On SEC Whistleblower Reforms
Corporate compliance officers deal with whistleblowers all the time. So now that the Securities and Exchange Commission is moving to revamp its whistleblower award program, watch that debate closely. Lots of constituencies are going to voice opinions here, and you don’t want yours to get lost in the fray.
The SEC published its proposed reforms (184 pages long) last week, and they are out for comment through the summer. The most notable proposals include…
- Setting a $30 million ceiling on large whistleblower awards;
- Expanding the SEC’s discretion to increase the size of smaller awards, bringing the amount to $2 million;
- Allowing outsiders to bring tips based on publicly available information, but raising the standard of “independent analysis” that would let those tipsters deserve an award;
- Clarifying that whistleblowers must provide their tips “in writing” — although that really means submitting information through the SEC’s tip website — to be eligible for awards and anti-retaliation provisions;
- Establishing new procedures to accelerate the dismissal of claims that seem destined for dismissal anyway (frivolous or untimely claims; tips based on public information that the SEC would never use anyway, and so forth).
Some of the proposals are wise and much needed given the Digital Realty Trust v. Somers decision from the Supreme Court earlier this year — the one that said if employees want to claim whistleblower protections offered under the Dodd-Frank Act, they must first report their claim to the SEC. That decision does compliance officers no favors, since it simply means more whistleblowers will run to the SEC first with their allegations of misconduct, rather than to their compliance function.
The Compliance Officer’s Interest
The political potshots over these proposals may get distracting, so let’s keep our eye on the ball. Corporate compliance officers’ primary concern here is to foster the culture of whistleblowing. That means the most important priority for you, the corporate compliance officer, is the whistleblower’s ability to claim retaliation protections under the Dodd-Frank Act.
To that extent, these proposed rules are good. They clarify what a whistleblower must do to qualify as “reporting” to the SEC, and the act of reporting isn’t onerous: visit the SEC website and submit a tip via an online form. That’s the process already, and the SEC receives thousands of tips every year.
Equally useful are the SEC’s steps to streamline internal processes to dismiss tips that aren’t useful, either because they’re bogus or untimely or restatements of publicly available information. If the priority is for whistleblowers to claim retaliation protections, then it’s just as important for them to know when they can’t claim Dodd-Frank retaliation protections. The sooner the SEC delivers that news, the better — even if the news is something the would-be whistleblower won’t like.
These specific reforms, then, are something corporate compliance officers can support unequivocally.
DPAs and NPAs
The SEC is also proposing that whistleblowers will be eligible for awards if their tips lead to a deferred- or non-prosecution agreement. That’s another good move. Current SEC rules aren’t clear on that point; in theory, someone could provide a tip that results in an NPA plus some monetary penalty, but receive no award because the NPA might be construed as an ineligible form of resolution.
The new rules would dispel that confusion: If your tip leads to a DPA or NPA, you would be eligible for an award if your tip met all the proper criteria. That’s good news, since it may lead to more reporting of bribery offenses.
My only beef is with tips that lead to a declination to prosecute — might those tipsters be left in the cold? After all, the Justice Department’s FCPA Corporate Enforcement Policy does offer declinations more generously, to encourage more cooperation. So how would a resolution like that square with this proposed new rule? (Rule 21F-4(d), if you’re keeping track.)
Now, we’ve never actually seen a declination with monetary penalties; I’m not even sure that arrangement is logically sound. But we have seen declinations with disgorgement, and disgorgement implies some wrongful behavior even if the Justice Department lets the offending company evade sanction. So if someone’s tip leads to that resolution, shouldn’t he or she be eligible for an award like anyone else?
Then again, from the compliance officer’s perspective, the important point is a whistleblower’s ability to assert retaliation protections. So this hill is an interesting one to explore, but not one a CCO needs to die on.
Caps on Big Awards
The SEC’s’ most controversial proposal is to cap maximum awards at $30 million. Why do that? Apparently because chairman Jay Clayton just seems to believe that the SEC needs an ability “to determine whether a truly large award was reasonably necessary to advance the program’s goals, or whether some reduction of the award amount is appropriate.”
This is a shot aimed at the whistleblower litigation industry: groups that invest in whistleblowers with strong cases, hoping the target company will settle with the SEC for a large sum, and then the investors get a slice of that big whistleblower award.
The point of the SEC whistleblower award program is to support whistleblowers — and Clayton offers no evidence that (a) large awards are a problem; or (b) capping large awards will further the cause of whistleblowers generally. On the other hand, creating an ability to cap awards does create what SEC commissioner Robert Jackson (Democratic appointee) called “political” risk: that future SEC regulators could cut awards just because they want to, and that would have a chilling effect on whistleblowers risking careers to speak up.
Commissioner Kara Stein, the other Democratic appointee, also wondered whether the language of the Dodd-Frank Act allows the SEC to conjure up an awards cap at all. Couple her point, with the lack of evidence that a cap is useful — and you can almost see the lawsuit some good governance group will file against the SEC when Clayton does try to ram through his $30 million cap.
Speaking of ramming through proposals: The public comment period for these proposals will last through the summer. In theory the SEC could try to adopt final rules in the fall, but Michael Piwowar, Republican appointee to the SEC, leaves his job this week.
That means the SEC will be deadlocked 2-2 on politically contentious issues, and this cap certainly qualifies as that, until a replacement is named. (Stein’s term expired 13 months ago, but she can remain in office until December.) So we might not see any final action until 2019 — and if Democrats take control of the Senate, to veto unwelcome appointees by President Trump, who knows what might happen.
Then again, Trump did nominate Elad Roisman to replace Piwowar. Typically that nomination wouldn’t move forward until paired with a Democratic nominee to replace Stein. Senate Republicans, could, however, jettison typical practice and approve Roisman alone in a power grab.
Wouldn’t be the first time that Senate Republicans ignored the rules for a power grab, after all.
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