The Securities and Exchange Commission (SEC) has proposed for public comment several amendments to the SEC’s rules implementing its whistleblower program. The whistleblower provisions of the Securities Exchange Act of 1934 (Exchange Act) provides, among other things, that the SEC shall pay an award to eligible whistleblowers who voluntarily provide the SEC 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. In May 2011, the SEC adopted a comprehensive set of rules to implement the whistleblower program.
The proposed rules would make certain changes and clarifications to the existing rules, as well as several technical amendments, including the following:
- Allowing awards based on deferred prosecution agreements (DPAs) and nonprosecution agreements (NPAs) entered into by the U.S. Department of Justice (DOJ) or a state attorney general in a criminal case, or a settlement agreement entered into by the SEC outside of the context of a judicial or administrative proceeding to address violations of the securities laws. This would address the fact that the current whistleblower rules do not address whether the SEC may pay an award when an eligible whistleblower who voluntarily provides (i) original information that leads to a DPA or NPA entered into by DOJ or a state attorney general in a criminal proceeding; or (ii) information that leads to a settlement agreement entered into by the SEC outside of the context of a judicial or administrative proceeding to address violations of the securities laws.
- Elimination of potential double recovery under the current definition of related action in that the rules would be amended to clarify that a law-enforcement action would not qualify as a related action if the SEC determines that there is a separate whistleblower award scheme that more appropriately applies to the enforcement action.
- Additional considerations for small and exceedingly large awards would be addressed. In the context of potential awards that could yield a payout of $2 million or less to a whistleblower, the proposed rules would authorize the SEC to adjust the award percentage upward under certain circumstances (subject to the 30% statutory maximum) to an amount that the SEC determines more appropriately achieves the programs objectives of rewarding meritorious whistleblowers and sufficiently incentivizing future whistleblowers who might otherwise be concerned about the low dollar amount of a potential award. Relatedly, in the context of potential awards that could yield total collected monetary sanctions of at least $100 million, the proposed rules would authorize the Commission to adjust the award percentage so that it would yield a payout (subject to the 10% statutory minimum) that does not exceed an amount that is reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers; however, in no event would the award be adjusted below $30 million.
The SEC noted that the three proposed rule changes described above are intended to serve two important and related objectives. First, the amendments are designed to help ensure that an eligible, meritorious whistleblower is appropriately rewarded for his or her efforts when the SEC or a related-action authority recovers monetary sanctions from wrongdoing that violates the securities laws. Second, the amendments would help ensure that the Investor Protection Fund (IPF) that Congress has established to pay meritorious whistleblowers is used in a manner effectively and appropriately leverages the IPF to further the SEC’s objectives, which includes using the IPF to compensate whistleblowers who come forward with original information that leads to a DPA or NPA entered into by DOJ or a state attorney general, or a settlement agreement entered into by the SEC.
Ultimately, while the SEC’s whistleblower program has made significant contributions to the effectiveness of the SEC’s enforcement of the federal securities laws, it is believed that the proposed rule changes will significantly enhance what has already proved to be a successful program. To that end, the SEC has received over 22,000 whistleblower tips since the inception of the program through the end of fiscal year 2017. Original information provided by whistleblowers has led to enforcement actions in which the SEC has obtained over $1.4 billion in financial remedies, including more than $740 million in disgorgement of ill-gotten gains and interest, the majority of which has been or is scheduled to be returned to harmed investors. The SEC has ordered over $266 million in whistleblower awards to 55 individuals whose information and cooperation assisted the SEC in bringing successful enforcement actions and, in some instances, other enforcement authorities in bringing related actions against wrongdoers.
Interested parties should forward comments regarding the proposed amendments to the whistleblower rules to the SEC on or before September 18, 2018.
For the full text of the SEC’s request for comments , click here.