Over ten years after the inception of the U.S. Securities and Exchange Commission’s (the “SEC”) whistleblower program, and more than two years after a vote in favor of proposing amendments to the program, the SEC narrowly passed[1] a new set of rules imposing noteworthy modifications.[2] The whistleblower program, first established in July 2010 under the Dodd-Frank Wall Street Reform and Consumer Protection Act through the addition of Rule 21F to the Securities Exchange Act of 1934,[3] promotes original information tips on violations of securities laws through incentives in the form of monetary awards and anti-retaliation protections.[4] The program has seen substantial success thus far. To date, the program has awarded nearly $562 million to 106 whistleblowers.[5] Now, the SEC’s self-proclaimed intention of the recent amendments is “to provide greater clarity to whistleblowers and increase the program’s efficiency and transparency,” an undeniably attractive set of stated objectives.[6]
Among the number of changes to the whistleblower program is the adoption of a uniform definition of the most fundamental term, “whistleblower,”[7] that applies going forward to the sections of Rule 21F that govern awards eligibility, confidentiality obligations, and anti-retaliation protections.[8] This detailing emerged in response to the 2018 Supreme Court case, Digital Realty Trust, Inc. v. Somers, which requires an individual to report securities violations to the SEC itself to qualify as a whistleblower, excluding those who do not from employment protections.[9] An individual that reports a violation solely to their internal compliance department does not reap the benefits of the whistleblower program,[10] and coverage under the program begins only after an individual reports violations to the SEC, following all guidelines.[11]
The SEC’s recent amendments take the decision in Digital Realty regarding what qualifies one as a whistleblower, thus affording them the corresponding privileges and protections, a step further than the Supreme Court did.[12] The new rules enact an “in writing” requirement for information presented to the SEC.[13] Under the amendment, a whistleblower is “(i) an individual (ii) who provides the Commission with information ‘in writing’ and only if (iii) the information relates to a possible violation of the federal securities law (including any law, rule, or regulation subject to the jurisdiction of the Commission) that has occurred, is ongoing, or is about to occur.”[14] How does this “in writing” obligation impact the processes and results for each the aspiring whistleblowers and the SEC? Will this achieve the SEC’s goal of increased “efficiency and reliability” in processing reported violations, or will it prove too burdensome for would-be reporters?
The SEC contends the flexibility available in fulfilling the “in writing” requirement provides adequate options to reduce the cost of doing so for whistleblowers to a nominal amount.[15] One can submit reports online, via email, through facsimile, and by U.S. mail to satisfy the “in writing” requisite.[16] However, this requirement means that an individual that reports an incident only orally, perhaps in a moment of urgency, is not afforded protections nor eligible for an award.[17] As a result, even individuals that fully cooperate through interviews and testimony, but who have not submitted information in writing, lack the guarantee of anti-retaliation protections.[18] Compounding this complication is the SEC’s ability to decrease an award if an individual unreasonably delays reporting.[19] It is possible then to imagine a situation where one faces the decision of either turning over information as soon as possible to mitigate delays, or waiting until they can report in writing to avoid compromising protections.
The hard-set goal of increased efficiency, channeled through stricter reporting requirements, may leave individuals with valuable and potentially career-risking information exposed. They will be left wondering how the SEC can justify imposing additional hurdles for whistleblowers that make protections against retaliation harder to qualify for.[20] The amendments are set to become effective 30 days after they are published to the Federal Register.[21] Time will tell if and how whistleblowing reporting and program protection patterns are impacted.
[1] See Aaron Nicodemus, Whistleblower Advocates Up In Arms Over Changes to SEC Program, Compliance Week (Sept. 23, 2020, 4:54 PM), https://www.complianceweek.com/whistleblowers/whistleblower-advocates-up-in-arms-over-changes-to-sec-program/29507.article (discussing the details of the SEC’s 3-2 vote).
[2] See Press Release, SEC, SEC Adds Clarity, Efficiency and Transparency to Its Successful Whistleblower Award Program (Sept. 23, 2020), https://www.sec.gov/news/press-release/2020-219 [hereinafter SEC Sept. 23, 2020 Press Release].
[3] Id.
[4] Id.
[5] Press Release, SEC, SEC Whistleblower Program Ends Record-Setting Fiscal Year With Four Additional Awards (Sept. 30, 2020), https://www.sec.gov/news/press-release/2020-240.
[6] SEC Sept. 23, 2020 Press Release, supra note 2.
[7] See Whistleblower Program Rules, Exchange Act Release No. 34-89963, at 65 (Sept. 23, 2020), https://www.sec.gov/rules/final/2020/34-89963.pdf.
[8] Jason Zuckerman, Matthew Stock & Katherine Krems, SEC Adopts Amendments to Whistleblower Rules that Will Strengthen Some Aspects of the Program But Also Reduce Large Awards and Limit Protection Against Retaliation, Nat’l L. Rev. (Sept. 24, 2020), https://www.natlawreview.com/article/sec-adopts-amendments-to-whistleblower-rules-will-strengthen-some-aspects-program.
[9] See Dig. Realty Tr., Inc. v. Somers, 138 S. Ct. 767, 772 (2018).
[10] Alia Al-Khatib, SEC Adopts Final Rules Amending Its Whistleblower Program, Nat’l L. Rev. (Sept. 25, 2020), https://www.natlawreview.com/article/sec-adopts-final-rules-amending-its-whistleblower-program.
[11] Id.
[12] Zuckerman et al., supra note 8.
[13] Whistleblower Program Rules, supra note 7, at 66.
[14] Id.
[15] Id. at 75.
[16] Zuckerman et al., supra note 8.
[17] Whistleblower Program Rules, supra note 7, at 68.
[18] Nicodemus, supra note 1.
[19] Zuckerman et al., supra note 8.
[20] See Al-Khatib, supra note 10.
[21] SEC Sept. 23, 2020 Press Release, supra note 2.
