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SEC Votes to Proposed Amendments to the Rules Governing Its Whistleblower Program

On June 28, 2018, the Securities and Exchange Commission (the “SEC”) voted to propose amendments to the rules governing its whistleblower program.  The whistleblower program was established in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  It added Section 21F to the Securities Exchange Act of 1934 (the “Exchange Act”), establishing the Commission’s whistleblower program.  The public comment period is for 60 days following publication of the proposing release in the Federal Register.

Highlights of the proposed amendments include:

  • Allowing awards based on deferred prosecution agreements and non-prosecution agreements, or a settlement agreement entered into by the SEC, to ensure that whistleblowers are not disadvantaged because of the particular form of an action that the SEC, DOJ, or a state attorney general acting in a criminal case may elect to pursue. 
  • Allowing the SEC to exercise discretion to:
    • Adjust an award percentage upward, to take into account whether the increase would assist in achieving the objectives of rewarding meritorious whistleblowers, and to incentivize future whistleblowers who might otherwise be concerned about the low dollar amount of a potential award. 
    • Provide for an award mechanism for SEC enforcement actions that do not qualify as covered actions, because (1) they do not meet the threshold monetary requirement, (2) they are based on publicly available information, or (3) the monetary sanctions collected are de minimis.
    • Adjust the award percentage, so that it would yield a payout that does not exceed an amount that is reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers. 
  • Eliminating double recovery, if a whistleblower could potentially receive multiple recoveries for the same information from different whistleblower programs. 

In addition, the SEC proposed rule amendments in response to the Supreme Court’s recent decision in Digital Realty Trust, Inc. v. Somers, in which the Supreme Court invalidated the SEC’s rule interpreting Section 21F’s anti-retaliation protections to apply in cases of internal reports.  The proposed rules would modify Rule 21F-2 so that it comports with the Court’s holding by, among other things, establishing a uniform definition of “whistleblower” that would apply to all aspects of Exchange Act Section 21F.

Additional changes proposed by the SEC address the processing of certain types of whistleblower award applications:

  • Proposed new subparagraph (e) to Exchange Act Rule 21F-8 – this would clarify the SEC’s ability to bar individuals from submitting whistleblower award applications where they are found to have submitted false information to the SEC, as well as to give the SEC the ability to bar individuals who repeatedly make frivolous award claims in SEC actions.  
  • Proposed new Exchange Act Rule 21F-18 – this would afford the SEC with a summary disposition procedure for certain types of likely denials, including untimely award applications, applications submitted in an improper form pursuant to the rules, and applications in which the information was never provided to or used by staff responsible for the investigation. 

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