SEC Approves Amendments to Whistleblower Program Rules and Issues Interpretive Guidance
Companies should consider review of their compliance programs and procedures for addressing internal complaints or tips of potential misconduct.
On September 23, 2020, the Securities and Exchange Commission ("SEC") adopted several amendments to the rules governing its whistleblower program and published guidance regarding the process for determining award amounts for eligible whistleblowers. Established in 2012, the program empowers the Commission to reward individuals who voluntarily provide original information about a violation of the federal securities laws that leads to a successful enforcement action. Whistleblower awards may total not less than 10% nor more than 30% of monetary sanctions collected in the covered and related actions.
To date, the SEC has announced awards totaling $523 million to 97 whistleblowers in 80 enforcement actions, of which $120 million was awarded in 2020. Whistleblower tips have led to the imposition of $2.5 billion in financial remedies as a result of successful enforcement actions since inception of the program, of which $750 million has been earmarked for harmed investors.
The amendments include several noteworthy changes to or clarifications of the rules governing the program:
- The amended rules allow awards for information leading to a deferred or non-prosecution agreement by the U.S. Department of Justice in a parallel proceeding or a settlement by the SEC outside of a judicial or administration proceeding to address violations.
- The amended rules establish a "multiple recovery rule" clarifying that recovery of an award from the SEC is not available when the Commission determines that a separate whistleblower award program more appropriately applies.
- The amendments establish a process to presumptively award amounts at the top end of the statutory range when the maximum award is $5 million or less. Awards under $5 million comprise 75% of all awards since the program's inception.
- The amendments require a whistleblower to submit a written report to the Commission as a prerequisite for award eligibility, confidentiality, and retaliation protection. This amendment results from a Supreme Court decision limiting retaliation protection for persons who report internally to their employer before reporting to the Commission.
Notably, the SEC did not approve a proposed amendment enhancing review of larger awards exceeding $30 million to an individual whistleblower where the information provided led to at least $100 million in collected monetary sanctions. While only six whistleblower awards to date have exceeded $30 million, a number of commenters objected that the proposed amendment would effectively function as an award cap. Instead, the amendments clarify that while award amounts should be based exclusively on the award factors set forth in the existing rules, the Commission retains broad discretion to consider those factors in percentage terms, dollar terms, or some combination thereof.
Nothing in the adopted amendments or the interpretive guidance changes the bottom line. The SEC whistleblower program offers substantial financial incentives for current or former employees to report information about potential violations of the securities law. In its most recent report to Congress, the Office of the Whistleblower noted that 85% of award recipients, who were employees or former employees of the company about which they were reporting, had reported internally to the company. In prior years, the SEC also brought 11 anti-retaliation enforcement actions against companies or individuals who impeded a whistleblower's efforts to report to the SEC. The volume of tips has increased year over year since the program's inception with more than 5,000 tips received by the SEC last year.
For all these reasons, companies should focus on implementing a robust reporting system that encourages internal reporting and feedback. A successful compliance program is designed to appropriately address all complaints or allegations of potential violations of the securities laws, including anonymous tips, and to provide for full and prompt investigation of all such tips, as well as timely implementation of any necessary remediation.
Finally, a company's policies and procedures should include clear directions that retaliation of any kind will not be tolerated, and supervisory personnel should receive appropriate training regarding the company's policies and expectations.
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