SEC Reforms Its Whistleblower Program

September 24, 2020

In 2015, I earned the distinction of representing the first in-house compliance officer to whom the SEC issued a whistleblower award, which was over $1 million. "SEC Announces Million-Dollar Whistleblower Award to Compliance Officer" (SEC Release, April 22, 2015)
https://www.sec.gov/news/pressrelease/2015-73.html My client risked a long-standing industry career after realizing that the firm's management knowingly implemented a fraud upon the regulatory community designed to cover up serious misconduct. Sadly, my interaction with the SEC's Office of the Whistleblower ("OWB") was horrific notwithstanding that my client ultimately enjoyed a much-deserved reward. Despite the significant personal and professional risk incurred by my client in reaching out to the SEC, the whistleblower was largely responded to by OWB with an attitude of dismissiveness bordering on hostility. That was in marked contrast to the professional interaction with the Enforcement staff handling the underlying investigation.

After the SEC had fully collected the multi-million dollar fine imposed upon the respondent, the federal regulator declined to provide any meaningful guidance or updates as to its process for determining eligibility for an award, the timeframes for same, and, thereafter, when the Claims Review Staff ("CRS") issued a Preliminary Determination, we were unable to obtain meaningful guidance on how long it would take to obtain payment. Inexplicably, OWB displayed an institutional bias by which my whistleblower client was treated more along the lines of a criminal defendant or respondent in an administrative proceeding, in contradistinction to my client's actual role as an independent, sincere, cooperative, and valuable source of information.

As a former regulator with two Wall Street self-regulatory organizations, I fully understand and respect the need for prosecutors and regulators to scrupulously maintain whatever confidentiality is mandated for investigations, hearings, and trials. Since I represent individuals and entities that are often industry defendants/respondents and I also represent defrauded public customers, I am particularly vested in ensuring the integrity of regulatory and criminal justice processes. I understand the rules of the game and I honor the rulebook. It is in that spirit that during the last five years, I have urged the SEC to implement more deadlines within its Rule 21F and to hold OWB accountable for its managerial failures. For details about my grievances with OWB, see:

"SEC Whistleblower Program Is A Black Hole Of Despair" (BrokeAndBroker.com Blog, April 9, 2015).
http://www.brokeandbroker.com/2735/sec-oig-owb/

Comments on Proposed Rule: Amendments to the Commission's Whistleblower Program Rules / Release No. 34-83557; File No. S7-16-18/ From: Bill Singer / September 12, 2018
https://www.sec.gov/comments/s7-16-18/s71618-173238.htm

It was a moment of great satisfaction and vindication when the SEC published:

SEC Adds Clarity, Efficiency and Transparency to Its Successful Whistleblower Award Program (SEC Release)
https://www.sec.gov/news/press-release/2020-219

For nearly two years, I monitored the substantial record of largely negative comments
https://www.sec.gov/comments/s7-16-18/s71618.htm submitted to the SEC about the shortcomings of OWB and the frustrations many whistleblowers and their lawyers had experienced with the whistleblower process. Thankfully, many of the complaints raised in the comments now appear to be addressed -- not all the criticisms have been satisfactorily answered in the recent SEC Release but, overall, it's a start, and a very good one at that.

The SEC adopted amendments to its Whistleblower program for the expressed purpose of increasing its efficiency and infusing more clarity/transparency into the award process. As set forth in the "Summary" portion of the Final Rule (Rel. No. 34-89963; File NO. S7-16-18) https://www.sec.gov/rules/final/2020/34-89963.pdf:

The Securities and Exchange Commission ("Commission") is adopting several amendments to the Commission's rules implementing its congressionally mandated whistleblower program. Section 21F of the Securities Exchange Act of 1934 ("Exchange Act") provides, among other things, that the Commission shall pay-under regulations prescribed by the Commission and subject to certain limitations-to eligible whistleblowers who voluntarily provide the Commission with original information about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administrative action, or a related action, an aggregate amount, determined in the Commission's discretion, that is equal to not less than 10 percent, and not more than 30 percent, of monetary sanctions that have been collected in the covered or related actions. On May 25, 2011, the Commission adopted a set of rules to implement the whistleblower program. After ten years of experience administering the program, the Commission is adopting various amendments that are intended to provide greater transparency, efficiency and clarity to whistleblowers, to ensure whistleblowers are properly incentivized, and to continue to properly award whistleblowers to the maximum extent appropriate and with maximum efficiency. The Commission is also making several technical amendments, and adopting interpretive guidance concerning the term "independent analysis."

One controversial aspect of the SEC proposed amendments was addressed in the Final Rule: "Although the Commission did not intend to create a new restriction on, or affect the size of, Award Amounts, this proposed rule was misperceived by some as a potential new restriction on Award Amounts." at page 9 of the Final Rule. By way of summary, the Final Rule adopted the following [Ed: footnotes omitted]:

Allowing awards based on deferred prosecution agreements ("DPAs") and non-prosecution agreements ("NPAs") entered into by the U.S. Department of Justice ("DOJ") or a settlement agreement entered into by the Commission outside of a judicial or administrative proceeding to address violations of the securities laws;
Consistent with the Commission's practice in award determinations to date, clarifying the current definition of related action to make clear that recovery from the Commission for the related action is not available where the Commission determines that a separate whistleblower award program more appropriately applies to the non-Commission action;
Providing a specific process presumptively setting Award Amounts at the top end of the range when the statutory maximum award of 30 percent is $5 million or less and the negative Award Factors are not present, subject to the discretion of the Commission to apply certain exclusions;
Clarifying the Commission's broad discretion when applying the Award Factors in Rule 21F-6(a) and (b) and setting Award Amounts, including the discretion to consider the Award Factors in percentage terms, dollar terms or some combination thereof; and
Revising the Commission's definition of "whistleblower" in light of the Supreme Court's decision in Digital Realty Trust, Inc. v. Somers, and making certain related clarifications to Rule 21F-2 to address various other interpretive questions that have arisen in connection with the Court's holding.

at pages 10 - 11 of the Final Order

Notably, the SEC has attempted to respond to criticisms from me and other critics about the opaque nature of its statistical disclosures [Ed: footnotes omitted]:

[T]he Commission is directing that the Office of the Whistleblower will include in its annual reports to Congress (beginning with the fiscal year 2020 report), in an aggregated manner, an overview discussion of the factors that were present in the awards throughout the year, including (to the extent practicable) a qualitative discussion of how these factors affected the Commission's determination of Award Amounts. The Office of the Whistleblower will continue to make available on its webpage, and will review and update as necessary on not less than an annual basis, information regarding its approach to processing whistleblower award claims, including the initial review and prioritization of award claims.

at page 13 of the Final Order

Strengthening our Whistleblower Program (Statement by SEC Chairman Jay Clayton)
https://www.sec.gov/news/public-statement/clayton-whistleblower-2020-09-23

Although SEC Chair Clayton made the comment noted below at the end of his statement, I believe it deserved to be among his opening remarks:

Finally, before I turn to our colleagues for their presentation, I want to note our appreciation to whistleblowers who, sometimes at great risk to their livelihood, report suspected securities laws violations to the SEC. Our whistleblower program has been a success because of their efforts. Working together, we have stopped frauds and prevented losses for countless investors. Today's amendments build upon the strong foundation to date and make the program even stronger. I look forward to your continued assistance in rooting out fraud and protecting investors and the marketplace.

In Chair Clayton's comments, he highlights a key reform to the Whistleblower program:

[(1)] in roughly 75% of cases, we were limited to awarding $5 million or less by statute, and (2) in most of our cases, it turned out that after analyzing the award factors, we awarded amounts in the top quarter of the range. How, then, could we take this information and use it to help us get money to these whistleblowers faster?

The amendments today provide that, for awards where the statutory maximum is in the aggregate $5 million or less and no negative award factors are present, there will be a presumption that the award be set at the statutory maximum, subject to certain exclusions that will not apply in the majority of circumstances. Again, in these cases, our review will presume that the whistleblower will get the maximum award allowed under the statute. In addition to providing greater transparency and certainty, this presumption will reduce the time the Commission would otherwise spend determining the precise award amounts. Said simply, based on our experience, we can add more certainty around time and amount in the substantial majority of cases, enhancing the effectiveness of the program for the Commission and increasing incentives for whistleblowers, all with no meaningful countervailing cost.

But what about cases where the maximum possible statutory award is greater than $5 million? The evaluation will remain unchanged. . . .

Amendments to the Commission's Whistleblower Program Rules (SEC Commissioner Hester M. Peirce)
https://www.sec.gov/news/public-statement/peirce-whistleblower-2020-09-23

SEC Commissioner Peirce supported the Final Rule and her remarks evidence her keen appreciation for both the purpose of encouraging whistleblowers to step forward and the SEC's obligation to timely pay awards to those tipsters [Ed: footnote omitted]:

[T]he whistleblower program has, in its decade of existence, become an integral part of our enforcement program. People have brought us countless tips, and many of those tips inform us for the first time of misconduct that needs to be investigated or help us connect the dots in an existing investigation. Many of these whistleblowers would have come to us even in the absence of the prospect of an award. Our ability to pay awards, however, enables us to recognize whistleblowers' contributions to the integrity of our markets in a concrete way. As Justice Ginsburg explained in Digital Realty Trust, Congress "recognize[ed] that 'whistleblowers often face the difficult choice between telling the truth and committing 'career suicide'.' "An award may encourage an individual to make the difficult choice to tell the truth by replacing the income she loses if she is fired from her job and by providing some offset for the reputational, personal, and even physical threats that whistleblowers can endure as a result of alerting us to wrongdoing.

We have drawn from our decade of experience with the rule lessons about how to administer this program effectively. One lesson that has emerged is the importance of paying whistleblowers quickly. These amendments will help us to do that by focusing the time and attention of our Office of Whistleblower staff on meritorious award claims. We also have gained experience with a wide variety of whistleblower claims; the facts and circumstances are unique to each matter. The amended rule allows us to look at each matter on its facts, but also lays out the parameters that guide our decision-making and give whistleblowers greater insight into what they can expect to receive.

Statement on the Commission's New and Improved Whistleblower Program Rules (SEC Commissioner Elad L. Roisman)

SEC Commissioner Roisman supported the Final Rule. Perhaps as a nod in the direction of those of us who have long complained about a seeming "culture" of dilatory responses from the Office of Whisleblowers ("OWB"), Roisman notes in part that:

Increased Efficiency for OWB
The final rule, like the proposal, includes several mechanisms designed to increase the efficiency and effectiveness of our hard-working colleagues in OWB who focus on getting awards to whistleblowers. For example, the rules provide for a summary disposition mechanism that will allow the staff in OWB to issue a preliminary award denial of certain common invalid award claims. This change and others will free up resources in OWB, so that the staff can more efficiently process valid claims. . . .

Statement of Commissioner Caroline Crenshaw on Whistleblower Program Rule Amendments (SEC Commissioner Caroline A. Crenshaw)

https://www.sec.gov/news/public-statement/crenshaw-whistleblower-2020-09-23

Notwithstanding the positive aspect of the Final Rule, the Devil is in the details and it remains to be seen if the aspirations will prove insurmountable for OWB Staff. As Commissioner Crenshaw warns [Ed: footnotes omitted]:

Although today's rule makes improvements on the initial proposal, there are still aspects of the rule that leave inefficiencies and create uncertainties for potential whistleblowers. I am therefore, unfortunately, and for the following reasons, unable to support today's rulemaking.

First, I share Commissioner Lee's serious concerns about the discretion to consider the dollar amount, and I hope that future Commissioners will exercise the discretion as carefully as we do.

Second, we are providing interpretive guidance on the meaning of "independent analysis," which is a concept that impacts whether certain information provided by a whistleblower to the Commission is award-worthy. I worry this guidance will inadvertently impact the perception of the type of information the Commission considers valuable. In the guidance, we describe "independent analysis" as information that is not reasonably accessible and that is not "reasonably inferable" by the Commission. Our focus, instead, should be on the quality of the information and the analysis provided by the whistleblower. The amount of data and information available to the Commission is extensive. Given that, we should not focus on whether the staff "could have" inferred the information from what was provided, but whether the staff did infer the information prior to getting the submission.

Third, I am concerned about whether the rule sufficiently protects certain whistleblowers who experience retaliation. In Digital Realty, the Supreme Court held that the anti-retaliation protections in our rule apply only to those who provide information to the Commission before they experience retaliation. But the Court gave us express discretion to say how whistleblowers can come forward. Today, by limiting the anti-retaliation protections to whistleblowers who submit information in writing, we fail to do all we can to protect those who cooperate with our exams and investigations. In other words, if a whistleblower provides information to the Commission through interviews or testimony, that whistleblower does not necessarily get the benefits of the anti-relation provision. I think we could have approached our response to Digital Realty differently in light of our nation's strong history of protecting whistleblowers, and our agency's interest in continuing to do so.