SEC Reforms Whistleblower Reforms

The Securities and Exchange Commission quietly voted last week to expand the ways that whistleblowers might win awards for reporting misconduct to regulators, and reversed previous rule changes from the Trump Administration that capped especially large awards.

Neither development is a surprise, nor should they be particularly disruptive to the internal reporting programs that corporate compliance officers already manage. They are, however, yet more examples of the pro-whistleblower bent that the SEC keeps advancing under chairman Gary Gensler — so we should keep at least one eye on what the agency is doing, since whistleblowers going to the SEC rather than your office can ultimately tie your company into knots.

First, the SEC gave itself the power to pay whistleblower awards for enforcement actions brought by other agencies, in cases where the other agency’s awards program might be limited and the whistleblower would stand to receive less money. 

That is, if a whistleblower brought a tip to the SEC that led to a successful enforcement action at both the SEC and some other federal agency, but that agency’s whistleblower program is “not comparable to” the SEC’s program — then the SEC can issue a single award to the whistleblower that covers both award programs, even if the misconduct allegations are more relevant to the other agency than to the SEC.

So what constitutes a rival awards program “not comparable to” the SEC’s program? One where that other program’s statutory award range is more limited, its awards are subject to an award cap, or the award is discretionary rather than mandatory.

In other words, when a whistleblower tip might lead to an award that’s smaller, because the complaint really pertains to another agency, the SEC reserves the right to step in and give the whistleblower a larger award anyway.

whistleblowerSecond, the SEC reversed a policy the agency adopted in 2020 that gave commissioners de facto power to cap unusually large awards by “exercising discretion” over the dollar amount of awards. The new policy adopted last week reaffirmed that the commissioners can exercise such discretion — but only to make awards even larger, not smaller. 

This will give whistleblowers additional comfort knowing that the commission would not decrease awards based on their size,” Gensler said in a statement.

As one might expect, Republican commissioners Hester Peirce and Mark Udeya disagreed with last week’s actions. They both issued rather tart statements decrying the latest changes as unnecessary, and frustrating to companies trying to keep pace with regulatory change as the Biden Administration undoes the work of the Trump Administration.

“The commission is revisiting rules that were finalized a little over a year and a half ago. Reversing rules shortly after adoption, in the absence of a regulatory weakness or failure, sets a bad precedent,” Udeya said in a statement. He then added, “Today’s amendments are not aimed at remediating any known or identified weaknesses with the current whistleblower rules.”

Well, yes and no. Plenty of people in the whistleblower lobby said the SEC had no business in 2020 trying to cap large awards, even with the fig leaf conjured up by then-chairman Jay Clayton that commissioners had inherent power to exercise discretion over the dollar size of awards. Just  because the Trump Administration was subsequently rousted from office, that doesn’t mean the 2020 rule went away; in theory some future set of SEC commissioners could still use that rule to cap large awards. Now they can’t, unless they reverse Gensler’s reversal of 2022.

All that said, for compliance officers the larger point about these latest changes to the whistleblower program is still rather small. Your primary objective is forever and always to encourage internal reporting, regardless of how the SEC and other regulators try to tempt employees with whistleblower awards. 

To that extent, your best moves remain the same: lean on senior executives to talk up the importance of internal reporting, build an internal hotline function that’s easy to use, and train everyone with a pulse on the scourge of whistleblower retaliation.

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