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SEC approves ‘diluted’ proposed changes to whistleblower program

  • September 30, 2020

By Zack Fishman for Fastinform

The U.S. Securities and Exchange Commission voted on Wednesday to update its whistleblower program, approving changes that were “diluted” from initial proposals to cap awards and tighten deadlines, a securities law expert said.

The securities regulator has offered incentives to individuals who flag corporate fraud with a goal of protecting investors and promoting fairness and transparency in equities markets. Reform advocates, however, have argued that the awards have spurred profit-seeking tipsters and attorneys to overwhelm SEC staff with complaints of limited value.

Under the new amendments, whistleblowers whose information leads to small enforcement actions — which include nearly three-quarters of all cases, according to the SEC — will by default be given the maximum reward, following consideration of other factors by the commission. Procedural changes will also allow SEC staff to more quickly process tips, which are submitted more frequently, with 5,200 being made in 2019.

Before the vote, SEC “watered down” some proposed rules following criticism from whistleblower advocates, lawyers and lawmakers that it would disincentivize tipsters, Reuters reported on Tuesday. A 30-day deadline for tips to be formally submitted after first contacting anyone at the SEC was given broad exceptions, and the commission tossed a discretionary cap that would have reduced award amounts for large enforcement actions.

Columbia University law professor John Coffee, who specializes in securities law, told Fastinform in an interview Wednesday that the approved changes are a “diluted” form of the initial proposals. He noted that a deadline for filing tips would have led to “poor and weaker complaints” by giving law firms representing whistleblowers less time for research and drafting.

“There is a large constituency favoring whistleblowers and bounties to them, and I doubt the chairman wanted to take them head on,” Coffee told Fastinform.

But to Jordan Thomas, who chairs the whistleblower representation practice at New York-based law firm Labaton Sucharow, the SEC rule changes still mostly represent a loss for whistleblowers.

While the streamlining of the application review process is a positive, he told Fastinform, the new rules create more uncertain conditions for whistleblowers. He said they grant the commission the ability to conduct after-the-fact assessments on what could have been publicly known about a case, as well as discretion to reduce award sizes — a power expanded with the amendment on small enforcement actions.

The commissioner’s word that they value whistleblowers may not inspire enough confidence for would-be tipsters to look past the uncertainty, said Thomas, who played a large role in establishing the commission’s whistleblowing program before leaving in 2011 and legally representing many SEC whistleblowers.

“Unfortunately, like most Americans, whistleblowers don’t have trust for government, regardless of administration,” Thomas said.

The SEC’s whistleblower program was formed in the wake of the 2008 financial crisis as part of the 2010 Dodd-Frank Act. The program has awarded about $523 million to 97 people in its 10-year existence, with the largest award being worth $50 million, according to the SEC. Whistleblowing tips have led to more than $2.5 billion obtained during enforcement actions, the commission said, with most having been returned to investors.

“Today’s rule amendments will help us get more money into the hands of whistleblowers, and at a faster pace,” said SEC Chairman Jay Clayton. “Experience demonstrates this added clarity, efficiency and transparency will further incentivize whistleblowers, enhance the whistleblower award program and benefit investors and our markets.”

Another change, however, would allow the SEC to refuse to pay a whistleblower if another federal agency uses their information in an enforcement action, which it was previously required to do. And a guidance weakens rules that qualifies whistleblowers submitting original analysis for awards.

The amendments will come into effect 30 days after they are published in the Federal Register, according to the SEC.

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