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Protect the SEC Whistleblower Program

Incentivize Whistleblowers, Don't Cap Rewards or Exclude Whistleblowers

The Securities Exchange Commission (SEC) has announced proposed changes that would undermine its extremely successful whistleblower program. It’s critical that these changes are not implemented. They would cause grievous damage to one of the best whistleblower programs in the country.

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We must let the SEC know that its whistleblower program has widespread support across the country. Join our campaign today, and demand protection and incentives for these brave people.

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The U.S. Securities and Exchange Commission (SEC) Whistleblower Program is a Success

The Dodd-Frank Wall Street Reform and Consumer Protection Act (often simply known as Dodd-Frank) enhanced the Securities Exchange Act, codified in law as 15 U.S.C. § 78(u)(6), in the wake of the 2008 financial crisis and created the SEC Whistleblower Program. It offers rewards to qualified persons who provide information to the SEC which leads to the recovery of monetary sanctions. The law is structured to ensure that whistleblowers’ information benefits the SEC to the greatest extent possible. As a result, it has grown into one of the best whistleblower programs in the country and one of the most effective checks on corporate fraud.

However, in June 2018, the SEC announced proposed amendments that will undermine its successful whistleblower program. The crucial proposed revisions to the Securities Exchange Act are:

  • Rule 21F-9(e): Placing an arbitrary cap on whistleblower rewards, which would be imposed regardless of the size of the penalties that the whistleblower’s evidence helps to secure, would dis-incentivize whistleblowers from coming forward, as demonstrated by other laws that attempt to do this. Rewards tied to fines recovered, and the level of the whistleblower’s contribution to the successful outcome of the case, are essential in encouraging whistleblowers to step forward with high-quality information on the largest cases.
  • Rule 21F-6: Creating an unrealistic reporting procedure that would disqualify a vast number of whistleblowers simply because they either elected to attempt to resolve matters within their companies or discussed the matter with anyone else, rather than going directly through the SEC’s specific reporting procedures.

Ensuring Whistleblowers Remain Incentivized, and Receive Their Full Reward

The National Whistleblower Center strongly opposes a proposed change to arbitrarily limit the amount of the award granted to a whistleblower. Clear evidence demonstrate that such caps in fact dis-incentivize whistleblowers from coming forward with high-quality information, and could destroy what would otherwise be a successful whistleblower program.

The SEC proposed these changes with no input from the whistleblower community, yet adopted a position consistent with the long-standing and flimsy viewpoint advanced by the anti-whistleblower U. S. Chamber of Commerce (“the Chamber”), that has previously been fully rejected by the SEC.

The National Whistleblower Center (NWC) filed a Freedom of Information Act (FOIA) request seeking documents related to lobbying efforts by Wall Street firms and the Chamber of Commerce that gave rise to the SEC’s proposed rules. The SEC determined that the NWC had a “compelling need” to receive these documents “on an expedited basis” and determined that there were 15,877 emails that could be responsive to NWC’s request. These included 1,078 emails that referenced both “whistleblower” and “Chamber of Commerce” created between January 2, 2017 and June 29, 2018.

“At the end of the day, an effective anti-corruption program can work only if telling the truth and reporting frauds is more profitable then committing the crimes. The proposed rule ignores this reality. It disincentives the most important potential whistleblowers in the securities industry and takes away the Commission’s best advertisement for promoting honesty in the markets,” explained NWC then-Executive Director and current Chairman of the Board Stephen M. Kohn in an op-ed published by Law360.

The majority of the comments from the public criticized the SEC’s proposed amendments. All SEC submitted comments can be found here.

The NWC led a directed effort to bring light to just how detrimental this proposed change would be. The NWC submitted public comments to oppose these amendments in September and December of 2018, and October 2019. Additionally, NWC board chairman, Stephen Kohn, submitted comments opposing these key rules changes in September and October of 2019.

Further, the NWC leadership and staff met with the SEC directly to strongly oppose such “caps” on SEC whistleblower rewards. In this meeting, the NWC explained that the U.S. Securities and Exchange Commission (SEC) Office of the Whistleblower has proven to be a highly successful program over the past decade:

  • Over $1.7 billion in total monetary sanctions from wrongdoers as a result of whistleblower tips.
  • More than $901 million in disgorgement of ill-gotten gains and interest.
  • Approximately $452 million has been or is scheduled to be returned to investors.
  • Over $326 million awarded to 59 individual whistleblowers

Additionally, the NWC provided the SEC with analysis which demonstrates that reward laws with caps have universally failed. This is shown through an in-depth analysis of the FIERRA and FCA whistleblower provisions, and the efficacy of those laws over three decades. In fact, government agencies which administer the whistleblower reward programs recognize the essential contribution of whistleblowers and oppose reward caps as ineffective. The SEC rejected the cap proposal in 2011 and no commissioner dissented from that rejection, and the NWC urges the SEC to continue to reject the Chamber’s anti-whistleblower, and anti-data, position.

Finally, the NWC provided the SEC with an additional explanatory comment which highlighted the importance of ensuring the integrity of the Investor Protection Fund while timely and properly paying whistleblower claims. This public submission explain the relator provision of the law, and explains why an arbitrary cap is not the solution. It also advocates for a deferred or bifurcated payment structure to allow the SEC to retain flexibility in the timing of the payments of reward, and to create a more effective and efficient SEC whistleblower reward program.

Additional Resources:

Allow Whistleblowers to Remain Protected by the SEC Whistleblower Program

The National Whistleblower Center also strongly opposes a proposed change to the U.S. Securities and Exchange Commission (SEC) to require whistleblowers file a TCR form with the SEC, before contacting any other person or entity – including at the SEC itself. This proposed change would create an unrealistic procedure for whistleblowers; in fact, we estimate that the vast majority of whistleblowers would fall through the cracks. What appears to be a minor technical amendment would, if implemented, have a devastating impact on the SEC’s successful whistleblower program.

The National Whistleblower Center has submitted a supplemental comment for the pending whistleblowers rules to the SEC . Read the letter here. The letter explains how,

  1. The proposed rule disqualifies a vast number of whistleblowers who lawfully disclose securities frauds to the SEC, including making disclosures permitted or encouraged on the Commission’s own website;
  2. The Commission’s justification for the proposed rule is without merit and the Commission lacks the authority to approve the proposed rule;
  3. The exception to the proposed rule 9(e) proposed by the Commission will not mitigate the harm caused by the rule;
  4. The proposed rule is inconsistent with the purposes and statutory language of the Dodd-Frank Act; and
  5. The Commission can encourage the filing of TCR’s without punishing whistleblowers.

On a practical level, this proposed rule may lead to a whistleblower’s permanent disqualification from award eligibility if that whistleblower makes disclosures to the Commission prior to filing a TCR, including by contacting the SEC at its “Contacting Us” line, or leaving a voicemail, filing any complaints through the Investor Complaint Form, filing any complaints with the Chairman of the Commission or a Commissioner, sending a letter or fax to the Commission, providing whistleblower information by calling or writing to SEC divisions, contacting the Office of the Investor Advocate, submitting Ombudsman Matter Management System Form, and speaking with the SEC enforcement staff or investigators, or any of the SEC’s 4,200 employees, including when the whistleblower is contacted by SEC for a voluntary interview or on-the-record testimony.

Stephen M. Kohn, Board Chairman of the National Whistleblower Center and whistleblower law expert who has represented whistleblowers for over 30 years, noted in the letter that,

In our continued review of the proposed rule, we noticed that a change that appeared to be a minor technical amendment, would in fact have a catastrophic impact on the SEC’s Whistleblower Program. Proposed rule Section 9(e) makes the filing of a TCR mandatory, prior to any other form of contact with the Commission. If a whistleblower contacts anyone at the SEC without first having filed a TCR, that whistleblower automatically ineligible for an award. Consequently, Section 9(e) would, if approved, undermine the core purpose of the Dodd-Frank Act, i.e. “motivat[ing] people who know of securities law violations to tell the SEC.” Digital Realty Trust, Inc. v. Somers, 583 U.S. __, 138 S.Ct. 767, 773 (2018) (quoting S. Rep. 111-176 at 38).

Finally, proposed rule is contrary to the purposes of the Dodd-Frank Act (DFA), as the “core objective” of the DFA’s whistleblower program is to aid the Commission’s enforcement efforts by “motivat[ing] people who know of securities law violations to tell the SEC.” The Commission’s rule-making authority is contingent on those rules’ consistency with the purposes of the DFA.

It’s critical that the SEC does not make this proposed change. The National Whistleblower Center, utilizing over three decades of institutional knowledge and whistleblower law expertise, is on the forefront of this fight. We must ensure that small, technical rule changes do not cause cause the whistleblower program to falter. Help us to continue to do so – support our work here!

Understanding the Value of the U.S. Securities and Exchange Commission (SEC) Whistleblower Program

The Dodd-Frank Wall Street Reform and Consumer Protection Act (often simply known as Dodd-Frank) enhanced the Securities Exchange Act, codified in law as 15 U.S.C. § 78(u)(6), in the wake of the 2008 financial crisis and created the SEC Whistleblower Program. It offers rewards to qualified persons who provide information to the SEC which leads to the recovery of monetary sanctions. The law is structured to ensure that whistleblowers’ information benefits the SEC to the greatest extent possible. As a result, it has grown into one of the best whistleblower programs in the country and one of the most effective checks on corporate fraud.

Section 922 of the law provides that whistleblowers can file anonymous and confidential claims. Crucially, eligibility does not depend on U.S. citizenship. Whistleblowers who provide original information that leads to a successful enforcement action entitled to a mandatory reward of between 10% to 30% of the collected proceeds. This incentivizes whistleblowers to provide high-quality information on significant crimes. Specific whistleblower provisions under this law are explained by leading whistleblower attorneys here.

Attorneys who form the National Whistleblower Center leadership took the lead on advocating toward the SEC during the crucial time of creating the SEC Whistleblower Program. In 2010 and 2011, these leading whistleblower legal experts were the principal authors of eight key comments to the SEC, and chaired formal meetings as well as individual meetings in order to ensure that the rules agreed upon would make the program as successful as possible. More information can be found here.

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The SEC Whistleblower Program Works:

The data continues to prove the efficacy of the SEC whistleblower program:

  • Since 2011, the SEC has paid over $326 million in rewards.
  • Between 2011 to 2018, 3,305 whistleblower tips have been received from outside of the U.S., from a total of 119 countries.

The SEC’s Office of the Whistleblower’s 2017 annual report confirmed that “whistleblowers have provided tremendous value to its enforcement efforts and significantly helped investors.” It also confirmed that SEC whistleblower disclosures have “directly” contributed to “hundreds of millions of dollars returned to investors.” For example, that year alone the SEC paid $50 million in whistleblower rewards to 12 individuals.

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The SEC Whistleblower Reward Program As An Effective Avenue For Law Enforcement:

Leadership of the SEC agree that whistleblower information is crucial for the success and ability of the SEC enforcement capacities. Time and time again, the SEC has made it clear: whistleblowers should not hesitate to come forward with information that they believe may lead the SEC to discover and prosecute criminals who aim to evade and undermine U.S. laws.

The “whistleblower program . . . has rapidly become a tremendously effective force-multiplier, generating high quality tips, and in some cases virtual blueprints laying out an entire enterprise, directing us to the heart of the alleged fraud.”

– Chairman Mary Jo White, Securities and Exchange Commission. Remarks at the Securities Enforcement Forum, Washington DC (October, 2013)

“Whistleblowers, whether they are located in the U.S. or abroad, provide a valuable service to investors and help us stop wrongdoing… This award recognizes the continued, important assistance provided by the whistleblower throughout the course of the investigation.”

— Jane Norberg, Chief of the Office of the Whistleblower, Securities and Exchange Commission, Press Release on award to overseas whistleblower

“[I]t makes no difference whether . . . the claimant was a foreign national, the claimant resides overseas, the information was submitted from overseas, or the misconduct comprising the U.S. securities law violation occurred entirely overseas.”

— Kevin M. O’Neill, Deputy Secretary, Securities and Exchange Commission, Order Determining Whistleblower Award Claim

The National Whistleblower Center’s Work with SEC Rulemaking Process:

National Whistleblower Center leadership has worked closely with the SEC and the rulemaking process for the agency since the very formation of the SEC whistleblower program. More information about the specific work of NWC leadership, as well as links to the key comments authored for the National Whistleblower Center and submitted to the SEC, can be found here. This includes:

  • November 1, 2010 letter to SEC opposing corporate lobby position.
  • November 22, 2010 letter to SEC Chairman Schapiro explaining that proposed rules violate congressional intent.
  • December 17, 2010 formal rulemaking letter with report to the SEC on the Impact of Qui Tam Laws on Internal Compliance.
  • January 25, 2011 letter to Chairman Schapiro applying Chevron to proposed rules, and a marked-up version of proposed rules.
  • February 10, 2011 letter to Commissioners explaining the proposed rules’ impact on the ability of US to enforce the Foreign Corrupt Practices Act.
  • March 7, 2011 letter to Chairman Schapiro responding to Chamber of Commerce’s attacks on the NWC’s December 17, 2010 report.
  • March 17, 2011 letter to SEC with provision-by-provision analysis of proposed rules with suggested revisions and justifications for revisions
  • May 16, 2011 letter to SEC Chairman Schapiro and CFTC Chairman Gensler regarding the impact of the first reported decision under the Dodd-Frank Act on the rulemaking process
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