Tomorrow, the U.S. Securities and Exchange Commission (SEC) will vote on controversial proposed changes to its whistleblower program. Ahead of the vote, attorneys at the qui tam law firm Kohn, Kohn & Colapinto (KKC), and partner Stephen M. Kohn highlighted the five key proposed rule changes and the threats they pose to the program.
On September 21, Kohn authored a piece titled “Pending Changes Pose Threat to SEC Whistleblower Program,” while the attorneys at KKC filed a summary comment with the SEC about the proposed changes. Both pieces outline the five most important issues in the vote. They are as follows:
- Proposed Rule 21F-9(e): The Tips, Complaints, and Referrals Issue. This proposed rule would establish that whistleblowers must first file a formal whistleblower complaint (TCR) before contacting anyone at the SEC. If the whistleblower does make contact with the SEC before filing a TCR, they would be automatically disqualified from obtaining a mandatory whistleblower reward. In his piece, Kohn quotes a comment filed by Enron whistleblower Sherron Watkins, who claims that the proposed rule “would create unrealistic reporting procedures that would disqualify a vast number of whistleblowers.” The attorneys at KKC strongly urge the SEC to vote no on this issue.
- Proposed Rule 21F-6(d): Limiting Rewards in Large Cases. This proposed rule would implement a “soft cap“ on whistleblower awards, allowing the SEC to lower the monetary amount of large whistleblower rewards simply due to their size. Kohn argues against this rule and claims that “it is well established that large rewards play a vital public service, in both incentivizing whistleblowers to step forward and deterring future misconduct by the regulated community. Lowering awards simply on the basis of size is inconsistent with the plain meaning of the statute.” The attorneys at KKC state that any rule which permits arbitrary reductions of awards based on size should be opposed.
- Proposed Rule 21F-3(b)(4): Related-Action Cases. This proposed rule rewrites the related-action requirement by granting the SEC authority to deem what is a related action and to thus avoid paying related-action rewards. Kohn and the attorneys at KKC claim this rule violates the Dodd-Frank Act, which mandates the payment of related-action rewards. Thus, they argue the SEC vote down the proposed rule.
- Proposed Rule 21F-2(d)(4): Protection of Internal Whistleblowers. This proposed rule strips the SEC of the authority to protect internal whistleblowers. The proposed rule follows a Supreme Court ruling in Digital Realty v. Somers, which ruled that the Dodd-Frank Act does not grant the SEC this authority. However, Kohn references a letter sent to the SEC by the authors of the Sarbanes-Oxley Act (SOX Act), which explains that the SOX Act does grant the SEC the authority to protect internal whistleblowers. Thus, the attorneys at KKC urge the SEC to oppose this rule change.
- The Definition of an Analyst. While not a rule change, the SEC proposes guidance that weakens its current rules defining qualified analysts eligible for rewards. Kohn references a letter to the SEC written by a number of Senators which outlines the Senators’ opposition to the proposal because it “would permit the SEC to create an insurmountable hurdle for a whistleblower to establish original information based on ‘independent analysis.'” The attorneys at KKC state that the proposed guidance should not be approved.
Kohn and other attorneys at KKC have repeatedly met with SEC officials to discuss the proposed rule changes. They also have, alongside a large swath of other whistleblower advocates, filed comments to the SEC in opposition to these changes. Over 100,00 comments, emails, and petitions were filed with the SEC opposing said changes.
Pending Changes Pose Threat to SEC Whistleblower Program
SUMMARY SUPPLEMENTAL COMMENT Dodd-Frank Act (“DFA”) Proposed Whistleblower Rule File Number S7-16-18