Under the new leadership of Chair Gary Gensler, the U.S. Securities and Exchange Commission (SEC) may revise controversial rules for its highly successful whistleblower program. The rules in question were passed in September 2020 and have been widely criticized by whistleblower advocates.
Chair Gensler released a statement on August 2 detailing the possibility of revising the rules. The statement comes after Gensler announced at the National Whistleblower Day 2021 celebration that he had directed staff to review the whistleblower program.
“In September 2020, the Commission adopted amendments to the SEC’s whistleblower program rules,” Gensler says in the statement. “Various members of the whistleblower community, as well as Commissioners Lee and Crenshaw, have expressed concern that two of these amendments could discourage whistleblowers from coming forward.”
“I have directed the staff to prepare for the Commission’s consideration later this year potential revisions to these two rules that would address the concerns that these recent amendments would discourage whistleblowers from coming forward,” the statement continues.
“This is a major step forward for accountability,” said leading whistleblower attorney Stephen M. Kohn of Kohn, Kohn & Colapinto. “The SEC program needs improvements to ensure that qualified whistleblowers are rewarded, and procedural roadblocks removed.”
“We welcome the Chairman’s commitment to effective whistleblower protection,” continued Kohn, who over the years has worked closely with the SEC on developing the rules for its whistleblower program.
“Chair Gensler has consistently demonstrated a commitment to whistleblower protections,” said Siri Nelson, Executive Director of the National Whistleblower Center (NWC). “The Commission’s plan to revisit the whistleblower program rules to remedy persistent issues is a welcomed opportunity for improvement – particularly considering the existing unanimous support of the program by the Commissioners. NWC plans to issue comments on any revisions that are proposed and hopes to see continued unity among the Commissioners in their support for whistleblowers under Chair Gensler’s leadership. This announcement is very encouraging.”
The first of the two rules in question concerns the payment of whistleblower awards for related enforcement actions brought by other law enforcement agencies. Under the Dodd-Frank Act (DFA) the SEC is required to pay awards to whistleblowers when their information leads to successful related enforcement actions. The 2020 rule amendment, however, precludes the SEC from paying a related action award if another alternative whistleblower program may also apply to the action.
Whistleblower advocates criticized this rule change for disincentivizing whistleblowing and for straying from Congressional intent. When the rule was approved, SEC Commissioner Allison Lee opposed the change because directing whistleblowers to other agencies’ whistleblower programs could have negative consequences. Lee explained in her dissent 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.”
The other rule in question concerns the SEC’s ability to lower whistleblower awards simply due to the size of the award. While the 2020 rule changes did not include a proposed “soft cap” on large whistleblower awards, the SEC claimed it already had the discretion to lower awards they deem too large. Whistleblower advocates argue that reductions to large whistleblower awards could be a disincentive to potential whistleblowers, particularly high-ranking and well-paid officials, and could undermine the deterrent effect of the program.
According to Gensler’s statement, SEC staff “is considering whether our rules should be revised to permit the Commission to make awards for related actions that might otherwise be covered by an alternative whistleblower program that is not comparable to the SEC’s own program, and to clarify that the Commission will not lower an award based on its dollar amount.”
Prior to his confirmation as SEC Chair, Gensler pledged strong support for the SEC Whistleblower Program. He reaffirmed his support in his speech on National Whistleblower Day, where he said “we must ensure that whistleblowers are empowered to come forward when they see misbehavior and that they are appropriately compensated according to the framework established by Congress, and that those who report wrongdoing are protected by retaliation.”
Statement in Connection with the SEC’s Whistleblower Program