The Securities and Exchange Commission has, at long last, updated the rules for its whistleblower awards program. Among the changes: a presumption toward more generous awards at the lower end of the pay scale, restrictions on people who abuse the tipster process too often, and faster disposal of would-be tips that don’t meet the awards program criteria.
And the controversial idea to cap large awards at $30 million — technically killed, although the SEC’s two Democratic commissioners still objected that the agency could use other measures to achieve that same end of whittling down large awards.
The SEC adopted the reforms Wednesday on a typical 3-2 partisan vote, Republicans in favor. The vote was a long time coming; SEC staff originally proposed their reforms to the program two years ago, and SEC chairman Jay Clayton had twice postponed meetings to vote on the reforms amid fierce opposition from whistleblower advocates over the $30 million cap and several other changes.
Anyway, now it’s done. The highlights are as follows.
A presumption toward the high end for smaller awards. Under the Dodd-Frank Act, whistleblowers are eligible to receive 10 to 30 percent of whatever settlement the SEC collects based upon their tips. Now whenever the potential award would be $5 million or less, the SEC will presume to give the maximum 30 percent, barring a few factors that might warrant giving a tipster less money. (Say, the tipster waited a long while to alert the SEC, and harm to investors increased.)
A crackdown on tipsters who abuse the program. The SEC will now reserve the right to bar permanently any tipster from getting an award after SEC staff determine that the tipster has previously submitted at least three frivolous prior award applications. (The Office of the Whistleblower will warn a claimant when his or her tip is considered frivolous and give the tipster the opportunity to withdraw it.)
Faster resolution of award applications that aren’t going to survive. A new rule in the program will allow the SEC to use a summary disposition process for certain types of common denials, such as untimely award applications, applications that involve a tip not provided to the SEC in the form that the rules require, and applications where the tipster’s information was never used by staff responsible for the investigation.
All those reforms are sensible because they bring more certainty to the whistleblower, who is taking a considerable career gamble by reporting misconduct to the SEC. So far, so good.
A Word on Big Awards
Another significant issue was that proposed cap on awards larger than $30 million. The whistleblower lobby razzed that idea when first proposed in 2018, and noted that the Dodd-Frank Act’s statutory language says nothing about capping awards; they can range from 10 to 30 percent of total settlement, period. Opposition was so pointed that last year Clayton retreated with a statement saying the cap was never really a cap at all. It was just, ya know, an ability to use cap-like powers for awards that were especially un-small.
So today’s reforms don’t include a cap on large awards per se. The SEC even specifically said: “The Commission has determined not to adopt proposed Exchange Act Rule 21F-6(d)(2), which would have provided a formalized process for the Commission to conduct an enhanced review of certain awards.”
Except, the final rules do say the SEC has power to decide any whistleblower awards based on dollar amount. Democratic commissioners Allison Herren Lee and Caroline Crenshaw said that was really just another way to impose a cap on awards that the Commission (read: the Republicans in charge) deems too large.
“We claim a new discretion to consider dollar amounts — in the setting of award amounts — that is broader than the discretion we proposed to write into the rule [in 2018], because it is applicable to all awards, no matter their size,” Lee said.
Will whistleblowers try to challenge that rule in court? Perhaps, and Lee warned that award applicants will have no transparency into, or any way to appeal, the agency’s discretion around dollar-amount judgments. That seems like a telling point to raise when a bunch of whistleblower and plaintiff lawyers are listening to you.
In one sense, this dispute isn’t terribly relevant to compliance officers. Your interest is in helping whistleblowers to feel comfortable, so they’ll speak up more often. So your beef is really with that Digital Realty Trust ruling from the Supreme Court that says whistleblowers can’t claim protections if they only report to the compliance officer. Let’s hope that Congress, some day, finally fixes that daft glitch in the statute.
In another sense: compliance officers can be whistleblowers too, and you tend to be one of the few who know about really large frauds, where awards of $30 million or more might be possible. To that extent, this new rule about discretion to cut awards based on dollar amount kinda works against your personal interests.
About Digital Realty Trust
And the SEC amended its rules to conform to the Digital Realty Trust decision from the Supreme Court in 2018. That ruling specified that for whistleblowers to be eligible for anti-retaliation protections under the Dodd-Frank Act, they must first report their suspicions to the SEC. People who only report allegations to the internal compliance function are not protected.
Now that’s reflected in SEC rules too. Specifically, tipsters must report their information “in writing,” which actually means submitting the tip electronically via the SEC’s online portal.
Some critics complain that the “in writing” part is a punch in the whistleblower nose, since oral declarations to the SEC no longer invoke protection. I see the theoretical point there, but in practice, filing a tip via email is not onerous. Besides, who actually uses the phone any more? People under 30 don’t even know that you can talk on phones.