On September 23, 2020, the U.S. Securities and Exchange Commission (SEC) voted 3-2 to adopt amendments to its whistleblower award program. The Commission touted the amendments as providing enhanced clarity to whistleblowers, improving the program’s efficiency and transparency, and likely increasing the award dollar amount in a significant percentage of whistleblower actions. With improvements to the program making participation increasingly attractive to potential whistleblowers, firms should ensure that their compliance programs keep pace to foster a culture of internal reporting in an environment where retaliation against whistleblowers is clearly not tolerated.
The Commission’s whistleblower award program, established by the Dodd-Frank, has proved an enforcement juggernaut for the Commission, leading to more than $2.5 billion in financial remedies, with over $500 million awarded to 97 whistleblowers. The program has continued to grow under Chairman Jay Clayton, who has overseen the five largest awards in the program’s history. The recent amendments to the program are expected to further bolster the Commission’s ability to process claims promptly and make awards to qualifying tipsters. We summarize key changes to the program below.
Adjustments to Whistleblower Awards
Significantly, the adopting release dropped the controversial proposed amendment that would allow the Commission to apply a haircut to awards over $100 million. The adopting release reiterates the Commission’s view that it exercises discretion in applying the award factors and setting the award amount, including the ability to apply the award factors in percentage terms, dollar terms, or some combination thereof. The two dissenting Commissioners objected to this discussion when they voted against the amendments, although they did not argue that the current Commission has abused this discretion.
Noting that approximately three-fourths of the whistleblower awards have been for less than $5 million, the amendments streamline the determination process for those awards by presuming the statutory maximum will be awarded where no negative award criteria are present. Awards over $5 million will still be subject to SEC analysis, with amounts determined based on the application of the factors enumerated in Rule 21F-6.
Uniform Definition of “Whistleblower” in the Wake of Digital Realty Trust, Inc. v. Somers
The U.S. Supreme Court found in Somers v. Digital Realty Trust, Inc. (2018) that whistleblower protections extend only to individuals who report alleged violations of securities laws to the SEC. The adopting release reflects the holding that individuals who report such allegations only internally are not whistleblowers based on the plain meaning of Dodd-Frank’s statutory text and therefore do not qualify for the statute’s whistleblower protections. Notably, the Commission added a requirement that a whistleblower must submit a claim in writing to the SEC to receive statutory protections, which is likely to further drive whistleblowers directly to the SEC. Despite suggestions from some commenters, the final rules include a reaffirmation that cooperation with internal compliance remains a “plus” factor for increasing award size, even in light of Digital Realty.
The Commission is also issuing interpretive guidance defining the scope of retaliatory conduct prohibited by Section 21F. Employers should still be mindful that other antiretaliation statutes, including Sarbanes-Oxley, may protect those who make internal reports.
Whistleblower Award Eligibility
Related Actions: The amendments also clarify the Commission’s approach in related actions. To qualify for an award, the regulator must receive information from the whistleblower rather than from another agency. In effect, the amendments will encourage whistleblowers to provide information directly to multiple agencies, including the Department of Justice.
NPAs and DPAs: The adopting release allows deferred prosecution agreements (DPAs) or nonprosecution agreements (NPAs) entered into by the Department of Justice in a criminal proceeding to trigger eligibility for a whistleblower award. This is significant because neither is a typical “proceeding,” and NPAs are not even filed with a court. This likely will have the biggest impact in Foreign Corrupt Practices Act actions, where such resolutions are common. This, combined with the new requirement that whistleblowers or the SEC must specifically communicate the relevant information to the Department of Justice, may push more whistleblowers to report their concerns to the Department of Justice.
"Independent Analysis” Used in Award Applications: Exchange Act Rule 21F-4 requires the whistleblower to provide “independent analysis” to qualify for an award under the program. The Commission is issuing interpretive guidance explaining that a whistleblower must provide evaluation, assessment, or insight beyond what would be reasonably apparent to the Commission from publicly available information. Earlier this month the Commission awarded $2.5 million to outside securities analysts in just such a case.
In addition to the substantive amendments noted above, a number of the adopted rules are aimed at procedural components of the rule, including increased flexibility for submitting whistleblower tips, clarifications to the list of materials on which the Commission may rely in making award determinations, and clarifications to the materials that may make up the administrative record for judicial review.
The two dissenting Commissioners, Lee and Crenshaw, expressed concern that the amendments would create uncertainty for potential whistleblowers that could chill reporting. Of particular concern were the Commission’s discretion to change the award size (and whether this potentially exceeded the Commission’s statutory authority) and the guidance regarding what constitutes the “independent analysis” a whistleblower must provide.
Today’s narrow 3-2 margin reflects the challenges SEC Chairman Clayton faced in building consensus around the proposed amendments. The split vote came after an unusually long review period and two prior planned votes, both cancelled shortly before they were scheduled to occur. The statements of the dissenting Commissioners similarly suggested that there were protracted efforts to achieve unanimous approval, which were ultimately unsuccessful. They also made clear, however, that they supported many of the new rules’ improvements to the program.
The SEC’s whistleblower award program continues to be an enormous success for the SEC, as all five Commissioners emphasized when voting on the new amendments. As the SEC looks for additional ways to improve its operation, it is important that firms continually review and improve their compliance programs and consider their compliance cultures to ensure that potential whistleblowers are comfortable and encouraged to make complaints internally without fear of retaliation.
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