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Enforcement News: SEC Amends Whistleblower Program to Incentivize Whistleblowing

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  • Posted on: Sep 6 2022

By: Jeffrey M. Haber

On August 26, 2022, the Securities and Exchange Commission (“SEC” or “Commission”) announced (here) that it adopted two amendments to the rules governing its whistleblower program. The first rule change allows the Commission to pay whistleblowers for their information and assistance in connection with non-SEC actions in certain circumstances. The second rule affirms the Commission’s authority to consider the dollar amount of a potential award for the limited purpose of increasing an award but not to lower an award.

Specifically, the SEC amended Rule 21F-3 to allow the Commission to pay whistleblower awards for certain actions brought by other entities, including designated federal agencies, in cases where those awards might otherwise be paid under the other entity’s whistleblower program. The amendments allow for such awards when the other entity’s program is not comparable to the Commission’s program or if the maximum award that the Commission could pay on the related action would not exceed $5 million.

Further, the amendments affirm the Commission’s authority under Rule 21F-6 to consider the dollar amount of a potential award for the limited purpose of increasing the award amount, and it would eliminate the Commission’s authority to consider the dollar amount of a potential award for the purpose of decreasing an award.

A copy of the final rule can be found here. A copy of the fact sheet summarizing the final rule can be found here.

“In 2010, Congress under the Dodd-Frank Act directed the SEC to establish a whistleblower program, which to date has greatly aided the Commission’s work to protect investors,” said SEC Chair Gary Gensler. “Today’s amendments enact two changes to help enhance the whistleblower program. The first amendment expands the circumstances in which a whistleblower who assisted in a related action can receive an award from the Commission for that related action rather than from the other agency’s whistleblower program. Under the second amendment, when the Commission considers the size of the would-be award as grounds to change the award amount, it can do so only to increase the award, and not to decrease it. I think that these rules will strengthen our whistleblower program. That helps protect investors.”

The SEC’s whistleblower program was established in 2010 to encourage individuals to report high-quality tips to the Commission and help the agency detect wrongdoing and better protect investors and the marketplace. The program has made significant contributions to the effectiveness of the Commission’s enforcement of the federal securities laws. Since the program’s inception, enforcement matters brought using original information from meritorious whistleblowers have resulted in orders for more than $5 billion in total monetary sanctions. The Commission has awarded more than $1.3 billion to meritorious whistleblowers under the program.

The whistleblower rule amendments will become effective 30 days after publication in the Federal Register.

Speaking of the whistleblower program …

On August 9, 2022, the SEC announced (here) the award of more than $16 million to two whistleblowers who provided information and assistance in a successful SEC enforcement action.  

The first whistleblower prompted the opening of the investigation and provided information on difficult-to-detect violations. This whistleblower also identified key witnesses and provided critical information, which helped the staff in their investigation. As a result, the SEC is awarding this whistleblower approximately $13 million. The second whistleblower submitted important new information during the course of the investigation. As a result, the SEC is awarding this whistleblower more than $3 million.

“The information and assistance provided by these two whistleblowers in helping to identify complex wrongdoing demonstrates the importance of the whistleblower program to the SEC’s enforcement efforts,” said Creola Kelly, Chief of the SEC’s Office of the Whistleblower. “These whistleblowers reported critical information that aided the SEC’s investigation and provided extensive, ongoing cooperation that helped stop the wrongdoing and protect the capital markets.”

Under the SEC’s whistleblower program, whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action. Whistleblower awards can range from 10 to 30 percent of the money collected when the monetary sanctions exceed $1 million. 

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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