SEC Whistleblower Rules & Changes

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• In a victory for whistleblowers, this proposal was withdrawn in its entirety.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.