On June 28, 2018, the U.S. Securities and Exchange Commission (“SEC”) proposed amendments to the rules governing its whistleblower program. Press Release, SEC Proposes Whistleblower Rule Amendments, No. 2018-120 (June 28, 2018). Among other things, the proposed amendments would affect the types of whistleblower awards authorized by the SEC’s rules, allow for adjustments of awards in certain cases, adopt a new definition of “whistleblower,” improve the SEC’s ability to bar individuals from making frivolous award claims, and clarify what types of whistleblower submissions constitute “original information.” These proposed amendments, which on balance reflect a modest refinement of the whistleblower program and signal that the essential contours of the program continue to have the strong support of the Commission, are subject to notice and comment by the public and further modification by the SEC.
As drafted, the SEC’s proposed amendments would expand the scope of whistleblower awards by ensuring that they can be awarded when information is provided not only in connection with investigations that result in any form of action or settlement entered into by the SEC, but also when the information results in deferred prosecution agreements (“DPAs”) and non-prosecution agreements (“NPAs”) entered into by the U.S. Department of Justice (“DOJ”) or state attorneys general in criminal cases. The SEC’s proposals also would allow for discretionary adjustments to the statutorily calculated awards in the context of “small and exceedingly large” awards. Specifically, they would allow the Commission to adjust the award percentage upward to an amount no greater than $2 million (subject to a 30% statutory maximum) in the context of relatively small awards, or downward to an amount no less than $30 million (subject to a 10% statutory minimum) in the context of relatively large awards, to ensure that whistleblower incentives are sufficiently strong and that the SEC “is a responsible steward of the public trust.”
The proposed amendments would also adopt a new definition of “whistleblower” consistent with the Supreme Court’s opinion in Digital Realty Trust, Inc. v. Somers, which we covered in a prior edition of this newsletter. See Shearman & Sterling LLP: Government/Regulatory Enforcement, Supreme Court Finds Dodd-Frank Does Not Protect Internal Whistleblowers (Feb. 27, 2018). The SEC’s proposal would define whistleblowers as those who report possible securities laws violations in writing to the SEC, and would ensure that this definition applies uniformly to the whistleblower award program, heightened confidentiality requirements for whistleblowers, and employment anti-retaliation protections.
The proposed regulations also seek to streamline how the SEC processes award applications. Among other things, the regulations would provide procedures whereby the SEC could summarily dispose of certain types of claims that are likely to be denied, such as untimely applications and applications where a claimant’s information was never used by the staff responsible for an investigation. The proposed regulations would also permit the SEC to bar applicants from seeking awards after providing false information to the SEC, or after submitting three frivolous award applications.
As part of the proposed regulations, the SEC also drafted interpretative guidance that would clarify what constitutes “original information” provided to the SEC, which is a prerequisite to eligibility for a whistleblower award. See 17 C.F.R. § 240.21F-1. Under current regulations, original information includes certain information derived from “independent analysis,” which is defined as a person’s “examination and evaluation of information that may be publicly available, but which reveals information that is not generally known or available to the public.” 17 C.R.F. § 240.21F-4(b). The SEC’s proposed guidance would clarify that this definition should be read narrowly, including only the sort of assessments or insights that provide information beyond what would be “reasonably apparent” to the SEC from publicly available information.
In sum, the proposed amendments, while relatively modest, signal a maturing of the SEC’s whistleblower program. The proposed amendments, however, are not yet final – they are subject to further revision by the SEC, and a 60-day period in which the public will have the opportunity to comment.