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NASAA Approves Model Whistleblower Award and Protection Act with Changes Recommended by Constantine Cannon Attorneys

Posted  October 2, 2020
By Chris McLamb

Earlier this year, the North American Securities Administrators Association (NASAA) proposed a Model Whistleblower Award and Protection Act that would help states bolster their securities enforcement by incentivizing whistleblowers.  Constantine Cannon attorneys Eric Havian, Michael Ronickher, and Chris McLamb teamed up with Alexis Ronickher of Katz Marshall & Banks LLP to comment on the proposal, encouraging NASAA to adopt best practices from the hugely successful SEC Whistleblower Program.

We are pleased that NASAA has acted on these recommendations and approved a final version of the Model Act with stronger whistleblower rewards and protections.  This revised version gives states an easy framework for improving their securities enforcement mechanisms by leveraging the unique information whistleblowers can bring forward.

More Certainty Around Awards

As originally drafted, the Model Act provided state securities administrators with discretion over whether to issue an award in any particular case.  But history has shown that discretionary awards do not sufficiently incentivize people to come forward.

Congress recognized when enacting the SEC Whistleblower Program that mandatory rewards are “the critical component” that incentivizes individuals to blow the whistle.  And the historic success of the SEC Whistleblower Program has proven Congress right.  The program’s mandatory awards have provided certainty to would-be whistleblowers agonizing over whether to come forward.  As a result, over 100 whistleblowers have helped the agency bring scores of successful enforcement actions—and have received more than $550 million for their efforts.

We urged NASAA to follow the SEC’s lead by making awards mandatory for all eligible whistleblowers.  Although the final version of the Model Act did not go that far, NASAA strongly encouraged states “to adopt a policy that presumes an award will be made.”  States should heed that advice.  Otherwise, their whistleblower programs will languish as individuals inclined to do the right thing ultimately decide that risking career suicide isn’t worth it when there is no guarantee of a reward.

Rewarding Whistleblowers Who Help Return Money to Victims

We also recommended that NASAA adopt the SEC’s approach of including restitution—payments made by a wrongdoer to the victims—when calculating a whistleblower’s reward.   The proposed Model Act excluded such amounts from the award calculation, but there was no reason to do so.  Like the SEC Whistleblower Program, the Model Act does not pay whistleblower awards out of the money that would otherwise go to victims, but instead directs that awards “shall be paid from a fund established elsewhere under state law.”  This prudent structure ensures that whistleblowers can be rewarded without taking money from the victims’ pockets.

Thankfully, NASAA revised the final version of the Model Act to permit awards based on restitution at the discretion of the state’s security administrator.  States considering the Model Act should go further and mandate the inclusion of restitution amounts in the calculation of awards.  That way, whistleblowers will be fully incentivized, which will help return stolen money to investors.

Providing Anonymity to Wary Whistleblowers

In addition, we encouraged NASAA to adopt the SEC’s regime for anonymous reporting, which is often the critical protection that persuades vulnerable whistleblowers to come forward.  NASAA did exactly that.  The Model Act now provides that whistleblowers who report a tip anonymously with the assistance of counsel can still receive a reward.  This crucial change will give cautious whistleblowers the comfort they need to do the right thing.

Indeed, in many cases, those with the most critical information, which would be of the most use to regulators and law enforcement, are also the most vulnerable to overt retaliation and more subtle assaults on their future careers.  The SEC program’s success is due in part to its anonymity provisions, which have convinced many of these key whistleblowers to bring their information to light.

Protections for Internal Whistleblowing

Finally, NASAA adopted our recommendation to extend anti-retaliation protections to internal whistleblowing.  Most employees first report concerning conduct internally, without ever considering going outside the company.  The Model Act now protects those whistleblowers to the same extent as those who bring their information directly to government regulators.  This change will encourage internal whistleblowing, which can be one of the most efficient ways to stop misconduct and protect investors.

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As revised, the final version of the Model Act is a major step forward for whistleblowers.  With the improvements noted above, the Model Act provides a robust framework for states looking to modernize and enhance their securities enforcement.  When the SEC enacted a whistleblower regime incorporating similar provisions, it received an enormous boost to enforcement efforts.  States that adopt the Model Act—and particularly those that provide additional certainty to whistleblowers—should see similar results.

To read our full comment letter to the North American Securities Administrators Association, click here.

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