SEC Pauses Enforcement of Some Whistleblower Program Rules

The SEC’s whistleblower program was enacted in 2011 as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the program, a whistleblower can receive an award totaling between 10% and 30% of the fines levied in SEC civil enforcement actions stemming from a tip, assuming the fines total more than $1 million.

One amendment, according to Mr. Gensler’s statement on Monday, could be used by a future commission to lower an award because of its size. Another amendment would prevent the SEC from making an award in related enforcement actions brought by other law-enforcement and regulatory authorities if another whistleblower award program might also apply to the action.

Specifically, the SEC staff is considering whether the rules should be revised to allow the agency to make awards for related actions that might otherwise be covered by an alternative whistleblower program that isn’t comparable to the SEC’s program, Mr. Gensler said.

The SEC staff will also look into clarifying that the agency won’t lower an award based on its dollar amount, according to the statement Monday.

The SEC on Thursday issued a statement adopting new procedures for the interim period while it considers possible revisions. The SEC said it would continue considering dollar amounts only in connection with the part of the rules that explicitly allows the use of such discretion to raise awards.

That refers to automatically applying a 30% maximum for awards that are estimated to be $5 million or less, assuming that there were no negative factors, such as an unreasonable delay in reporting potential wrongdoing.

In the case of the “related-action” rule, during the interim period the SEC would exempt certain eligible awards from the limitations of the amendment or notify the award recipients that they are affected by the amendments.

The applicants can then request a delay of the processing of the applications after the rule-making, according to the procedural announcement.

The two Republican commissioners, in a joint statement Thursday, criticized the procedural changes. Hester Peirce and Elad Roisman said the procedural changes effectively nullified the standing SEC rules and were designed to ensure that the two rules are substantively ignored while proposed amendments are formulated and considered. They said such action reduces the certainty of the law.

“This course of action is unwise and continues a troubling and counterproductive precedent,” they said in the statement. “Abandonment of duly-adopted rules without notice and request for comment raises the prospect that the rules that the Commission adopts in compliance with the Administrative Procedure Act may be interim at best, and transitory at worst.”

Jordan Thomas, who sued the SEC in January over the two amendments, filed a joint motion on Friday with the SEC in federal court in Washington, D.C., to halt the lawsuit in light of the SEC’s agreement to consider changing the rules.

“It’s a big event; we raised concerns in January, and less than six months later, the commission agreed to change the rules we challenged and abandoned enforcement of the two rules,” he said. “That’s a huge win for whistleblowers and a loss for those that have been championing Wall Street interests.”

Other attorneys representing whistleblowers also welcomed the SEC actions.

“The policy statement issued by the SEC on August 5, 2021, is a home run for whistleblowers,” Stephen M. Kohn, chairman of the board of directors of the National Whistleblower Center, said in a statement Friday. “The SEC has done the right thing in protecting its highly successful program from administrative abuses.”

Write to Mengqi Sun at [email protected]