By Jason Zuckerman of Zuckerman Law
Recently, the SEC’s successful whistleblower reward program reached a milestone of paying $1B in awards to whistleblowers. And enforcement actions from whistleblower tips to the SEC have yielded more than $4.8 billion in financial remedies. Notwithstanding the success of the program and the hard work of the Office of the Whistleblower (OWB) and Division of Enforcement to build an effective program, the SEC could further enhance its ability to identify and detect fraud by strengthening the SEC whistleblower program. To that end, TAF’s SEC Committee recently sent a letter to Chair Gensler offering recommendations to strengthen the program.
Fortunately, SEC Chair Gary Gensler has repeatedly expressed support for the SEC whistleblower program and has taken specific actions to encourage whistleblowers to come forward. For example, when the SEC announced that it has paid $1B in awards to whistleblowers, Chair Gensler stated, “The assistance that whistleblowers provide is crucial to the SEC’s ability to enforce the rules of the road for our capital markets.”
Given the Chairman’s support of whistleblowers, TAF is confident that these recommendations will be given every consideration. The Committee recommended rescinding some recent amendments to the rules that could undermine the Program. The specific goals and actions to improve the program include requests to:
Foster collaboration between the SEC and whistleblowers and their counsel.
Whistleblowers and their counsel are integral to the SEC whistleblower program, and whistleblower tips help the Commission detect and investigate illegal conduct while conserving resources. As such, the SEC should more consistently and openly collaborate with whistleblowers and their counsel. TAF recommends that the Commission adopt rules to improve communication between the SEC and whistleblowers, including a requirement to update whistleblowers about the status of their tips.
Rescind the erroneous independent analysis definition adopted in September 2020
The new amended rules adopted in September 2020 adjusted the definition of “independent analysis,” and rather than providing clarification, the new definition causes confusion and could deter whistleblowers with valuable information from coming forward. The new definition states that information from non-insiders will only be eligible for award consideration if, when the application for an award is being considered (many years after the whistleblower submitted the original tip), the SEC determines Commission staff could not have inferred the tip information from public sources. TAF recommend that the Commission use the previous definition of independent analysis, where a non-insider tip would be eligible for an award if the Commission did not previously infer the information from public sources.
Improve collections and reward whistleblowers for bankruptcy proceeding recoveries
The SEC has thus far failed to collect at least 40% of the penalties it has levied over the last decade, with strategic bankruptcy filings further diminishing the Commission’s ability to collect. A whistleblower award is entirely dependent on the SEC’s collection of the sanction imposed in the covered enforcement action. The Commission should move to improve its collections process, including by strengthening internal staff guidance to freeze assets to stop an ongoing fraud and improving asset recovery efforts in whistleblower cases. Further, whenever possible, whistleblowers should receive credit for whatever amount the Commission can obtain as a judgment creditor in bankruptcy.
Clarify that the amount of collected monetary sanctions is not a relevant factor in award percentage
The SEC has recently claimed that it has always had the discretion to reduce an award where the Commission deems the award amount excessive. This supposed discretion is inconsistent with the award criteria and could lead the Commission to arbitrarily reduce awards. The SEC should clarify that it is not changing the standard for determining the amount of a whistleblower award, and the Commission should continue to provide predictable awards to encourage whistleblowers to come forward.
Rescind the 2020 amendment to the rule governing related-action awards
The 2020 amendment to the rule governing related-action awards states that the Commission can pay a related-action award only where the SEC finds that its whistleblower program has the more direct or relevant connection to the action. This guidance could chill whistleblowers from coming forward with valuable information, as some alternative whistleblower programs have caps on awards that do not exist under the SEC’s program. The SEC should rescind this amendment and at a minimum clarify that this discretion simply provides the Commission with the right to offset any amount of an alternative award against any related-action award to which a whistleblower is otherwise entitled.
Rescind the new rule excluding oral disclosures from Dodd-Frank protected conduct
The Commission adopted an amendment in September 2020 that limits protected whistleblowing to written disclosures to the SEC, rendering disclosures via interview, testimony, or examination unprotected. This weakens contravenes well-established precedent that oral disclosures are protected. The SEC should promptly abandon the writing requirement and expressly protect testimony to the Commission.
Rescind the new TCR timing requirement
The 2020 amendments include a provision that a whistleblower must file a TCR within 30 days of first contacting the Commission to be eligible for an award. This imposes a new, unnecessary procedural burden on whistleblowers and could discourage disclosures. The SEC should rescind the 30-day requirement, and instead, a whistleblower should be eligible for an award as long as they filed a TCR before the Commission initiated an enforcement action. In the alternative, the deadline should be extended to at least 120 days from when a whistleblower first learns about the requirement or retains counsel.
Reconsider guidance concerning reductions in awards based on “unreasonable delays” in reporting
The Commission should reconsider its interpretation of “unreasonable delay” in deciding whistleblower awards, as this is the most common negative factor in award determinations. Rather than using an unofficial presumption that a six-month period constitutes an unreasonable delay, the Commission should consider that the timing of a whistleblower’s reporting is complex and personal. The SEC should assess the timing of a whistleblower’s reports on a case-by-case basis and reject any formal timing requirements. A whistleblower’s deliberation and careful consideration improves the overall quality of tips, and the SEC should encourage such deliberation, within reasonable bounds.
As the SEC prepares proposed amendments to the rules governing the SEC whistleblower program, TAF will continue to offer input to further strengthen a program that has a proven track record of protecting investors and combatting fraud.
In making these suggestions, TAF is mindful of Chairman Gensler’s support of whistleblowers. In remarks for the National Whistleblower Day Celebration, Chair Gensler stated:
The tips, complaints, and referrals that whistleblowers provide are crucial to the Securities and Exchange Commission as we enforce the rules of the road for our capital markets . . . the whistleblower program helps us to be better cops on the beat, execute our mission, and protect investors from misconduct . . . Investors in our capital markets have benefited from the critical information provided by whistleblowers. . . . We must ensure that whistleblowers are empowered to come forward when they see misbehavior; that they are appropriately compensated according to the framework established by Congress; and that those who report wrongdoing are protected from retaliation.
Chair Gensler has also taken action to carry out his commitment to encouraging whistleblowers to come forward. On August 2, 2021, he suspended the implementation of two recent amendments to the SEC whistleblower rules because these amendments could discourage whistleblowers from coming forward. In addition, Chair Gensler directed the s