowers are properly incentivized and protected under the law.” KKC provided language changes for the TCR filing requirement rule, the rule capping large whistleblower awards, and the rules meant to expedite the award determination process.

Eighth Supplemental Comment: Proposed Rules

KKC filed another supplemental comment arguing against the SEC’s proposed ruled instituting a strict TCR filing requirement. KKC highlighted another recent CFTC award determination which makes clear that TCRs serve to perfect one’s whistleblower status and the timing of such a filing is not relevant to a whistleblower’s award eligibility when the record shows a whistleblower has been of significant assistance to the Commission.”

Ninth Supplemental Comment: Proposed Rules

KKC filed a comment requesting that, despite the Supreme Court ruling in Digital Realty vs. Trust, the SEC ensures that its rules continue to offer protections to internal whistleblowers under the authority granted to them by the Sarbanes-Oxley Act.

2022 Amendments to SEC Whistleblower Program Rules

On February 10, 2022, the SEC announced two proposed amendments to the rules governing its highly successful whistleblower program. Both proposed amendments address issues raised by rule changes passed in 2020 and aim to ensure that qualified whistleblowers are properly rewarded.

The attorneys of KKC support the SEC’s proposed amendments and are working to voice support and offer guidance on the best ways to properly implement the changes.

In particular, The attorneys of KKC have already filed comments supporting the proposed change to the rules on the payment of related action awards. A 2020 rule change allows the SEC to deny a related action award if the related action could be covered by another whistleblower reward law. As explained in one of KKC’s filings to the SEC, this runs counter to the statutory language of the Dodd-Frank Act and creates unjust hardship for whistleblowers.

The attorney’s of KKC look forward to continually to work closely alongside the SEC to ensure the SEC Whistleblower Program remains the gold-standard of whistleblower award programs.

KKC sent a letter to the SEC voicing their support for the SEC’s proposed amendment to the agency’s related action rules. In the letter, KKC details why the current related action rule needs to be amended, explaining that as is the rule violates the law and disincentivizes whistleblowers. In addition, KKC endorsed one of two options set forth by the SEC for the rule change and offered some suggested changes to the amendment.

KKC sent a letter to the SEC reaffirming their support for the agency’s proposed rule changes. The letter cites to academic literature and public comments by government officials to show that the proposed rules “will significantly enhance the public interest, protect investors, and promote efficiency, competition, and capital formation within the securities markets.” KKC also offered detailed answers to a number of questions posed by the SEC relating to the proposed rule changes.