In a press release on September 23, 2020, the US Securities and Exchange Commission (“SEC” or “Commission”), in a split 3-2 vote, amended its whistleblower program in an effort to further encourage whistleblowers to provide tips to the Commission. Along with the new rules, the SEC’s Office of the Whistleblower published guidance regarding the process for determining award amounts for eligible whistleblowers. The amendments take effect 30 days following publication in the Federal Register.
As the press release states, the SEC whistleblower program has generated a significant number of tips and award payments. 2020 saw the payout of the largest single award ever at $50 million, and the program has, over the past decade, awarded more than $500 million to 97 separate whistleblowers.
Summary of the Key Changes
In short, the key changes to the whistleblower program are:
- A presumption in favor of awarding the maximum bounty for awards under $5 million;
- Defining “whistleblower” in light of the Supreme Court’s Digital Realty Trust, Inc. v. Somers decision;
- Expanding the definition of a “successful enforcement”; and
- Various other procedural amendments.
The Commission expects these changes to bring efficiency to both the claims and awards processes. With such expansion and clarifications, organizations should ensure that their whistleblower compliance programs are firmly and properly established. A deeper view into these key changes makes the necessity of reviewing an established program clear, and we discuss the primary changes in turn below.
The New Presumption in Favor of the Maximum Award
As has always been the Commission’s stance, the Office of the Whistleblower’s guidance makes clear that the SEC retains discretion when considering award factors and setting award amounts. The criteria for deciding the amount of an award are found in Rule 21F-6. Examples of these factors include the significance of the information provided, the level of assistance or level of culpability of the whistleblower, delay in reporting, interference by the whistleblower, and several others.
When adopting the new changes to the program, the SEC noted that three-quarters of all whistleblowers awards have been for less than $5 million. The Commission now will presume that, for awards totaling less than $5 million, the statutory maximum award (30 percent of recovered funds) is appropriate when no negative criteria are present. Awards over $5 million will continue to be determined based on the factors found in Rule 21F-6. Somewhat surprisingly, the Commission did not include the much-considered proposed amendment to allow for a cap on awards over $30 million and a lowering of awards over $100 million. In stressing its own discretion in making awards, however, the Commission has left considerable room to move an award up or down without transparency. This said, the new presumption of a 30 percent recovery for smaller amounts is clearly intended to incentivize whistleblowers who may be concerned about a small payout when balanced against the risk to their chosen profession.
Uniform Definition of “Whistleblower”
In 2018, in Somers v. Digital Realty Trust, Inc., the United States Supreme Court held that whistleblowers were only protected against retaliation if they blew the whistle to the SEC itself. The SEC has clarified the whistleblower rules to align with this finding, defining a “whistleblower” as:
- An individual;
- Who provides the Commission with information “in writing”; and
- If the information relates to a possible violation of the federal securities law (including any law, rule, or regulation subject to the jurisdiction of the Commission) that has occurred, is ongoing, or is about to occur.
Thus, whistleblower protections only extend to those who report potential securities law violations to the SEC. The SEC, however, did keep internal reporting as a positive factor in award consideration.
Importantly, the clarification adds the requirement that the claim be made in writing. The SEC stated that this requirement “will be applied in a flexible manner to accommodate whistleblowers who make a good-faith effort to comply with our rules in seeking retaliation protection.” These requirements, taken together, appear intended to enhance the likelihood that a whistleblower will report to the SEC itself in order to obtain protections and be considered for awards. Of course, organizations should remember that other anti-retaliation statutes still protect those who report internally.
Expanded Definition of “Successful Enforcement”
Although the awards are narrower than those the rule initially proposed, whistleblowers now are eligible for awards regardless of whether the Department of Justice (“DOJ”) or the SEC takes action. A “successful enforcement” now includes any settlement agreement that the SEC enters into outside of a formal proceeding, as well as DOJ deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs), despite the fact that none of these is filed with a court. Whether these changes push whistleblowers to the DOJ rather than to the SEC remains to be seen. Additionally, the SEC limited recovery when a whistleblower receives an award from another program.
Other Procedural Amendments
The SEC clarified that, in order to receive an award, the whistleblower must directly provide information to the regulator rather than tell one regulator and have it inform the others. This may encourage whistleblowers to make claims with multiple agencies, particularly the DOJ, even when blowing the whistle to the SEC. Additionally, the SEC adopted rules that increase the number of ways tips can be made and qualify for an award, clarified the reward determination factors, and identified the scope of the administrative record for judicial review.
What to Do
By streamlining and adding clarity to an already demonstrably successful program, the SEC is seeking to multiply the number and quality of whistleblower reports from industry representatives. Now more than ever, it is important for every firm regulated by the SEC to review its whistleblower policy, ensuring that the tone from the top allows for robust internal reporting with serious review and that the policy effectively guards against retaliation and includes effective communication with employees who engage in internal reporting.