SEC Adopts New Rules for Whistleblower Program

Travis Thickstun

Associate Editor

Loyola University Chicago School of Law, JD 2023

Twelve years after the 164-year-old brokerage firm Lehman Brothers collapsed during the global financial crisis that had been sparked by the subprime mortgage catastrophe, last month the U.S. Securities and Exchange Commission (SEC) adopted a new rule changing parts of the agency’s whistleblower program. The program, which was established by the Dodd-Frank Act in 2010, permits the agency to provide financial awards to whistleblowers who provide it with original information about fraud and securities violations. At issue in this new rule is how the SEC will evaluate and apply its award criteria based on the circumstances in each case. Commissioners voted 3-2 to adopt the final rule – which is effective 30 days after publication in the Federal Register – during their Sept. 23 meeting. The SEC said the new rule was aimed at more efficient claim processing, increased transparency to the structure used by the Commission in determining award amounts and making other changes that reflect the Commission’s experience overseeing the program.

Changes to SEC whistleblower program

Whistleblowers have helped the SEC obtain more than $2.5 billion in financial penalties, of which more than $1.4 billion was from disgorgement of fraudulent gains. Of that amount, the SEC said almost $750 million has been or will be returned to injured investors. Because of the contributions of whistleblowers, the Commission said it had ordered more than $523 million to 97 individuals in 80 enforcement actions whose original information helped the agency pursue enforcement actions – as well as those brought by other enforcement authorities against wrongdoers.

Stephanie Avakian, who is the director of the Commission’s enforcement division, told Commissioners at their Sept. 23 meeting that the rule changes were another step in the agency’s reevaluation of its whistleblower awards process. The SEC, Avakian said, has implemented process improvements that resulted in a record of $136 million going to 30 whistleblowers so far this year. In fact, Avakian said the agency had already received 6,500 tips, complaints and referrals from whistleblowers so far this year – a nearly 25% increase over last year’s total.

Five key changes the rule made to the whistleblower program include:

  1. Additional tools in award determinations, including a presumption of the statutory maximum award amount for certain awards of $5 million and less;
  2. Uniform definition of “whistleblower” in response to the U.S. Supreme Court’s decision in Digital Realty Tr., Inc. v. Somers, 138 S. Ct. 767 (2018);
  3. Increased efficiency in the claims review process, including barring applicants who submit materially false, fictitious, or fraudulent statements to the Commission;
  4. Clarification and enhancement of certain policies and procedures, including practices and procedures in implementing the program; and
  5. Commission interpretive guidance to help clarify the meaning of “independent analysis.”

Opposition to considering dollar amount of whistleblower awards

But not all of the rule changes were without disagreement.

Commissioner Allison Herren Lee said she was unable to support the proposed rule because of the treatment given to the Commission’s discretion to consider the dollar amount of an award in making award determinations. Lee said she could not support a rule that permitted two different outcomes where the only distinction was the amount of the award, particularly where it provided whistleblowers no way to contest its application.

“Whistleblowers deserve better,” Lee said during the Commission’s hearing. “They take great risks to help law enforcement, never knowing when they make their decision to speak up what will happen to them.”

Commissioner Caroline A. Crenshaw, who also voted against the new rule, said she shared Lee’s concerns about the discretion to consider the award amount.

“Our program’s effectiveness depends on providing potential whistleblowers with certainty about how they will be treated, including award eligibility and determinations,” Crenshaw said during the hearing. “Although today’s rule makes improvements on the initial proposal,” Crenshaw said. “there are still aspects of the rule that leave inefficiencies and create uncertainties for potential whistleblowers.”

In fact, during the rule’s pre-adoption public-comment period, the SEC’s proposed rule change resulted in more than 110,000 comments from those opposed to some key parts of the proposed rule. Opponents included Public Citizen, which said it opposed what it called an “arbitrary cap” on whistleblower awards in cases over $30 million. The consumer-advocacy organization said it supported parts of the proposed rule that would authorize the SEC to adjust the award percentage upward for small awards. Senator Charles Grassley, chairman of the U.S. Senate Committee on the Judiciary, joined in opposition to this proposed limit of $30 million, writing that the Commission’s proposal “would operate as an arbitrary cap.” Grassley was also concerned that – unlike awards in qui tam suits under the federal False Claims Act – the Commission’s program lacked the ability for Wall Street whistleblowers to appeal the size of awards to independent federal judges.

Rule aimed at giving greater transparency, efficiency, and clarity to whistleblowers

The SEC said the final rule it adopted was aimed at providing greater clarity to whistleblowers and increasing the program’s efficiency and transparency.  The Commission also said it wanted to provide added efficiencies and transparency in the award process.

“The Commission’s enforcement efforts, and most importantly, American investors and markets, have greatly benefitted from the credible information and assistance that whistleblowers have provided,” SEC Chairman Jay Clayton said in a Sept. 23 press release.  “Whistleblowers often take professional and reputational risks in reporting their information to the SEC and we are committed to rewarding them for taking those risks and contributing to our enforcement efforts. Today’s rule amendments will help us get more money into the hands of whistleblowers, and at a faster pace. Experience demonstrates this added clarity, efficiency, and transparency will further incentivize whistleblowers, enhance the whistleblower award program, and benefit investors and our markets.”

In adopting the new whistleblower rule, the SEC underscored its purpose of providing greater transparency, efficiency, and clarity to whistleblowers.