SEC Whistleblower Rules & Changes
SEC Approves Changes to Whistleblower Program, Rejects Major Anti-Whistleblower Provisions
The U.S. Securities and Exchange Commission (“SEC”) met at 10 a.m. on September 23, 2020, to vote on proposed changes to the SEC’s highly successful Dodd-Frank Act whistleblower reward program. The SEC approved rule changes to its highly successful whistleblower program in a 3-2 vote. After the changes were first proposed in 2018, whistleblower advocates were vocal in opposing a number of the changes which they warned threatened the efficacy of the program. In response, the SEC removed two of these controversial rule changes from its final proposal.
Read the Analysis of the 2020 Whistleblower Rule Amendments
Based on the public comments made by the Commissioners at today’s meeting, Stephen M. Kohn, a leading whistleblower attorney at Kohn, Kohn & Colapinto and the Chairman of the Board of Directors of the National Whistleblower Center, issued the following statement:
“Whistleblowers scored a major victory today when the SEC backed down from two proposals that would have devastated its whistleblower reward program. The Commission did not approve proposals that would have triggered an automatic reduction in the amount of rewards issued in large enforcement actions. However, the dissents of Commissioners Lee and Crenshaw demonstrate that significant issues remain that could impact the program.”
Read “The SEC Whistleblower Rule Changes Explained,” Stephen Kohn’s National Law Review article detailing the September 23, 2020 amendment.
The importance of the rules changes was explained in a recent column written by whistleblower attorney Stephen M. Kohn in The Hill and Law360. Kohn, Kohn and Colapinto and the National Whistleblower Center filed twelve detailed comments on the proposed rules (See below). They also met with four of the five Commissioners (including the Chairman) and the responsible staff members from the Office of General Counsel and the Whistleblower Office.
The importance of the vote was highlighted by the tremendous success of the current program. Since the Dodd Frank Act whistleblower law was enacted, the program has recovered $2.5 billion in fines, returned $750 million to harmed investors, and paid whistleblowers over $500 million. All paid directly from fines and penalties collected in enforcement actions triggered by whistleblowers.
What Was At Stake?
On June 29, 2018 the SEC published proposed changes to the rules governing its whistleblower program. These rules, if implemented, would undermine the SEC’s program, and strip numerous whistleblowers of protection and eligibility for rewards. The major features in the 2018 proposal were:
- Limiting awards to whistleblowers in large fraud cases. The Dodd-Frank Act mandated that rewards be paid at a minimum amount of 10% and a maximum amount of 30%. The proposed rule set an arbitrary cap in large cases, directing the Commission to pay awards at the lowest level (10% ) when fines and penalties against fraudsters were large. The problems with this cap were explained in formal comments filed on October 21, 2019, December 10, 2019, January 16, 2020, and by Senator Charles Grassley, who also strongly opposed this change.
- In a victory for whistleblowers, this proposal was withdrawn in its entirety.
- Barriers to qualifying for rewards. The proposed rules created a barrier in order for whistleblowers to qualify for rewards. The proposed rule would require whistleblowers to use a specific form when “first” informing the Commission of a violation. No form, no reward. In other words, if a whistleblower sent a letter to the Chairman of the Commission disclosing a fraud, and later filed the official whistleblower disclosure form, that whistleblower would be automatically excluded from obtaining a reward. This change would disqualify a vast amount of whistleblowers from the reward program. The problems with this change is highlighted in comments filed on May 6, 2019, October 8, 2019, October 16, 2019, October 21, 2019, November 22, 2019, December 10, 2019, and December 23, 2019.
- In a victory for whistleblowers, the Commission modified this proposal to permit late files, TCRs, and reward applications in most circumstances when a whistleblower would be otherwise qualified to obtain an award.
- Ending protections for internal whistleblowers. Under the current rule, the SEC can sanction a company if it retaliates against internal whistleblowers who report securities violations to corporate compliance programs, auditors, or in-house lawyers. The proposed rule eliminates this authority and would permit companies to retaliate against internal whistleblowers without facing any sanction. This is detailed in the comments filed on July 24, 2018, October 21, 2019, December 10, 2019, and January 8, 2020.
- In the September 23, 2020 rule making, all protections for internal whistleblowers under the Dodd Frank Act (DFA) were cut. Whistleblowers must go directly to the SEC to obtain protection under the DFA.
- Restricting “related action” cases. Under the current rules, if a whistleblower’s information results in a sanction issued by another federal law enforcement agency (such as the Justice Department) based on the whistleblower’s original information that triggered the sanction. The proposed rule would severely limit this authority. This is detailed in the comments filed on July 24, 2018, December 10, 2019, and September 10, 2020.
- This was the largest defeat for whistleblowers in the newly approved rules. The Commission approved procedures that could result in the denial of related action rewards.
- Limiting Role of Analysts. The current rule implements the Dodd-Frank Act requirements that “analysts” can qualify as whistleblowers. Although the SEC is not proposing to change this rule, they are recommending “guidance” to the staff that would severely limit who can qualify as an analyst. Read the letter submitted by several Senators opposing this change.
- The guidance approved for evaluating whistleblowers who are “analysts” was another setback for the whistleblower community. Although the guidance approved restricts who can qualify as an analyst, the actual rule was never changed. Consequently, analysts should be able to successfully appeal those denials in court.
Open Meeting of the Securities and Exchange Commission – September 23, 2020
September 28, 2020
First 100 SEC Whistleblower Awards