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SEC Votes to Propose Amendments to Whistleblower Program Rules

SEC Votes to Propose Amendments to Whistleblower Program Rules

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On June 28, 2018, the SEC announced that it voted to propose amendments to the rules governing its whistleblower program.  The whistleblower program was established in 2010 to incentivize individuals to report high-quality tips to the SEC and help the SEC detect wrongdoing and better protect investors and the marketplace.

Original information provided by whistleblowers has led to enforcement actions in which the SEC has ordered over $1.4 billion in financial remedies, including more than $740 million in disgorgement of ill-gotten gains and interest, the majority of which has been, or is scheduled to be, returned to harmed investors.

The proposed rules, according to the SEC, would, among other things, provide the SEC with additional tools in making whistleblower awards to ensure that meritorious whistleblowers are appropriately rewarded for their efforts, increase efficiencies in the whistleblower claims review process, and clarify the requirements for anti-retaliation protection under the whistleblower statute.

The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register.

SEC Whistleblower Program Background

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 21F to the Securities Exchange Act of 1934 (the “Exchange Act”), establishing the SEC’s whistleblower program.  Among other things, Section 21F authorizes the SEC to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions over $1 million and successful related actions.  Awards must be made in an amount equal to 10 to 30 percent of the monetary sanctions collected.

Congress established a separate fund at the Treasury Department, called the Investor Protection Fund (IPF), from which whistleblower awards are paid.  Since the whistleblower program’s inception, the SEC has ordered over $266 million in 50 awards to 55 whistleblowers, including individuals filing jointly, whose information and cooperation assisted the SEC in bringing successful enforcement actions.

The proposed whistleblower rule amendments would make certain modifications and clarifications to the existing rules, as well as several technical amendments.

Highlights of the Proposed Whistleblower Rule Amendments
Additional Tools in Award Determinations

Allowing awards based on deferred prosecution agreements (“DPAs”) and non-prosecution agreements (“NPAs”) entered into by the U.S. Department of Justice (“DOJ”) or a state attorney general in a criminal case, or a settlement agreement entered into by the SEC outside of the context of a judicial or administrative proceeding to address violations of the securities laws: This proposed amendment will ensure that whistleblowers are not disadvantaged because of the particular form of an action that the SEC, DOJ, or a state attorney general acting in a criminal case may elect to pursue.

Currently, the SEC’s whistleblower rules do not address whether the SEC may pay a related-action award when an eligible whistleblower voluntarily provides original information that leads to a DPA or NPA entered into by DOJ or a state attorney general in a criminal proceeding.  Under the proposed amendment, the SEC would be able to make award payments to whistleblowers based on money collected as a result of such DPAs and NPAs, as well as under settlement agreements entered into by the SEC outside of the context of a judicial or administrative proceeding to address violations of the securities laws.

Additional considerations for small and exceedingly large awards:
  • Historically, over 60% of the awards given out in the SEC whistleblower program have been less than $2 million.  In the context of potential awards that could yield a payout of less than $2 million to a whistleblower, the proposed rules would authorize the SEC in its discretion to adjust the award percentage upward under certain circumstances (subject to the 30% statutory maximum) to an amount up to $2 million.   In exercising its discretion to increase an award under this provision, the SEC would consider whether the increase helps to better achieve the program’s objectives of rewarding meritorious whistleblowers and sufficiently incentivizing future whistleblowers who might otherwise be concerned about the low dollar amount of a potential award.
  • The proposing release also includes a general inquiry for public comment regarding whether the SEC could establish a potential discretionary award mechanism for SEC enforcement actions that do not qualify as covered actions (because they do not meet the more than $1 million threshold requirement), are based on publicly-available information, or where the monetary sanctions collected are de minimis.
  • Forty percent of the aggregate funds paid by the SEC to whistleblowers have been paid out in only three awards. In the context of potential awards that could yield total collected monetary sanctions of at least $100 million, the proposed rules would authorize the SEC in its discretion to adjust the award percentage so that it would yield a payout (subject to the 10% statutory minimum) that does not exceed an amount that is reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers.  However, in no event would the award be adjusted below $30 million.  This proposed amendment is intended to make sure that the SEC is a responsible steward of the public trust while continuing to provide strong whistleblower incentives.
  • Elimination of potential double recovery under the current definition of “related action”: This proposed amendment would prevent the irrational result that could occur if a whistleblower could receive multiple recoveries for the same information from different whistleblower programs.  The proposed amendment would clarify that a law-enforcement or separate regulatory action would not qualify as a “related action” if the SEC determines that there is a separate whistleblower award scheme that more appropriately applies to the enforcement action.
Uniform Definition of “Whistleblower”

The SEC also proposes rule amendments in response to the United States Supreme Court’s recent decision in Digital Realty Trust, Inc. v. Somers.  In that decision, the Supreme Court held that the whistleblower provisions of the Exchange Act require that a person report a possible securities law violation to the SEC in order to qualify for protection against employment retaliation under Section 21F.  The Supreme Court thus invalidated the SEC’s rule interpreting Section 21F’s anti-retaliation protections to apply in cases of internal reports.

The proposed rules would modify Rule 21F-2 so that it comports with the Supreme Court’s holding by, among other things, establishing a uniform definition of “whistleblower” that would apply to all aspects of Exchange Act Section 21F—i.e., the award program, the heightened confidentiality requirements, and the employment anti-retaliation protections.  For purposes of retaliation protection, an individual would be required to report information about possible securities laws violations to the SEC “in writing”.  To be eligible for an award or to obtain heightened confidentiality protection, the additional existing requirement that a whistleblower submit information on Form TCR or through the SEC’s online tips portal would remain in place.

Increased Efficiency in Claims Review Process

Two further proposed changes are designed to help increase the SEC’s efficiency in processing whistleblower award applications.

  • Proposed new subparagraph (e) to Exchange Act Rule 21F-8 would clarify the SEC’s ability to bar individuals from submitting whistleblower award applications where they are found to have submitted false information to the SEC, as well as to afford the SEC with the ability to bar individuals who repeatedly make frivolous award claims in SEC actions.  To prevent repeat submitters from abusing the award application process, the proposed rule would permit 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.
  • Proposed new Exchange Act Rule 21F-18 would afford the SEC with a summary disposition procedure for certain types of likely denials, such as untimely award applications, applications that involve a tip that was not provided to the SEC in the form and manner that the rules require, and applications where the claimant’s information was never provided to or used by SEC staff responsible for the investigation.  The proposed summary disposition procedures would help facilitate a more timely resolution of such relatively straightforward denials, while freeing up staff resources to focus on processing potentially meritorious award claims.  As under current rules, Claimants would have an opportunity to contest a preliminary denial of their claim before the SEC makes its final determination.
Clarification and Enhancement of Certain Policies and Procedures 

The proposed amendments would clarify and enhance certain policies, practices, and procedures in implementing the program.  These recommendations include the items listed below.

  • Proposed revisions to Exchange Act Rule 21F-4(e) to clarify the definition of “monetary sanctions” so that it codifies the SEC’s current understanding and application of that term.
  • Proposed revisions to Exchange Act Rule 21F-9 to provide the SEC with additional flexibility to modify the manner in which individuals may submit Form TCR (Tip, Complaint or Referral).
  • Proposed revisions to Exchange Act Rule 21F-8 to provide the SEC with additional flexibility regarding the forms used in connection with the whistleblower program.
  • Proposed amendment to Exchange Act Rule 21F-12 to clarify the list of materials that the SEC may rely upon in making an award determination.
  • Proposed amendment to Rule 21F-13 to clarify the materials that may comprise the administrative record for purposes of judicial review.
Interpretive Guidance

In addition to the foregoing proposed rule amendments, the SEC is publishing proposed interpretive guidance to help clarify the meaning of “independent analysis” as that term is defined in Exchange Act Rule 21F-4 and utilized in award applications.  Under the proposed guidance, in order to qualify as “independent analysis,” a whistleblower’s submission must provide evaluation, assessment, or insight beyond what would be reasonably apparent to the SEC from publicly available information.

What’s Next with the Proposed Amendments?

The proposal seeks public comment and data on a broad range of issues relating to the whistleblower program.  After careful review of the comments, the SEC will consider what further action to take on the proposal.

Do You Qualify as An SEC Whistleblower?

If you voluntarily provide original, high-quality information (i.e., information derived from your independent knowledge, NOT facts derived from publicly-available information) about the possible violation of the federal securities laws that has occurred, is ongoing or is about to occur AND which leads to a successful SEC enforcement action, resulting in an order of monetary sanctions exceeding $1 million, then you MAY be eligible for an SEC whistleblower award of between 10% and 30% of the monetary sanctions collected in actions brought by the SEC and related actions brought by certain other regulatory and law enforcement authorities.

Remember, information is voluntarily provided if you provide information to the SEC or another regulatory or law enforcement authority before a) the SEC requests it from you or your lawyer or b) Congress, another regulatory or enforcement agency or self-regulatory organization asks you to provide the information in connection with an investigation or certain examinations or inspections.

Can You Submit Information Anonymously to the SEC?

Yes, however, if you wish to submit information to the SEC anonymously, you MUST be represented by an attorney in connection with the anonymous information submission to be eligible for an award.

What Kind of Wrongful Conduct Is of Interest to the SEC?

Examples of the kind of conduct about which the SEC is interested include:

  • Ponzi scheme, Pyramid Scheme, or a High-Yield Investment Program
  • Theft or misappropriation of funds or securities
  • Manipulation of a security’s price or volume
  • Insider trading
  • Fraudulent or unregistered securities offering
  • False or misleading statements about a company (including false or misleading SEC reports or financial statements)
  • Abusive naked short selling
  • Bribery of, or improper payments to, foreign officials
  • Fraudulent conduct associated with municipal securities transactions or public pension plans
  • Other fraudulent conduct involving securities
SEC Investigations and The Federal Securities Laws

The SEC conducts investigations into possible violations of the federal securities laws. Again, the more specific, credible, and timely a whistleblower tip, the more likely it is that the tip will be forwarded to SEC investigative staff for further follow-up or investigation. For example, if the tip identifies individuals involved in the scheme, provides examples of particular fraudulent transactions, or points to non-public materials evidencing the fraud, the tip is more likely to be assigned to SEC Enforcement staff for investigation.

It is important to keep in mind that the SEC does not have jurisdiction to take action on information that is outside the scope or coverage of the federal securities laws. The SEC may, in appropriate circumstances, refer your matter to another regulatory or law enforcement agency.

Attorney Involvement in SEC Whistleblower Matters

As one former Director of the SEC’s Division of Enforcement has stated:

One thing I get asked about a lot is how [the SEC] view[s] whistleblower counsel. It will come as no surprise . . . that we welcome the involvement of counsel in whistleblower tips. While whistleblowers can engage with [the SEC] without the assistance of counsel, counsel experienced in whistleblower representations can help with up-front triage of tips to identify those that have a nexus with the federal securities laws and that may have merit. And [attorneys] can work with whistleblowers going forward to identify information that will be important to us and that will allow us to advance [SEC] investigations.

The same SEC Enforcement official also highlighted that attorneys for whistleblowers can help manage client expectations regarding the length of SEC investigations and the awards process; help determine whether the whistleblower can furnish corroborating information to support a securities fraud tip; and, if necessary, segregate information and engage in discussions with SEC officials to prevent unnecessary disclosure of information protected by the attorney-client privilege or work product doctrine and, thereby, help minimize any negative impact on, or substantial delay of, an SEC investigation.  Additionally, whistleblowers and their attorneys can assist the SEC maintain the confidentiality of whistleblowers by identifying any facts or documents that they are furnishing that, potentially, could identify the whistleblower.

Do You Have Questions or Concerns About Providing Information to the SEC About Securities Fraud?

If so, please know that Kehoe Law Firm’s legal team understands the issues associated with making the difficult decision to voluntarily come forward with information about securities fraud or other wrongdoing.  Moreover, the Firm’s legal staff has extensive experience investigating and prosecuting fraud, as well as interacting with sources of information, especially brave, honest individuals who are willing to expose fraud committed against the United States government.

If you have questions or concerns about voluntarily providing information as a whistleblower to the SEC about violations of the federal securities laws, including questions about whistleblower award eligibility or the form and manner in which the information is required to be provided to the SEC, please contact Kehoe Law Firm, P.C. by completing the form above on the right or sending an e-mail to [email protected].  If you prefer to speak privately with an attorney, please contact either Michael Yarnoff, Esq., [email protected], (215) 792-6676, Ext. 804, or John Kehoe, Esq., [email protected], (215) 792-6676, Ext. 801.

Please see Frequently Asked QuestionsSubmit a TipClaim an AwardFinal Orders, and Section 21F of the Securities Exchange Act of 1934 (Securities Whistleblower Incentives and Protection) for additional Whistleblower Program information.

Source: SEC.gov

Kehoe Law Firm, P.C.