SEC Rule Amendments Impact Whistleblower Award Determinations

Implemented in 2011, the SEC's whistleblower program has received more than 22,000 tips, secured over $2.5 billion in penalties and restitution, and awarded over $523 million to successful tipsters.

SEC Rule Amendments Impact Whistleblower Award Determinations

The Commission has just approved a set of amendments to the whistleblower program. Commissioners voted on a collection of proposals dating back to 2018. One of the proposed rules would give the agency the discretion to award the statutory maximum of 30% whenever the final amount would not surpass $2 million. This concept garnered support from the Commission, but the threshold has been adjusted to $5 million.

Another proposed rule would have granted the SEC discretion to reduce awards whenever monetary sanctions surpassed $100 million, but the commissioners voted against it.

After the SEC opened up the proposals for public comments, it received about 150 letters. Many respondents viewed the award reduction rule as a move to impose a cap on whistleblower bounties. A letter by Senators Sherrod Brown, Jack Reed, Elisabeth Warren, Patrick Leahy, Chris Van Hollen, and Cristopher Coons warned that "Regrettably, the Proposal could deter whistleblowers." 

Meanwhile, a letter from the Center for Capital Markets Competitiveness described the SEC's award determination criteria as "nebulous and subjective." The U.S. Chamber of Commerce affiliate added that "the paucity of details in the orders granting (and denying) bounty awards provides little if any decision-useful information to regulated persons as to what conduct they should avoid." 

Key SEC Rule Changes

  • The Commission has expanded the scope of its whistleblower program, which will now extend to certain actions involving Justice Department DPAs and NPAs. 
  • If the largest potential award does not surpass $5 million, and in the absence of negative factors, meritorious claimants will receive the maximum award amount.
  • The definition of "whistleblower" has been modified to reflect the Supreme Court's decision in Digital Realty v. Somers, whereby the Justices established that only whistleblowers who report to the SEC are protected from retaliation under its whistleblower program.

The amendments were adopted by the SEC after a 3-2 vote. The dissenting commissioners were Allison Herren Lee and Caroline A. Crenshaw.  According to Herren, the rule impacting the agency's award determination is perilous. She criticized "the treatment given to the central issue of the Commission's discretion to reduce awards." 

Crenshaw was concerned about a new guidance regarding the type of information whistleblowers must submit to be eligible for awards. "I worry this guidance will inadvertently impact the perception of the type of information the Commission considers valuable," she commented.

Though the SEC's whistleblower program is widely perceived as successful, there is a consensus among whistleblower advocates that some of the recent amendments could be problematic. They argue that raising the percentage for smaller awards may mean that the amounts awarded in large-scale fraud cases might be reduced to compensate and that the award determination process still lacks transparency.

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