On September 23, the U.S. Securities and Exchange Commission (SEC) approved wide-spread changes to its highly successful whistleblower program in a 3-2 vote. The two dissenting Commissioners, Commissioner Allison Lee and Commissioner Caroline Crenshaw, expressed concerns about the rule changes, which echo concerns raised by whistleblower advocates in the lead up to the vote.
In their comments, both dissenting Commissioners acknowledge that all five Commissioners, and the SEC as a whole, clearly recognize the importance of whistleblowers to the agency. They likewise thanked SEC officials and agents for their commitment to supporting a robust whistleblower program. Commissioners Lee and Crenshaw also make clear that they support elements of the rule changes which increase the efficiency of the program, particularly in regards to issuing whistleblower rewards. However, in the end, Commissioners Lee and Crenshaw both voted no on the rule changes because of concerns that the changes do not serve whistleblowers well. In particular, the dissenting Commissioners point to concerns about the SEC’s authority to reduce large awards, a changed definition of “related action,” interpretive guidance on the definition of “independent analysis,” and the removal of protections for whistleblowers as reasons for their dissent.
“These dissents were necessary,” said leading whistleblower attorney Stephen M. Kohn, a partner at qui tam firm Kohn, Kohn & Colapinto and the Chairman of the Board of Directors of the National Whistleblower Center. “The changes to the ‘related action’ rule were detrimental to whistleblowers and needed to be opposed. Also, Commissioner Lee publicly challenged the position of the SEC Office of General Counsel concerning the SEC’s authority to reduce rewards in large cases. The General Counsel’s opinion on this matter is contrary to law, and it was essential that members of the Commission alert the public to this issue.”
Commissioner Lee states that “the principal reason that I find myself unable to support this rule, despite trying very hard to reach consensus, is because of the treatment given to the central issue of the Commission’s discretion to consider the dollar amount of an award in making award determinations.” The original proposed rule changes contained a highly controversial rule which would have implemented a “soft cap“ enabling the SEC to reduce the size of the largest whistleblower awards simply due to their size. The final approved rule changes removed this proposal. However, according to Commissioner Lee, it was removed because the SEC determined that it already has the authority to reduce awards due to their size, and a new rule was not necessary. Commissioner Lee opposes the position that the SEC has this authority due to the harm it could cause to the whistleblower program. As whistleblower advocates have argued, reductions to large whistleblower awards could be a disincentive to potential whistleblowers, particularly high-ranking and well-paid officials, and undermine the deterrent effect of the program. In a recent National Law Review article, Kohn argues that the position that the SEC has the authority to reduce awards due to their size “does not have any legal support either in the statute, the legislative history, or in the actual controlling regulations.”
Commissioner Lee also notes that she opposed the rule change proposal because of its interpretation of the definition of “related action.” Under the Dodd-Frank Act, the SEC is required to pay “related action” rewards to whistleblowers whose disclosures lead to a successful enforcement action by another agency. The newly approved rule grants the SEC the authority to determine which actions are and are not “related actions” and thus avoid paying “related action” rewards. Commissioner Lee takes issue with this rule because, as she notes, directing whistleblowers to other agencies’ whistleblower programs has real consequences. Lee explains that doing so “can increase the administrative burden on the whistleblower, who may already be in difficult circumstances,” and “may force them to participate in programs with varying standards of maintaining the confidentiality of their identity.” Whistleblower advocates have likewise opposed this rule change. Kohn referred to it as “the most detrimental anti-whistleblower rule approved by the Commission.”
In her dissent, Commissioner Crenshaw raises concerns about newly approved guidance which alters the definition of “independent analysis” in the context of determining whether or not the analysis provided by a whistleblower is “original information” and thus eligible for a whistleblower reward. In a letter sent to the SEC opposing the rule changes, six U.S. Senators stated that the “proposal would permit the SEC to create an insurmountable hurdle for a whistleblower to establish original information based on ‘independent analysis.'” Crenshaw adds that she is concerned that “this guidance will inadvertently impact the perception of the type of information the Commission considers valuable.”
Commissioner Crenshaw also points to a newly approved rule regarding anti-retaliation protections for whistleblowers as a reason for her dissent. The rule strips the SEC of the authority to protect whistleblowers and establishes that only whistleblowers who contact the SEC before retaliation are protected. Commissioner Crenshaw specifically takes issue with the rules limit on what forms of contact with the SEC merit protection. She explains that “by limiting the anti-retaliation protections to whistleblowers who submit information in writing, we fail to do all we can to protect those who cooperate with our exams and investigations.” Whistleblower advocates also argued that a weakening of whistleblower protections is unnecessary and dangerous. Specifically, they argued that the SEC has the authority to protect internal whistleblowers under the Sarbanes-Oxley Act (SOX).
Commissioner Crenshaw concluded her dissent by stating:
As I hope I have made clear, I am proud of our whistleblower program. And with the exception of the areas I have identified, I continue to believe the program admirably serves the interests of whistleblowers and the Commission, and by extension, the investing public. I had hoped to get to yes because I believe unanimity sends an important message, but because I must vote not only on the whole, but also on its parts, I am unable to support today’s rule.
Statement of Commissioner Caroline Crenshaw on Whistleblower Program Rule Amendments
June Bug vs. Hurricane:* Whistleblowers Fight Tremendous Odds and Deserve Better
SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240 and 249 [Release No. 34-89963; File No. S7-16-18] RIN 3235-AM11 Whistleblower
Open Meeting of the Securities and Exchange Commission – September 23, 2020