The U.S. Securities and Exchange Commission (SEC) is scheduled to meet at 9 a.m. on September 2 to vote on proposed changes to the agency’s highly successful whistleblower program. Whistleblower advocates warn that, if approved as originally written, the proposed amendments will weaken vital whistleblower protections and undermine the SEC’s effectiveness in exposing fraud and protecting investors.
Stephen Kohn, whistleblower attorney for Kohn, Kohn & Colapinto, and Chairman of the Board of Directors of the National Whistleblower Center, recently penned two separate pieces arguing against specific proposed amendments. Kohn argues against a proposed amendment in the first piece, which would drop the SEC’s current regulation prohibiting retaliation against internal whistleblowers. This proposed rule follows the 2018 case Digital Realty v. Somers, in which the U.S. Supreme Court ruled that a whistleblower under the Dodd-Frank Act (DFA) was only protected from retaliation under that law if they made their disclosure directly to the SEC. Kohn explains that, despite the Digital ruling, the SEC does have the legal authority to protect internal corporate whistleblowers from retaliation, and he argues for the necessity of these protections. He concludes his piece by stating, “it is absolutely essential that the Commission take advantage of the current rulemaking proceeding to ensure that internal whistleblowers remain fully protected, despite the ruling in Digital. Ensuring continued protection for internal whistleblowers can be fully accomplished under the existing regulatory and statutory provisions of the Sarbanes-Oxley Act.”
In the second piece, Kohn argues against a proposed amendment that would institute a “soft cap” that would allow the SEC to reduce whistleblower awards in most large cases. In addition to disincentivizing whistleblowers, the “soft cap” would be detrimental to the SEC’s goals, Kohn argues, because it would undermine the program’s deterrent effect on future securities violations. He writes, “ultimately, the long-term deterrent effects on crime can save investors and the public far more than is recovered from specific prosecutions.”
Senator Charles Grassley (R-IA), a longtime champion of whistleblower rights, has also argued against the proposed amendments. In a letter to the SEC, he explains his opposition to a number of the proposed amendments, including one meant to address delays in whistleblower awards. He writes that the “Commission’s Proposed Rule fails to adequately address the long delays experienced in whistleblower cases that are not frivolous.”
Kohn, who met directly with SEC Chairman Jay Clayton and a number of other SEC staff to discuss the proposed changes issued the following statement:
“The Commissioners and their staffs were open to hearing our concerns. We sincerely hope that the Commission does not approve the rules as originally proposed. The changes will cause untold harm to whistleblowers and undermine the current SEC program. Instead, we hope that the Commission has acted on the recommendations submitted by my firm, numerous whistleblowers, and numerous advocacy groups for whistleblowers and investors, and will use this opportunity to improve the program. Especially in light of the large scale frauds being committed due to COVID-19 issues, the time is right to improve the whistleblower program, not undermine its effectiveness.”
The SEC Whistleblower Program was established in 2010 and has proven to be highly successful. In a press release from earlier this year, Jane Norberg, Chief of the SEC’s Office of the Whistleblower, highlighted the program’s success. She stated that a recent whistleblower award “underscores the paramount role the SEC’s whistleblower program plays in safeguarding the Main Street investor. Since the beginning of the program nearly ten years ago, the SEC has ordered more than $2.5 billion in financial remedies based on whistleblower information, including more than $1.4 billion in disgorgement and prejudgment interest, of which almost $750 million has been returned or is scheduled to be returned to harmed investors.”