On February 10, the U.S. Securities and Exchange Commission (SEC) announced two proposed amendments to the rules governing its highly successful whistleblower program. Both proposed amendments address issues raised by rule changes passed in 2020 and aim to ensure that qualified whistleblowers are properly rewarded.
The first proposed amendment concerns related action awards for enforcement actions carried out by other agencies. The proposed amendment allows the SEC to pay related action awards even when the agency that carried out the related action has its own whistleblower program. The second proposed amendment affirms that the SEC can consider the potential dollar amount of an award when deciding to increase an award size but eliminates the SEC’s ability to consider dollar amount for the purpose of decreasing an award.
“These amendments, if adopted, would help ensure that whistleblowers are both incentivized and appropriately rewarded for their efforts in reporting potential violations of the law to the Commission,” said SEC Chair Gary Gensler. “The first proposed rule change is designed to ensure that a whistleblower is not disadvantaged by another whistleblower program that would not give them as high an award as the SEC would offer. Under the second proposed rule change, the SEC could consider the dollar amounts of potential awards only to increase the whistleblower’s award. This would give whistleblowers additional comfort knowing that the SEC could consider the dollar amount of the award only in such cases.”
“The proposed amendments are an excellent step in the right direction,” said leading whistleblower attorney Stephen M. Kohn of Kohn, Kohn & Colapinto. Kohn, who has previously worked closely with SEC Commissioners on whistleblower program rules added that “this initiates a process that should ensure that the SEC complies with the law, and pays rewards when a whistleblower’s information triggers multiple fines under various laws, including those administered by the SEC.”
Both newly proposed amendments address issues raised by rule changes passed by the SEC in 2020. At National Whistleblower Day 2021, Gensler announced that his staff were reviewing the whistleblower program and soon thereafter announced they would revise aspects of the 2020 rule changes.
One of the 2020 amendments that the SEC adopted altered the payment of related action awards. The 2010 Dodd-Frank Act, which established the program, contains a “related action” provision. Under this provision, when the information provided to the SEC by a whistleblower also leads to a successful enforcement action by another federal agency, the whistleblower is entitled to an award based on the money recovered in this “related” enforcement action. However, under the 2020 amendment, if a “related action” could be covered by another whistleblower reward law, then the SEC can deny the “related action” rule. This rule was heavily criticized by whistleblower advocates as well as the two SEC Commissioners who voted no on the rule changes.
The newly proposed amendment amends Rule 21F-3 to allow the SEC to pay related action awards even if the action was taken by an agency with a whistleblower reward program that has more direct or relevant connection to the enforcement action. The amendment outlines a number of potential approaches that could be used to determine the appropriate award. These approaches aim to ensure a qualified whistleblower is properly awarded but also to prevent whistleblowers from receiving two awards for the same action. Under the “Comparability” approach, the SEC would award related action awards if the other agency’s whistleblower program is not comparable to the SEC program due to caps on awards, lower statutory award ranges, or the lack of mandatory awards. Under the “Whistleblower Choice” approach, the whistleblower would decide whether to receive a related action award from the SEC or an award from the other agency’s whistleblower program. The “Offset Approach” and “Topping Off Approach” both ensure a whistleblower is awarded the full amount of an SEC related action award.
The other newly proposed amendment amends Rule 21F-6. In the 2020 rule changes, the SEC added language to the rule stating that the agency can consider the dollar amount of an award when making an award determination. The proposed amendment affirms the SEC’s authority to consider the dollar size when looking to increase an award but eliminates the authority to do so when decreasing an award.
Since it was established in 2010, the SEC Whistleblower Program has been highly successful. Overall, the SEC has awarded approximately $1.2 billion to 245 individuals.