SEC Amends Its Whistleblower Award Program Rules
Government/Regulatory Enforcement
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  • SEC Amends Its Whistleblower Award Program Rules

    On September 23, 2020, the Securities and Exchange Commission (“SEC”) announced that it voted to amend the rules governing its whistleblower award program.  According to the SEC, the amendments are intended to provide eligible whistleblowers with greater insight into the program as well as to improve efficiencies in reviewing and processing awards.  The SEC’s Office of the Whistleblower also issued staff guidance for determining award amounts for eligible whistleblowers.

    The whistleblower program enables the SEC to provide individuals who voluntarily provide original information leading to a successful SEC enforcement action with a monetary reward.  In theory, the awards are designed to serve not only as an incentive for individuals to assist the SEC in its enforcement efforts, but also as a reward for the professional and reputational risks individuals take by coming forward with information.  For a whistleblower to be eligible, any resulting enforcement action must result in over $1 million in sanctions.  The amount awarded is at least 10%, but no more than 30%, of the monetary sanctions collected by the SEC in the enforcement action and certain related actions.  The funds for the awards come from the Investor Protection Fund at the Treasury Department.  Since 2012, the SEC has awarded approximately $562 million to 107 individuals.

    The amendments addressed a variety of areas in the whistleblower program, including submitting award applications, reviewing and processing awards, clarifying the program rules, and defining terms in the program rules, but do not fundamentally alter the program’s structure or the manner in which it will incentivize potential whistleblowers.

    One of the main amendments added a rule that presumes whistleblowers will be paid the statutory maximum award amount (i.e., 30% of the amount collected in an enforcement action) when the potential award amount is less than $5 million if no negative award criteria are present, subject to certain exceptions.  At the same time, the SEC declined to adopt a controversial amendment that would have set a soft cap on future awards by granting the SEC explicit discretion to reduce an award that yielded sanctions of at least $100 million if the SEC found that the potential award exceeded what is “reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers.”  Instead, the SEC reiterated in its press release that award amounts are to be determined exclusively based on the factors set out in the SEC’s rules.

    Other amendments focused primarily on mechanical aspects of the program and on efforts to process award applications more efficiently.  For instance, individuals who have submitted three frivolous award applications will be barred from seeking an award.  And the amendments create a new summary disposition process by which the SEC will now be able to resolve claims.

    While generally welcome clarifying rules, none of these amendments addresses the more challenging effects of the whistleblower program—namely, that certain company insiders may at times become incentivized to seek a bounty from the SEC prior to raising concerns internally with a company. 

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