Finally, SEC Voting on Whistleblower Reforms

The Securities and Exchange Commission will vote next week on reforms to its whistleblower rewards program, more than two years after the reforms were first proposed, and which still have the potential to complicate your pursuit of a strong speak-up culture.

The vote is scheduled for Wednesday, Sept. 2. In theory compliance professionals will be able to watch the meeting online, but don’t be surprised if the actual meeting itself gets canceled. The SEC has a habit lately of canceling meetings at the last moment, voting in seriatim (that is, without meeting), and then just publishing the adopted proposals online. 

This is actually the second time the SEC has scheduled a vote on its whistleblower reforms. Commission chairman Jay Clayton first planned to vote on the reform package in October 2019, but canceled that vote amid complaints from whistleblower protection advocates. Let’s hope the second time’s the charm. 

What are the reforms? The original proposal was unveiled in June 2018. Among the ideas:

  • Giving the SEC more discretion to issue awards for smaller enforcement actions;
  • Clarifying that whistleblowers must provide their tips “in writing,” although that really means submitting information through the SEC’s tip website;
  • Clarifying that whistleblowers are eligible for awards even if their tips only lead to deferred- or non-prosecution agreements;
  • 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, and so forth);
  • 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;
  • Setting a $30 million ceiling on large whistleblower awards.

That last bit about capping awards at $30 million generated so much controversy that Clayton published a statement in November 2019 (that is, shortly after he canceled the first scheduled vote) to claim that the proposed cap wasn’t really a cap — it was just, you know, a cap-like structure for any award large enough to let you buy a house on MTV Cribs

We should also be clear that these were all the original proposals, which are now so old that they need to wear a coronavirus mask when going out in public. We won’t know what the amended proposals might look like until the SEC unveils them next week.

Retaliation for Internal Whistleblowers?

One potentially troublesome reform would be a change to Rule 21F-2(d)(4), which prohibits companies from retaliating against whistleblowers who report their concerns internally — meaning, to the compliance function or the audit committee.  

In theory, this proposal is meant to conform SEC rules to the standard spelled out by the Supreme Court in its Digital Realty Trust decision from 2018. That was the legally correct but practically ridiculous ruling that if a whistleblower wants to claim anti-retaliation protections under the Dodd-Frank Act, he or she must report their concerns directly to the SEC. Reporting only to the compliance officer or some other internal authority won’t cut it.

Since then, the number of tips flowing to the SEC Office of the Whistleblower has soared. And why wouldn’t it, really? If that’s what employees need to do to keep their jobs while complaining about an issue, of course they’ll do it.

That dynamic does not help the compliance officer. You want employees to feel safe when reporting issues internally. I appreciate the SEC’s predicament that its current rule doesn’t conform with the Supreme Court’s standard; and perhaps the Commission will have no choice but to adopt this specific reform anyway. That doesn’t mean it’s helpful to you. 

The ideal remedy is a legislative fix from Congress, which had been slouching along to passage. The House passed such a fix last year, and Senate Republicans introduced a companion measure last fall. Since then, like all else in the Senate, the bill has gone nowhere. 

Remember the Compliance Officer’s Interest

Compliance officers’ primary concern is to foster a speakup culture that supports internal reporting. That means an environment where employees feel safe and secure to report problems to you. So in a roundabout way, one of your concerns in this debate is the whistleblower’s ability to claim retaliation protections. If employees don’t feel safe, they won’t speak up to you. 

The debate around Rule 21F-2 is one example of how the SEC might complicate your corporate culture objectives. (Or, more accurately, how the U.S. Senate’s inaction is complicating those objectives.) 

That said, other proposed reforms might help your corporate culture quest. 

whistleblowerFor example, the reforms 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. 

After all, 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.

And let’s remember that compliance officers themselves can be whistleblowers, too. Some of you have won significant awards from the SEC for bringing issues to the agency’s attention, after your internal efforts fell on deaf ears. 

So however the SEC acts next week, watch closely.

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