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SEC Announces Proposed Amendments to Whistleblower Program Rules

The proposed amendments to the rules governing the whistleblower program, if adopted, would reverse prior amendments and provide further and significant financial incentives for whistleblowers to report potential violations to the SEC.

On February 10, 2022, the SEC voted to propose two significant changes to the rules governing its whistleblower program that would reverse amendments to the same rules adopted by a divided Commission in 2020. First, the proposed amendment to Rule 21F-3 would allow the SEC to pay whistleblower awards for certain actions brought by other entities, including designated federal agencies, in cases where those awards might otherwise be paid under the other entity's whistleblower program. This change would ensure that a whistleblower is not disadvantaged by another whistleblower program that would award them less than the SEC could offer. Second, the proposed amendment to Rule 21F-6 would affirm the SEC's authority to consider the dollar amount of a potential award for the limited purpose of increasing the award amount and "it would eliminate the Commission's authority to consider the dollar amount of a potential award for the purpose of decreasing an award." 

In a statement accompanying the announcement, SEC Chair Gary Gensler said: "I support these amendments because, if adopted, they would help ensure that whistleblowers are both incentivized and appropriately rewarded for their efforts in reporting potential violations of the law to the Commission." In a separate statement, Commissioner Hester Peirce announced that she would not support the "unnecessary and unpersuasive proposal to revisit the recently adopted amendments to the whistleblower rules" because, among other reasons, there is "no new information" to compel it.

In September 2020, a divided Commission adopted the first ever amendments to the SEC whistleblower program rules. One amendment modified the definition of a "related action" to exclude awards in cases in which a separate whistleblower program has a "more direct or relevant connection to the action" or if the whistleblower has already been granted an award by another agency. A second and more controversial amendment included the total amount of the award in the list of factors that the SEC can consider in whether to increase or decrease the amount of an award. In January 2021, after the amendments became effective, a lawsuit was filed challenging their lawfulness and alleging that they would disincentivize knowledgeable people from coming forward with information about potential violations. On August 2, 2021, newly confirmed Chair Gensler acknowledged the publicly expressed concerns that the 2020 amendments could discourage whistleblowers from coming forward and that the amended Rule 21F-6 "could be used by a future Commission to lower an award because of the size of the award in absolute terms." He further directed the SEC staff to prepare potential revisions to the two rules to address those concerns. On August 5, 2021, the SEC issued a statement clarifying how it would address the two rules while the SEC staff considered potential amendments, including that it would exercise its discretion under Rule 21F-6 only to raise award amounts, not to reduce them. In response, Commissioners Peirce and Roisman stated that the new procedures were designed to ensure that the existing rules are substantively ignored while proposed amendments are formulated and considered.

Following a public comment period, the SEC will vote on the proposed amendments; they are likely to be adopted based on the current composition of the Commission. In the event that the amendments are adopted, potential whistleblowers will have enhanced financial incentives to report potential violations of the securities laws to the SEC or other designated agency. Companies should ensure that employees are aware of, and encouraged to use, internal reporting channels, and consider implementing strong internal controls to evaluate and properly respond to complaints raised internally before they are raised with the SEC.

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