SEC Proposes Rule Amendments to Strengthen Whistleblower Program
The SEC recently announced proposed changes to its whistleblower program that would strengthen it for the years to come. The proposals would roll back two controversial rule amendments that the SEC adopted in 2020, which significantly increased the uncertainty facing would-be whistleblowers. Below we discuss the pros and cons of these new proposals, which would improve that status quo but have issues of their own.
No Reductions Based on Award Size
The first change would prohibit the SEC from using the size of a potential award as a basis for reducing the amount paid to a meritorious whistleblower. The SEC program entitles whistleblowers to receive between 10-30% of the amounts collected from defendants based on their information. Traditionally, the SEC has used percentage terms to apply its criteria for determining where in this range an award falls. For example, if a whistleblower delayed reporting, the SEC might reduce their award by 5%. The 2020 amendments, however, muddied this picture. There, the SEC proclaimed that it could consider the dollar amount of a potential award when making this determination. This raised concerns that the SEC could consider certain awards “too big” and arbitrarily reduce them.
After significant backlash from the whistleblower community, the new proposal eliminates this risk. Specifically, the SEC has proposed new language that prohibits using an award’s dollar amount as a basis for a reduction. Critically, however, the proposal leaves intact a rule entitling whistleblowers to a presumptive maximum award (30%) when its dollar value is below $5 million. This would be a true win-win for whistleblowers. The SEC would only consider the size of an award to increase low awards but never to decrease those on the larger end of the spectrum.
Proposed Improvements for “Related Action” Awards
The SEC also published four alternatives to improve its “related action” award rules. Under the Dodd-Frank Act, the SEC must award whistleblowers not only for the amounts collected by the SEC but also those collected by other relevant agencies based on the whistleblower’s information. Once again, the statute requires the SEC to pay an award of 10-30% for these “related actions.” In 2020, however, the SEC adopted new, controversial rules for how to deal with related actions brought by an agency with its own whistleblower program. These rules could force a whistleblower to accept a lesser award from the other agency—and nothing from the SEC—despite the SEC’s statutory obligation to pay 10-30%.
The new proposals offer various approaches to remedy this problem. They all seek to ensure that whistleblowers will not receive less than the 10% floor required by statute, either from the SEC, the other agency, or some combination of the two. Briefly, here are how the alternative proposals work:
- Comparability: Under this approach, the SEC would first determine if the awards paid under the other whistleblower program were “comparable” to the SEC’s program. If the other program has discretionary awards, an award range that was “meaningfully lower” than the SEC’s, or a dollar cap on award size, the SEC will pay a related-action award. If not, the SEC would have to determine whether that other program had “a more direct or relevant connection” to the related action. If so, the SEC would deny a related-action award.
- However, if the maximum related-action award would not exceed $5 million, the SEC would make an award without considering which program had the more direct and relevant connection.
- Under this approach, the whistleblower could not “double-dip.” They would have to waive any claim to an award from the other program before receiving an award from the SEC.
- Whistleblower Choice: This proposal is simpler. A whistleblower could apply for awards under both programs, then chose which one to accept. The SEC would not consider the other agency’s determination at all when setting its own award amount.
- This whistleblower would also have to waive any claim to an award from the other program before receiving an award from the SEC.
- Offset: Here, the SEC would independently determine the size of a related-action award, and any award paid from another program would offset a corresponding portion of the amount awarded by the SEC.
- Topping Off: Under this approach, the SEC would have unilateral discretion to supplement the award from another program if the SEC thought it was too low.
Although each of these standards would improve the status quo, they are not without their own flaws. As drafted, the Comparability approach does not define what constitutes a “meaningfully” lower award range. 25%? 20%? Without such clarity, whistleblower’s still face the risk of arbitrarily lower rewards than what Dodd-Frank mandated.
Further, the Comparability approach only assesses the quantitative differences between whistleblower programs when qualitative factors can sometimes make all the difference. The SEC whistleblower program includes robust confidentiality protections and anonymity provisions that minimize the risk of retaliation. Other programs lack these critical features. We know from experience that these provisions are often the difference between a whistleblower going forward or not. But under the SEC’s proposal, if an alternative program lacks these key protections but pays similar awards, a whistleblower will have to forfeit their award or risk their anonymity. The SEC should not force this problematic choice onto whistleblowers.
The Offset and Topping Off proposals also have downsides. Both could significantly extend the already years-long award process, as the SEC would have to wait until another agency reaches its determination before paying its own award. Further, the Topping Off approach is entirely discretionary providing no certainty to would-be whistleblowers.
For these reasons, the Whistleblower Choice approach appears to be the strongest proposal at the moment. But the SEC has solicited a bevy of comments on these alternatives, which remain subject to change. Whistleblower Insider will keep you up to date on the latest developments as the SEC further evaluates these proposals.
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