On February 10, the U.S. Securities and Exchange Commission proposed two amendments to the rules governing its whistleblower program, Exchange Act Rules 21F-3 and 6. “These amendments, if adopted, would help ensure that whistleblowers are both incentivized and appropriately rewarded for their efforts in reporting potential violations of the law to the Commission,” said SEC Chair Gary Gensler.
Section 21F established the SEC’s whistleblower program by authorizing the SEC to make monetary awards to individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions exceeding $1 million. The SEC’s whistleblower program is administered by the Office of the Whistleblower, an office within the SEC’s Division of Enforcement. Since the program’s inception, the SEC has awarded more than $1.2 billion to individual whistleblowers whose information and cooperation assisted the SEC in bringing successful enforcement actions. In its latest annual report, the SEC reported that, in FY 2021 alone, it made more whistleblower awards than in all prior years combined, both in terms of the largest dollar amount and the largest number of individuals awarded in a single fiscal year. FY 2021 also featured the largest number of whistleblower tips in a fiscal year since the program’s inception. The proposed amendments — mainly to Rule 21F-3(b)(3) and Rule 21F-6 — are intended to continue these trends by encouraging more whistleblowers to come forward.
The first proposed substantive amendment would allow awards for related actions where an alternative award program would provide an award that is meaningfully lower than the SEC’s whistleblower program would allow. In 2020, the SEC adopted Rule 21F-3(b)(3) to address situations where both the SEC’s whistleblower program and one or more other whistleblower program awards might apply. Specifically, Rule 21F-3(b)(3) authorized the payment of awards in instances where the SEC determined that its whistleblower program had a more “direct or relevant” connection to the enforcement action than the other award program(s). The 2020 amendment drew concern in that it could potentially provide meaningfully different awards to similarly situated whistleblowers. To address these concerns of disparate treatment, the SEC proposes various alternative amendments for comment, each designed to better incentivize whistleblowers to come forward.
The second proposed substantive amendment would eliminate the SEC’s authority under Rule 21F-6 to decrease a whistleblower’s potential monetary award. The 2020 amendments to Rule 21F-6 included express language authorizing the SEC to consider, in its discretion, the dollar amount of an award when making an award determination. In proposing this amendment, the SEC seeks to clarify to whistleblowers that those considerations will be made only for the purpose of increasing (and not decreasing) a monetary award.
There is a 60-day public comment period after which the SEC will vote on the proposed amendments. If adopted, the SEC would seek to have these proposed rule changes apply not only to all new whistleblower award applications filed after the effective date of the amended final rules, but also to any applications that are then pending.
These latest proposed amendments are consistent with the SEC’s overall efforts to expand its whistleblower program by further incentivizing whistleblowers to come forward. They also underscore the importance of companies establishing appropriate mechanisms to encourage internal reporting of alleged misconduct, as well as robust processes to investigate and address reports of potential concerns. Please contact us if you have any questions about the SEC’s whistleblower program or proposed amendments, or would like to discuss Goodwin’s expertise in these areas.Author(s)
Jennifer L. Chunias
Kate E. MacLeman