Yesterday, we submitted comments to the Securities and Exchange Commission in response to the Commission’s recently announced proposal to amend the rules governing the SEC Whistleblower Program. Here’s a link to the SEC’s proposal.
In our letter we commended the SEC for its recognition that the Whistleblower Program has been an extraordinary success and has contributed significantly to the Enforcement Division’s fight against fraud and other wrongdoing, and we expressed our support for the proposed changes that build on the program’s successes and address areas in demonstrated need of improvement. These include changes that improve the efficiency of the intake and award-making processes and provide clear answers to questions concerning eligibility to participate in the program. These changes are consistent with Congress’s intent to encourage whistleblowers to bring meritorious cases to the attention of the Commission’s enforcement personnel.
At the same time, we expressed our concern that the proposed limits to award payouts threaten to undermine this same central element of Congress’s clear intent when it enacted the Whistleblower Program in 2010: the creation of incentives for a broad pool of potential whistleblowers to come forward and report wrongdoing.
Accordingly, we opposed those proposed rules that would inject unnecessary ambiguity into the operation of the Whistleblower Program because they would create uncertainty and drive potential whistleblowers away, causing many who might otherwise have come forward with meritorious cases to decline to participate in the program.
Below is a quick summary of some the points we raised:
Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) Clarity is critical for participants in the Whistleblower Program, and this proposed change will eliminate uncertainty as to an important consideration for potential whistleblowers (i.e., that they do not run the risk of losing an award depending on the procedural tool the SEC or another regulator uses to impose sanctions on the wrongdoer).
Alternate Proceedings We are concerned about a lack of transparency in the proposed approach, which may have negative consequences on an otherwise deserving whistleblower. The rules should include a more clearly defined procedure for the Office of the Whistleblower to notify the public and potential whistleblowers that monetary sanctions exceeding $1 million have been levied, akin to the Notice of Covered Action process currently followed by the Office. The notice process should be designed to facilitate the provision of awards to meritorious whistleblowers.
The Definition of “Monetary Sanctions” Far from clarifying the process for determining the appropriate circumstances under which whistleblowers qualify for awards, this proposal inserts unnecessary ambiguity and does not appear to be justified by any actual problem. There is no reason to alter a clear definition of monetary sanctions or to eliminate any category of collected funds from the pool. We do, however, believe that the Commission should make clear that funds obtained by an SEC-requested trustee in bankruptcy will receive the same treatment as funds obtained by an SEC-requested receiver. The primary purpose of the two proceedings is essentially the same: to place control of the company in the hands of a disinterested party in order to properly run, reorganize or liquidate the business and protect investors and creditors.
Proposal to bar a whistleblower’s recovery from the SEC where there is a potential related action that is arguably more closely related to another whistleblower program We oppose this proposal because it injects ambiguity into what should be (and what Congress intended to be) a straightforward process to reward eligible whistleblowers whose information leads or significantly contributes to a successful SEC action in which sanctions exceed $1 million.
Proposal to allow the Commission to limit awards in large cases We urged the SEC not to alter its incentive structure so that only “super-whistleblowers” (those with information about massive frauds resulting in the largest sanctions imposed) are placed in a category subject to a downward adjustment of the award percentage, based on a nebulous standard of what is “reasonably necessary” to award the whistleblowers in the largest cases. On the contrary, we argued that the Commission should provide greater incentive percentages to those who bring forward information concerning the most serious frauds, and that there is no justification for such a radical change and no data indicating the need to drive down “excessive” payouts. The introduction of an additional layer of uncertainty – that an award may be reduced based upon what the Commission considers “reasonably necessary to achieve the programs goals” – will inevitably reduce the pool of individuals willing to take the extraordinary risks inherent in reporting the kinds of massive frauds that the program was designed to ferret out.
Guidance making a delay beyond 180 days “unreasonable” We support an improved level of clarity on this issue because certainty is valuable in incentivizing potential whistleblowers to come forward. We support a “bright line” test of 180 days going in both directions, with delays of less than 180 days presumed reasonable and delays exceeding 180 days presumed unreasonable
• Reporting and Retaliation Provisions We believe strongly that the imposition of an “in writing” requirement for a whistleblower to be entitled to anti-retaliation protections is too restrictive. The SEC should also be expansive in its interpretation of what constitutes retaliation, to include “downstream” conduct through which a former employer prevents a whistleblower from securing future employment or causes her/him to be blackballed. The rules should also limit language that can be read as incentivizing internal reporting to avoid causing potential whistleblowers to lose protection from retaliation by failing to report to the Commission concurrently with internal reports (or earlier). In addition, because the Supreme Court has determined that a whistleblower must report to the SEC to avail her/himself of anti-retaliation protections, the Commission should no longer consider internal reporting – or the failure to report internally – as a factor in determining the appropriate whistleblower award percentage.
Updating Forms We support the SEC’s proposal to allow for flexibility in making adjustments to the online form and suggest that there should be a 30-day grace period for anyone who submitted under the “old form” after the Commission issues a new one. We also urged the SEC to consider allowing the submission of forms to the Office of the Whistleblower by electronic mail in addition to current permissible methods (the online form and facsimile).
Barring frivolous claimants We support the Commission’s careful exercise of the authority to ban frivolous claimants from the program. The Commission has imposed lifetime bans from the program on two individuals, but was required to expend an inordinate amount of time and resources in doing so. The credibility and efficiency of the program are enhanced when the resources of the Office of the Whistleblower can be focused on providing timely Preliminary Determinations and Final Orders on good faith, non-frivolous claims. Clearing out the few repeat offenders who create nuisance work for program staff and the Commission is a well-founded idea whose time has come. In keeping with the principle that every claimant is given at least a second chance, the number of frivolous claims justifying exclusion should be reduced to two, but we see no benefit in extending a third chance to a claimant who clearly is acting in bad faith. At the same time, we support the idea of providing a one-time opportunity to reconsider and withdraw frivolous applications as a means of conserving resources.
Requiring the submission of TCR forms no later than 30 days after initially contacting SEC We have concerns that this proposal conflicts with other Whistleblower Program rules and may usurp Congressional intent by unilaterally and arbitrarily limiting the types of information for which an individual can claim whistleblower credit. Whistleblowers can receive credit under the Rules for providing the Commission with original information and analysis even if the Commission previously received that information from another source, such as Congress or the media. Under the proposed rule, however, individuals in such situations would not be eligible for an award because their TCR filing would necessarily be made long after the Commission received and used their work. This is not a hypothetical concern. Our members have reported circumstances where whistleblowers had no idea their work assisted a Commission enforcement action until some aspect of the matter became public, e.g., through the disclosure of a subpoena or the filing of a complaint. There are also circumstances in which whistleblowers have brought information to the Commission’s attention but are unaware that their information may qualify for a whistleblower award. While the Whistleblower Program has grown in stature and become more visible over the years, there are still many potential whistleblowers who are unaware of its benefits. We are not convinced that a “deficiency letter,” which we understand to be discretionary, would allay whistleblower concerns. The unfortunate reality is that the letters may not even reach whistleblowers in time to permit them to seek representation or advice and meet the submission deadline. Moreover, deficiency letters will have no impact on those whose original information and analysis, unbeknownst to them, was used by the Commission to initiate an enforcement action.
Limiting the CRS record to timely submissions and/or submissions made in response to requests by the Office of the Whistleblower We do not support the proposal to establish the WB-APP deadline as the date after which the Office of the Whistleblower will no longer consider information received by a whistleblower relevant to her/his award application. Our understanding is that many whistleblowers wait three years or more to receive a preliminary determination on their award applications, and a great deal can happen in that span of time that will have significant impact on the Commission’s calculus. In our view, a more reasonable approach that sufficiently protects whistleblower interests would be to limit the size and scope of any supplemental submission related to a whistleblower application to a reasonably short presentation of: (1) information requested by the Commission; and/or (2) information that could not reasonably have been known to the whistleblower at the WB-APP deadline. Such a change would strike the appropriate balance between increased efficiency and whistleblower advocacy.
Summary disposition process We support this proposed enhancement to the program, and agree that the proposed criteria for the exercise of summary disposition power by the Office of the Whistleblower are appropriate (no evidence that a TCR was filed, no evidence that staff bringing the action ever saw the TCR, etc.). We appreciate the proposal to ensure the provision of due process by allowing for an accelerated appeal following a summary disposition notice, and we believe this approach will promote efficiency while helping to ensure that meritorious cases do not fall through the cracks.
Proposed guidance on “Independent Analysis” Absent some evidence of a problem in need of fixing, we do not support affirmative changes to a program that is working well. The SEC’s proposed rule document provides no evidence of occasions where the current definition of and approach to “independent analysis” has caused any identifiable problems. The proposed “fix” injects uncertainty into a process that needs to be as unambiguous as possible to maximize the pool of potential whistleblowers. We do not support this proposed guidance and strongly urged that it not be included in the final rules. The proposal to limit awards based on “original analysis” to submissions that provide insight “beyond what would be reasonably apparent to the Commission from publicly available information” is a step backward if the intention is to provide additional clarity. It raises many questions, including the following: - Who determines what would be “reasonably apparent to the Commission?” At what point in time must that determination be made? As of the time of the submission or after the fact? With the benefit of hindsight virtually anything can be classified as “reasonably apparent,” and the assessment of an applicant’s eligibility for an award based on independent analysis will be made many years after the original submission was made. If the staff who worked on the investigation have moved on and are not available, who can state what was “reasonably apparent” while the investigative work was going on? - Can the Commission reject an application on the “reasonably apparent” standard even if no one at the Commission opened an investigation until the whistleblower made her/his submission? Shouldn’t the opening of an investigation based on the submission be dispositive of the question of whether the alleged conduct was “reasonably apparent”? - When a whistleblower’s award petition is being considered, years after the original submission and following the completion of a complex investigation, isn’t it counterproductive and unfair to investigative staff to ask them to acknowledge that facts now evidently true were not “reasonably apparent” at the time of the submission? Whistleblowers, including those who are not insiders, assume significant risk when they decide to submit information to the SEC, and this proposed guidance sends them precisely the wrong message. Its adoption would not resolve any identified problem and would disincentivize whistleblowers who provide sophisticated independent analysis .
Discretionary Award process We appreciate the proposed idea of “spot” awards in such instances and the helpful intention behind it, but we’re not sure there is statutory support for such discretionary payments. We are also concerned that the availability of spot awards might produce a high volume of requests for such awards and require the expenditure of staff time and resources not justified by the proposed benefit.