SEC enhances its whistleblower program to further incentivize tips
In what is described as an attempt to provide more clarity to whistleblowers and increase efficiency and transparency, on September 23, 2020, the Securities and Exchange Commission (the “SEC") voted to adopt significant amendments to the rules governing its heralded whistleblower program (the “SEC’s Program”). When the formal whistleblower initiative was introduced, it was said to be a significant “game changer” for regulators in need of leads from those who have knowledge of potential wrongdoing. The SEC established its bounty program 10 years ago to encourage individuals to voluntarily report high-quality tips to the SEC regarding potential securities law violations. Since the inception of the program and its first award in 2012, the SEC has issued nearly $562 million to 106 individuals, with awards ranging between $50,000 to $50 million. See here and here for our previous blog posts comparing and contrasting the SEC’s Program with that of the Ontario Securities Commission (the “OSC”).
SEC Chairman Jay Clayton has stated that the recent amendments will further incentivize tips by “get[ting] more money into the hands of whistleblowers, and at a faster pace”. At the same time, the SEC’s Office of the Whistleblower published guidance [PDF] on the process for determining award amounts for eligible whistleblowers.
Some notable highlights of the SEC’s amendments [PDF] include:
- Presumption of statutory maximum amount for awards up to $5 million: Where the maximum authorized award is $5 million or less (which is the case for most SEC whistleblowers), the amendments provide a presumption that the award be set at the statutory maximum of 30%, subject to no negative award criteria present. Negative award criteria may include factors such as the whistleblower’s role in the securities violation or if they benefitted financially from the violations.
- Allowing awards based on DPAs, NPAs or settlements: The amendments allow the SEC to award payments based on deferred prosecution agreements and non-prosecution agreements entered into by the U.S. Department of Justice, or a settlement agreement entered into by the SEC outside the context of a judicial or administrative proceeding.
- Increased flexibility in filing requirements: Previously, if an individual failed to file the required form prior to initiating contact with the SEC, the potential consequences were severe (including being disqualified as a whistleblower). Pursuant to the amendments, the SEC established a 30-day grace period in the event of non-compliance with this filing requirement.
- Codification of the guidance in Digital Realty Trust, Inc. v. Somers: The amendments have codified the decision of the U.S. Supreme Court in Digital Realty Trust, Inc. v. Somers [PDF], in which the Court held that an individual is only protected under the Dodd-Frank anti-retaliation provision if they have first reported a suspected securities violation to the SEC in writing. Consequently, an internal report will not be sufficient to qualify for this protection. Additionally, to be eligible for an award or to obtain heightened confidentiality protection, an individual must submit information by way of either a Form TCR or the SEC’s online tips portal.
- Heightened efficiencies in claims review: In an effort to reduce frivolous claims, the SEC’s Program now includes formal codification of the practice of barring applicants who submit materially false, fictitious or fraudulent statements in their whistleblower submissions. If an individual is deemed to have submitted three frivolous award applications, the SEC may permanently bar the individual from making any further applications. The amendments also include a summary disposition procedure for more easily managing certain types of common denials.
These amendments to the SEC’s Program become effective 30 days after publication in the federal register. It is expected that the amendments will increase the frequency of whistleblower reports and the magnitude of SEC’s awards. In Canada, the OSC claims that “whistleblowers perform a public service by providing inside knowledge on misconduct that would otherwise be difficult to detect”. If the SEC’s amendments do in fact increase the frequency of quality reports, will there be pressure on the OSC to follow suit?