In 2011, pursuant to authority granted under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission (SEC or Commission) adopted rules implementing the whistleblower provisions of Section 21F of the Securities Exchange Act of 1934 (the Whistleblower Program). The Whistleblower Program allows the Commission to provide monetary rewards to whistleblowers who provide the Commission with information that leads to successful enforcement actions. Over the past seven years, the Commission has trumpeted the successes of its Whistleblower Program—namely, that information provided by whistleblowers has led to almost $1.5 billion in disgorgement and penalties and over $275 million has been paid out in whistleblower “awards.”
At the same time, the Whistleblower Program has come under increasing scrutiny. After years of litigation, the anti-retaliation provisions of the Whistleblower Program were recently struck down by the U.S. Supreme Court, which held unanimously in Digital Realty Trust, Inc. v. Somers that the Commission had exceeded its authority by extending the protections to whistleblowers who only reported violations internally.1 The size of some of the most recent awards has also attracted considerable attention. Indeed, while the Commission has ordered almost 50 awards, over 40% of that money was awarded in three very sizeable awards.
After seven years, the Commission has decided it’s time to step back and revisit certain features of the Whistleblower Program.
On June 28, 2018, a divided Commission proposed amendments to the Whistleblower Program.2 Most significantly, the proposed amendments are designed to provide the Commission with greater discretion with respect to awards at the extremes of the Whistleblower Program (on collected monetary sanctions over $100 million and awards under $2 million)—essentially to enhance the Commission’s ability to limit very large (and increase modest) awards. The proposed amendments also provide interpretive guidance on the meaning of “original information,” clarify the types of government actions that can qualify for whistleblower awards and conform the anti-retaliation provisions to Digital Realty.
The proposed amendments will be open for comment for 60 days following publication in the Federal Register.
Proposed Rule Amendments
1. Size of Awards
When a whistleblower is entitled to receive an award, the Commission is required, by statute, to pay the whistleblower between 10% and 30% of the sanctions recovered. Currently, Rule 21F-5(a) nominally states that “[t]he determination of the amount of an award [within that range] is in the discretion of the Commission.” However, existing Rule 21F-5(b) provides that the Commission “will decide the percentage of the award applying the criteria in [Rule 21F-6]” and identifies the factors that the Commission must consider. The Commission’s discretion is therefore limited to those certain enumerated factors in determining the percentage of an award. The factors that may increase a percentage are limited to: (i) the significance of the information provided by the whistleblower; (ii) the assistance provided by the whistleblower; (iii) law enforcement interest; and (iv) participation in internal compliance systems. The factors that may decrease a percentage are limited to: (i) the whistleblower’s involvement in any violation; (ii) any unreasonable delay in reporting; and (iii) any interference with internal compliance and reporting systems. Notably, the Commission is not presently able to consider the size of an award in determining the percentage amount.
The Commission is now proposing to change that with amendments to Rule 21F-6 regarding (i) awards in cases yielding at least $100 million in collected monetary sanctions and (ii) awards to a single whistleblower below $2 million. The Commission believes additional flexibility, within statutory bounds, is appropriate in situations of extremely large and small awards. The Commission proposed the addition of paragraphs (c) and (d) to Rule 21F-6 to provide that additional flexibility.
Proposed paragraph (d) to Rule 21F-6 would permit the Commission to consider the dollar amount of an award and whether and how to adjust the award if the whistleblower has provided information that led to at least $100 million in collected monetary sanctions. The Commission would be required “to consider whether [the amount determined under current criteria] exceeds what is reasonably necessary to reward the whistleblower and to incentivize similarly situated whistleblowers.”3 If the Commission makes a determination that the proposed amount is excessive, it would be permitted to adjust an award downward to an “amount that is reasonably necessary.”4 The flexibility would be limited so that no departure could reduce an award below $30 million and the Commission could not reduce an award below the statutory floor of 10% of collected monetary sanctions.
Commissioner Jackson argued that this change would alter the incentive for prospective whistleblowers to provide tips; he argued that whistleblowers need certainty and that “[a]dding uncertainty to [the] process risks that would-be whistleblowers will stay quiet.”5 But the economic analysis in the Proposing Release argues that such a floor would not impact the incentives to prospective whistleblowers as a practical matter.6 The Commission requests comments on the appropriateness of the floor and how to address the floor in a situation with multiple whistleblowers.
On the other end of the spectrum, proposed paragraph (c) to Rule 21F-6 would provide the Commission flexibility to adjust an award upward if the award would potentially be below $2 million. The Commission seeks the additional flexibility to ensure that an award “reflects a dollar amount that the Commission determines is appropriate to achieve the program’s objectives of rewarding meritorious whistleblowers and sufficiently incentivizing future whistleblowers who might otherwise be concerned about the low dollar amount of a potential award.”7 An award may not be increased above $2 million and would still be subject to a cap of 30% of the collected monetary sanctions, per the statutorily permissible range. Also, in order to be eligible for this upward adjustment, the whistleblower must not have participated in the violative conduct, delayed reporting or interfered with compliance. The economic analysis to support the upward flexibility is sparse.8 There is limited discussion on how this potential for a larger award may encourage additional whistleblowers, and there is no discussion regarding the potential additional burden on corporate entities.
2. Actions Covered by the Whistleblower Program
In addition, the Commission is proposing to amend the definition of “action” in Rule 21F-4(d) to permit an award in the context of (i) deferred prosecution agreements and non-prosecution agreements entered by the U.S. Department of Justice or a state attorney general and (ii) settlement agreements entered by the Commission outside the context of judicial or administrative proceedings. These amendments offer the Commission flexibility to provide an award to a whistleblower regardless of the resolution the government seeks because such government action is outside the control of the whistleblower. The Commission has already interpreted its authority to include the ability to pay an award in the context of a deferred prosecution agreement; the proposed amendments clarify this authority and expand that authority to other appropriate administrative actions.9 The Commission requests comment on whether these types of actions are appropriate to include within the scope of the Whistleblower Program and whether there are other arrangements that should be included as well.
The Commission is also proposing to limit the definition of “related action” to exclude actions that would potentially entitle a whistleblower to double recovery under a different whistleblower program (e.g., the Internal Revenue Service, the Commodity Futures Trading Commission and state programs). The Proposing Release states that this scenario has yet to occur, but in administering the Whistleblower Program the Commission has become aware of the possibility.10 Whether another program is applicable is subject to the Commission’s determination on a case-by-case basis; the Commission requests comment on whether an objective, categorical exclusion would be more appropriate.
The Commission also requests comment on whether to conduct future rulemaking to include actions that do not result in monetary sanctions of $1 million or actions where a whistleblower’s tip consisted of publicly available information. These items are not covered by the present proposed amendments, but the Commission is interested in public comment. Interestingly, the Commission includes in the request a question about whether it has the statutory authority to make awards that are not tied to monetary payments where a whistleblower has provided information and the collected amount is too small to make the whistleblower eligible.
3. Individual Eligibility
The Commission is also proposing to amend the Whistleblower Program in order to conform with the Supreme Court’s decision in Digital Realty. The proposed amendment would provide a uniform definition of “whistleblower” and that a whistleblower must report to the Commission “in writing” to be eligible for an award, and to be protected from retaliation by an employer. We have previously discussed the decision prompting this change.
The Commission also proposed amendments to bar certain individuals from being eligible for an award. Individuals who submit false information or repeatedly11 submit frivolous award applications will be permanently barred from receiving an award. The proposed amendment is to ensure that the process remains efficient and to avoid the waste of SEC resources. In a similar attempt to ensure efficiency, the Commission proposed a summary disposition process for claims that are likely to be denied (i.e., late applications or applications that did not follow the proper form).
4. Interpretive Guidance
The Proposing Release also adds guidance to the “independent analysis” standard.12 The Whistleblower Program requires that the whistleblower provide “original information,” which is information that is based on either “independent knowledge” or “independent analysis.”13 The proposed guidance is to clarify the type of analysis of publicly available information that constitutes “independent analysis.” The Commission proposes the standard be that “to qualify as ‘independent analysis,’ a whistleblower’s submission must provide evaluation, assessment or insight beyond what would be reasonably apparent to the Commission from publicly available information.”14 The determination thus depends on whether the violations could be inferred from publicly available facts. The Commission acknowledges that this is not a bright line, but a “solid foundation.”15 Commissioner Stein was unconvinced that the additional 15 pages discussing this issue clarifies the applicable standard.16
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Ultimately, the proposed amendments are the Commission’s attempt to amend the Whistleblower Program to incorporate seven years of experience. The Commission is divided about whether the program needs any improvement. The public comment period is an opportunity for the public to provide their observations on whether these items improve the Whistleblower Program. The most significant amendments focus on how to tinker—at the extremes—with the rewards while continuing to incentivize whistleblowers.