In recent months, the U.S. Securities and Exchange Commission (SEC) has issued whistleblower awards at a record pace. In October 2020, the SEC issued a $114 million whistleblower award – the largest award in the history of its whistleblower program. And in the first four months of the 2021 fiscal year, the SEC set a new record for total money issued to whistleblowers in a fiscal year. Since the 2021 fiscal year began on October 1, 2020, the SEC has awarded over $176 million to 28 individuals.
While these figures in and of themselves demonstrate the success of the SEC Whistleblower Program and the SEC’s commitment to rewarding whistleblowers, whistleblower advocates have taken special note of specific elements of recent award orders. In these recent awards, the SEC has both utilized its discretionary authority to waive a strict disclosure filing requirement and issued awards for independent analysis. Recent rule changes concerning the disclosure filing requirement and independent analysis raised concerns among whistleblower advocates that the SEC may try to avoid giving rewards to deserving whistleblowers. The specifics of these recent award decisions has assuaged some of whistleblower advocates’ worst fears, though they note that award decisions should continue to be closely monitored and that further clarification on these rules may be necessary.
In September 2020, the SEC approved a number of rule changes to its whistleblower program. While the rule changes were largely seen as a win for whistleblowers because a proposed rule that would cap awards was not approved, whistleblower advocates did criticize certain rule changes as potentially harmful to whistleblowers. The newly amended rules went into effect on December 7, 2020.
Qualified SEC whistleblowers, individuals who provide original information that leads to a successful enforcement action, are entitled to a monetary award of 10-30% of funds recouped by the government. However, a number of the rule changes opened new avenues for the SEC to disqualify otherwise eligible whistleblowers from receiving awards.
Awards Waiving TCR Filing Requirement
One new rule (Rule 21F-9(e)) instituted a strict TCR filing requirement. Whistleblowers are required to file a formal whistleblower tip (TCR form) within 30 days of first making contact with the SEC or within 30 days of obtaining legal counsel in relation to the disclosure. The rule disqualifies from award eligibility any whistleblower who fails to file a TCR within this window. However, the new rules grant the SEC the discretionary authority to waive this requirement when it sees fit.
Whistleblower advocates viewed this rule change as a win for whistleblowers because the final approved rule was much less strict than the original proposed rule, which did not have a 30-day window but instead would have required whistleblowers to first file a TCR prior to any other contact with the commission. The proposed rule would also not have granted the SEC the discretionary authority to waive the requirement. While whistleblower advocates therefore applauded the revised rule change, questions remained as to whether the SEC would use its authority to waive the requirement for deserving whistleblowers — or whether it would use the rule as an excuse to avoid paying rewards.
Since the new TCR rule went into effect on December 7, 2020, the SEC has twice issued an award where it waived the TCR filing requirement. In a December 7 award order for a $500,000 award, the SEC noted it waived the TCR requirement after determining that doing so “would be in the public interest and consistent with the protection of investors.” The SEC listed 8 specific facts and circumstances that were present in the case and led to their decision to waive the requirement. These include the fact that the whistleblower provided information in writing directly to SEC Division of Enforcement staff and that the whistleblower “unambiguously indicated” that they “intended to submit the information pursuant to the SEC’s whistleblower program.” Other aspects include the fact that the SEC viewed the claimant as a whistleblower throughout the investigation and that the whistleblower’s attorney may have misunderstood communications from the SEC about the requirement. Lastly, the SEC noted that the whistleblower would have otherwise been eligible for an award and that a denial of an award “would result in undue hardship, unfairness, or inequity.”
The SEC also waived the TCR requirement for a $500,000 award issued on December 18, 2020. Like the December 7 order, the award order states that the SEC determined waiving the requirement “would be in the public interest and consistent with the protection of investors.” In this case, the SEC waived the requirement because the whistleblower first provided his original information to an individual who was acting as the whistleblower’s attorney at the time. This attorney subsequently went behind the whistleblower’s back and used the information to file a TCR which listed themself, not the whistleblower, as the claimant. The whistleblower continued to provide the SEC with information all while reasonably believing that the attorney was still acting as the whistleblower’s counsel and had filed a TCR on the whistleblower’s behalf.
“These award decisions reflect the Commission’s commitment to award meritorious whistleblowers regardless of whether they filed a TCR and send a powerful message encouraging whistleblowers to come forward and offer assistance however they can,” said whistleblower attorney Siri Nelson of Kohn, Kohn & Colapinto. Nelson, who met repeatedly with SEC officials during the rulemaking process, noted that “the Commission’s ability to waive the TCR filing requirement was a major issue Kohn, Kohn and Colapinto commented on extensively during the rulemaking process.”
“However,” added Nelson, “it is important that whistleblowers and their attorney’s remain aware that the surest way to be eligible for an award is to file a TCR before engaging with the SEC in any other way.”
Awards for Independent Analysis
As part of the rule changes, the SEC also issued guidance on how to interpret the independent analyst provisions of the Dodd-Frank Act (DFA). These DFA provisions allow for Wall Street analysts who provide the SEC with analysis that leads to enforcement actions to qualify as whistleblowers even if they are not providing “insider” information. The new guidance suggests limiting award payments made to analysts who provide analysis of publicly available information. According to an article on the rule changes penned by Nelson and fellow attorney Stephen M. Kohn, “[t]his guidance was widely criticized because of its subjective and confusing elements, which would allow the commission to deny a whistleblower a reward if it could assert that there was any likelihood that the commission would have arrived at the same conclusion without the analyst’s assistance.”
In the lead up to the vote on the rule changes, a group of U.S. Senators sent a letter to the SEC criticizing the guidance. The Senators, which included Sherrod Brown (D-OH), Elizabeth Warren (D-MA), and Jack Reed (D-VT), expressed their support for the SEC Whistleblower Program and urged the Commission to reject the guidance on independent analysis. The Senators wrote that the guidance “would permit the SEC to create an insurmountable hurdle for a whistleblower to establish original information based on ‘independent analysis’” and “would be contrary to public policy and the legislative purpose of the whistleblower law.” In her dissenting opinion on the rule changes, SEC Commissioner Caroline Crenshaw also took issue with the guidance. She explained that the SEC “should not focus on whether the staff ‘could have’ inferred the information from what was provided, but whether the staff did infer the information prior to getting the submission.”
Since the rule changes and guidance went into effect on December 7, 2020, the SEC has issued two separate awards for independent analysis. On January 7, 2021, the SEC issued a $100,000 award to a whistleblower who provided independent analysis of publicly available documents. According to the award order, the whistleblower “used information from various publicly available documents to calculate an estimate of an important metric” for a company. The whistleblower then used this estimate to demonstrate that the company’s “disclosures regarding that metric were implausible.” The SEC determined that the whistleblower “revealed important new information to the Commission that was not apparent from the face of the publicly available materials” and therefore ruled that the whistleblower’s analysis satisfies the original information requirement.
The SEC also issued an award for independent analysis on December 14, 2020. This $300,000 award is particularly notable because it was issued to a whistleblower who became aware of the securities violations during the course of official audit-related duties. Under Exchange Act Rule 21F-4(b)(4)(iii)(B), information obtained because a whistleblower is an “employee whose principal duties involve compliance or internal audit responsibilities” does not qualify as original information, and a whistleblower is therefore ineligible for an award based on this information. However, the award order notes that compliance and audit officers may be “eligible for whistleblower awards if they had ‘a reasonable basis to believe that the relevant entity is engaging in conduct that will impede an investigation of the misconduct.’” In this case, the SEC ruled that the whistleblower had sufficient reason to believe this and therefore awarded the individual for the independent analysis.
According to Nelson, “the analyst awards are encouraging because they highlight the value of independent analyst contributions, showing that the Commission will not likely act on any of the arbitrary bases for exclusion that advocates were worried about.” However, Nelson does caution that “despite these decisions, the guidance adopted alongside the final rules nonetheless creates concern and should be rescinded in order to create more stability in the program.”
Conclusion
Particularly within the context of a record fiscal year for the SEC Whistleblower Program, these specific whistleblower awards demonstrate the SEC’s continued commitment to rewarding whistleblowers and growing the whistleblower program. Whistleblower advocates are hopeful that if confirmed as SEC Chair, Gary Gensler, President Biden’s nominee for the position, will continue to support and enhance the program and address concerns about the recent rule changes.
Nelson notes that “SEC decisions should continue to be closely monitored in the coming years to truly understand how the SEC will enforce the new whistleblower rules. That said, these awards are very positive and should encourage whistleblowers to continue to come forward with whatever information or insights they have.”