Thursday, October 08. 2020
The whistleblower program was created to encourage individuals to report valuable tips to the SEC, helping the agency fight wrongdoing and better protect investors and the marketplace. Whistleblowers’ efforts have made a significant impact on the SEC’s enforcement of federal securities laws and the protection of investors since the program’s start a decade ago. Since 2010, the SEC has awarded approximately $523 million to 97 individuals whose original information led to the successful actions of the SEC, sometimes in conjunction with enforcement authorities, against wrongdoers. Whistleblower information has led to enforcement actions in which the SEC has retrieved over $2.5 billion from wrongdoers, much of which has been, or is scheduled to be, given back to harmed investors.
The awards given to whistleblowers must be made in the amount no less than 10 percent, and no more than 30 percent, of what has been retrieved from monetary sanctions imposed in covered SEC and related actions. Congress established a separate fund at the Treasury Department, the Investor Protection Fund (IPF), from which whistleblower awards are paid. Award money has never been taken or withheld from harmed investors to pay whistleblower awards.
The modifications to the rules governing the whistleblower program are designed to provide:
- clarity to existing rules and add further rules to increase the program’s efficiency and transparency in award determinations
- an update to the definition to “whistleblower”
- increased efficiency in claims review processes that continue to properly award whistleblowers to the maximum extent appropriate
- clarification and enhancement of certain policies and procedures
- SEC interpretive guidance and guidance from the Office of the Whistleblower
Additional Rules in Award Determinations
The rule amendments increase efficiencies around the assessing and processing of whistleblower award claims and provide the SEC with additional tools to reward deserving whistleblowers for their efforts and contributions to a successful case.
- 75% of all whistleblower awards are less than $5 million. Along with other improvements, the revisions provide a way for whistleblowers with potential awards of less than $5 million, subject to certain qualifications, to meet the requirements for an assumption that they will receive the maximum legal award amount. Other awards above $5 million will continue to be assessed according to past practice.
- This amendment guarantees that whistleblowers will not be at a disadvantage because of the particular form of an action that the SEC or Department of Justice may decide to pursue. Under the new rule, the SEC would be able to make award payments to whistleblowers based on money retrieved as a result of such actions as deferred prosecution agreements (DPA), non-prosecution agreements (NPA), and under similar SEC settlement agreements entered into after July 21, 2010 (the date the Dodd-Frank Act took effect). Individuals will have 90 days from the effective date of the revisions to apply for an award in connection with any agreement that was entered between July 21, 2010 and the effective date of the amendments.
- The rule clarifies the definition of “related action” and summarizes the SEC’s approach to determining whether an action is a related action, including clarifying that a law-enforcement or separate regulatory action does not qualify as a “related action” if the SEC determines that there is a separate award scheme that more appropriately applies to such law-enforcement or separate regulatory action.
Uniform Definition of “Whistleblower”
The rule also updates the definition of “whistleblower” in response to the Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers. The SEC is revising Rule 21F-2 to establish a standardized definition that will apply to all aspects of Exchange Act Section 21F, for example, to the award program, the heightened confidentiality requirements, and the employment anti-retaliation protections.
- Regarding retaliation protection, an individual must report information about possible securities laws violations to the SEC in writing. As required by the Supreme Court’s decision, to qualify for the retaliation protection under Section 21F, the individual must report to the SEC prior to experiencing the retaliation.
- To be qualified for an award or to obtain heightened confidentiality protection, the current requirement that a whistleblower submit information on Form TCR or through the SEC’s online tips portal remains in place, subject to the additional discretion of the SEC to allow waivers.
- The SEC is issuing interpretive guidance defining the scope of retaliatory conduct barred by Section 21F(h)(1)(A), which includes any retaliatory activity by an employer against a whistleblower that a reasonable employee would find materially undesirable.
Increased Efficiency in Claims Review Process
To streamline the award determination process and increase the SEC’s efficiency in processing whistleblower award applications, the changes to Exchange Act Rule 21F-8 include subparagraph (e). This addition summarizes the SEC’s practice of excluding applicants who submit false information in their whistleblower submission, other contact with the SEC, or related actions. The rule provides an important new tool for the SEC in processing impractical award applications by:
- preventing repeat submitters from abusing the award application process and permitting the SEC to permanently bar any applicant from seeking an award after the SEC determines that the applicant has abused the process by submitting three frivolous award applications
- notifying the claimant of the Office of the Whistleblower’s assessment when the first three applications are determined to be frivolous and giving the claimant the opportunity to withdraw the application.
Exchange Act Rule 21F-18 allows the SEC a summary disposition procedure for certain types of common application rejections, for example, untimely award applications, applications that involve a tip that was not shared with the SEC in the precise way the rules require, and applications where the claimant’s information was never provided or utilized by staff involved in the investigation. This streamlined process is designed to enable a well-timed resolution of relatively straightforward denials.
Clarification and Enhancement of Certain Policies and Procedures
The rule amendments also clarify and enhance certain policies, practices, and procedures in implementing the program with the following enhancements:
- Exchange Act Rule 21F-4(e) is revised to clarify the definition of “monetary sanctions,” summarizing the SEC’s current understanding and application of that term.
- Section 21F of the Exchange Act provides that the determination of the award amount is in the discretion of the SEC. Exchange Act Rule 21F-6 has been modernized to clarify the SEC’s discretion in applying the award factors and setting the amount of award, including the discretion to apply the award factors in percentage terms, dollar terms or a combination of the two. The amendments also confirm that the SEC will only consider the listed award factors ascribed in the rule when determining the award amount.
- The amendments also confirm that award amounts are to be determined based only on the application of the award factors in the SEC’s whistleblower rules. The modifications also clarify that the SEC may waive compliance with the Form TCR (Tip, Complaint or Referral) filing requirements if a whistleblower complies with the requirements within 30 days of initially providing the information or within 30 days of first obtaining actual or constructive notice of the TCR filing requirements.
- The waiver of non-compliance with Rule 21F-9(a) and (b) has been made automatic, rather than discretionary, when the SEC finds that the whistleblower has established that the specified conditions are satisfied. The SEC continues to retain its separate discretionary exemptive authorities under Rule 21F-8(a) and Exchange Act Section 36(a) for circumstances that may justify exemptive relief.
- Exchange Act Rule 21F-8 has been revised to provide the SEC with additional flexibility regarding the forms used in connection with the whistleblower program.
- Exchange Act Rule 21F-12 has been modified to clarify the list of materials that the SEC may rely upon in making an award determination.
- Exchange Act Rule 21F-13 has been updated to clarify the items that can make up the administrative record for purposes of judicial review.
SEC Interpretive Guidance
In addition to prior rule amendments, the SEC is publishing informative guidance to help clarify the meaning of “independent analysis” because that term is defined in Exchange Act Rule 21F-4 and used in award applications. The publication asserts that:
- To meet the criteria of “independent analysis,” a whistleblower’s submission must provide insight beyond what would be reasonably apparent to the SEC from information that is publicly available.
- In making that determination, the SEC will consider if the whistleblower’s conclusion of possible securities violations comes from multiple sources, including sources that are not easily identified and publicly accessed without special knowledge, unusual effort, or substantial cost, and the sources collectively raise a strong implication of a potential securities law violation that is not readily presumed by the SEC from any of the sources individually.
After carefully reviewing feedback it received, the SEC has determined not to adopt proposed Exchange Act Rule 21F-6(d)(2), a specific, time-based presumption of “unreasonable delay” as interpretive guidance, which would have provided an official process for the SEC to conduct an enhanced review of certain awards. The SEC will continue to review the facts and circumstances of each case to see if any delay was reasonably attributable to actions taken by the whistleblower, conditions out of the control of the whistleblower or to unreasonable actions by the whistleblower.
Guidance from the Office of the Whistleblower
Through the years, the Office of the Whistleblower and the Division of Enforcement have worked to modernize and greatly accelerate the assessment of applications for whistleblower awards and they have seen much improvement in these endeavors. To provide additional streamlining, as well as clarity and transparency in the award determination process, the Office of the Whistleblower has concurrently issued staff guidance regarding the process for determining award amounts for qualified whistleblowers. This guidance, publicly available on the webpage for the Office of the Whistleblower on the SEC’s website, echoes the Office of the Whistleblower’s experience with the program as well as the implementation of the revisions. It also sets forth the process for the Office of the Whistleblower to propose award amounts to the Claims Review Staff, which issues an initial determination that is subject to SEC review.
The guidance asserts that, for awards where the legal maximum award amount for the covered action and any related actions is collectively $5 million or less, the proposed amount will be the legal maximum where none of the negative award criteria specified in Rule 21F-6(b) are present, subject to certain limited exceptions as proposed in the rule.
The Office of the Whistleblower will continue to make information available regarding its whistleblower award claims process on its webpage. For further information, contact Emily Pasquinelli, Office of the Whistleblower, Division of Enforcement, at (202) 551-5973 or Nicole Kelly, Office of the General Counsel, at (202) 551-4408. They can be reached via mail at Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549.
The amendments to the whistleblower rules become effective 30 days after publication in the Federal Register.