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SEC Seeks to Amend Whistleblower Rules To Further Incentivize Whistleblowers To Report Violations of Law

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  • Posted on: Feb 22 2022

By: Jeffrey M. Haber

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 21F to the Securities Exchange Act of 1934 (“Exchange Act”), establishing the Securities and Exchange Commission’s whistleblower program. Among other things, Section 21 authorizes the SEC to make monetary awards to individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions exceeding $1 million. Awards must be made in an amount equal to 10%-30% of the monetary sanctions collected. Since the program’s inception, the Commission has awarded more than $1.2 billion to 245 individuals whose information assisted the Commission in bringing successful enforcement actions.

Under Section 21F(b) of the Exchange Act and Rule 21F-11 promulgated thereunder, a whistleblower who obtains an award based on a covered action also may be eligible for an award based on monetary sanctions that are collected in an action brought by other statutorily identified authorities, such as the IRS.

The SEC is proposing two amendments to its whistleblower program rules. The first proposed amendment addresses instances when a whistleblower from the SEC’s program receives an award from another, non-SEC, whistleblower program. The second 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.

The first proposed amendment would allow the Commission to make an award for a related action that might otherwise be covered by another whistleblower program even when the other whistleblower program has the more direct or relevant connection to the related action. Under the proposed amendment, the SEC intends to apply the following approaches:

  • Comparability: if a claimant files a related-action award application, and the alternative award program is not comparable to the SEC’s whistleblower program, because the statutory award range is more limited, awards are subject to an award cap, or the other award program is discretionary and not mandatory, the Commission would treat the non-SEC action as “related” for purposes of the Commission’s award program, regardless of whether the alternative award program has a more direct or relevant connection to the action. The Commission also would make an award on a potential related action without regard to which program had the more direct and relevant connection to the action if the maximum award that the Commission could pay on the action would not exceed $5 million.
  • Whistleblower Choice: a whistleblower would be given the option to decide whether to receive a related-action award from the Commission or the authority administering the other award program. The whistleblower would not be required to select which program to receive the award from until both programs had determined the award amount they would pay. 
  • Offset Approach: The Commission would determine the award percentage it would pay on the related action but offset from the Commission’s total award payment by the dollar amount the whistleblower received for the related action from the other award program. 
  • Topping Off Approach: The Commission would have the discretion to increase the award on the SEC covered action (up to 30 percent) if the Commission concludes that the other whistleblower program’s award for the related action was inadequate for any reason.

Under the Comparability or Whistleblower Choice approach, the whistleblower would be required to make an irrevocable waiver of any claim to an award from the other whistleblower award program.

The second proposed amendment would affirm the Commission’s authority to consider the dollar amount of a potential award for the limited purpose of increasing the award amount. 

In 2020, the SEC added language to Rule 21F-6, stating that the Commission has discretion to consider the dollar amount of a potential award when making an award determination. The proposed changes would affirm the Commission’s authority to consider the dollar amount of a potential award for the limited purpose of increasing the award amount, but would eliminate the Commission’s authority to consider the dollar amount of a potential award for the purpose of decreasing an award.

Commenting on the proposed amendments, SEC Chair Gary Gensler said: “These amendments, if adopted, would help ensure that whistleblowers are both incentivized and appropriately rewarded for their efforts in reporting potential violations of the law to the Commission. The first proposed rule change is designed to ensure that a whistleblower is not disadvantaged by another whistleblower program that would not give them as high an award as the SEC would offer. Under the second proposed rule change, the SEC could consider the dollar amounts of potential awards only to increase the whistleblower’s award. This would give whistleblowers additional comfort knowing that the SEC could consider the dollar amount of the award only in such cases.”

The public comment period for the proposed rules will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

A copy of the announcement of the proposed amendments can be found here.

A copy of the fact sheet discussing the proposed amendments can be found here. [Ed. Note: The foregoing discussion comes from the fact sheet.]

A copy of the proposing release can be found here

[Ed. Note: A full discussion of the SEC Whistleblower Program can be found on the Firm’s website (here) and on the SEC’s website (here).] 

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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