The SEC’s whistleblower program provides for awards in amounts between 10% and 30% of the monetary sanctions collected in an SEC action based on the whistleblower’s original information. The program, which has been in place for more than ten years, is widely acknowledged to have been a resounding success. In September 2020, the SEC adopted a number of amendments to the whistleblower rules, some of which were quite controversial. In early August, SEC Chair Gary Gensler issued a statement indicating that he had directed the SEC staff to revisit the whistleblower rules, in particular, two of the amendments that had been adopted in 2020. (See this PubCo post.) Gensler observed that concerns have been raised, including by whistleblowers as well as by Commissioners Allison Herren Lee and Caroline Crenshaw, that those amendments “could discourage whistleblowers from coming forward.” Now, the SEC has issued a policy statement advising how the SEC will proceed in the interim while changes to those rules are under consideration. Commissioners Hester Peirce and Elad Roisman were none too pleased with the SEC’s action here, questioning whether it might be part of a troubling pattern of unwinding actions taken by the last Administration. They made their views known in this statement.
The WSJ has reported that recent litigation brought against the SEC in connection with the two amendments has just been halted in light of the SEC’s agreement to consider changing the rules. One of the amendments precludes the SEC from, in some cases, making an award to a whistleblower that is potentially also covered by an alternative, separate award program that “more appropriately applies” to the related action. The second amendment permits the SEC to take into consideration the dollar amount of a potential award when making an award determination allowing the SEC, as Gensler phrased it, “to lower an award because of the size of the award in absolute terms.” Gensler has directed the staff to draft potential revisions to permit the SEC “to make awards for related actions that might otherwise be covered by an alternative whistleblower program that is not comparable to the SEC’s own program, and to clarify that the Commission will not lower an award based on its dollar amount.”
The SEC’s policy statement indicated that notice and comment was not required under the Administrative Procedure Act because the SEC had determined that the statement related only to “agency procedures,” did “not substantially affect the rights or obligations of non-agency parties,” and, therefore, was not a “rule” under the Congressional Review Act.
Amendment to Exchange Act Rule 21F-3. As described in the new policy statement, the amendment to Rule 21F-3(b)(3)) authorized the SEC “to determine, based on the facts and circumstances of the claims and misconduct at issue in the potential related action (among other factors), whether the Commission’s whistleblower program or the other whistleblower program has the more ‘direct or relevant connection to the [related] action.’ And responsibility for making an award in connection with the potential related action will then rest with whichever award program is determined to have the more direct or relevant connection to the action.”
The new policy statement provides that, during the interim policy review period, the staff must first consider recommending use of the SEC’s exemptive authority to permit an SEC award on a potential related action under specified circumstances, such as if the claimant could be disadvantaged by a cap in the alternative award program. Otherwise, if an alternative whistleblower program has a “more direct or relevant connection” to the action than the SEC’s program, the staff must inform the claimant, who can then request that the related-action award claim be held in abeyance during the interim period.
Amendment to Exchange Act Rule 21F-6. According to the policy statement, this amendment added language to allow the SEC “to consider, in its discretion, the dollar amount of a potential award when making an award determination. Before this amendment, the text of the rule (with one limited exception) did not expressly afford the Commission authority to consider the potential dollar amount of an award when determining awards; rather, the text of the rule generally referred to setting awards as a percentage of the monetary sanctions recovered.” The statement indicates that, at the time of the amendments, the SEC “explained that the amendment in question was a clarification of discretionary authority the Commission already possessed.” However, the statement notes that “the extent to which the amendment was a clarification was a point of disagreement at the time that the Commission adopted the amended rules in 2020.”
Going forward, according to the statement, the SEC expects that it will continue to consider dollar amounts only where the rules explicitly contemplate the use of discretion to raise awards. In the “unlikely event” of a deviation from this practice, the staff will inform the claimant, who can request that the matter be held in abeyance during the interim period.
In their statement, Commissioners Peirce and Roisman reprimanded the SEC for its “unwise” action in this policy statement. While acknowledging that the SEC was within its rights to amend its rules at any time—with appropriate notice and comment—even if the rules were less than a year old, the two Commissioners contended that the effect of the policy statement was to adopt “new procedures designed to ensure that two rule provisions, which are subject to litigation, are substantively ignored while proposed amendments are formulated and considered. This effectively nullifies standing Commission rules under the guise of changes to ‘agency procedures.’” Referring to an action with a similar effect recently taken by Gensler and Corp Fin with regard to the proxy advisor rules, they expressed concern that this action “continues a troubling and counterproductive precedent: If a rule challenge is pending in court when the presidential administration changes, the Commission believes it may immediately abandon proposed, noticed, and adopted rules at the majority’s will via public statements. 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. This reduces the certainty of the law, a consequence that does not bode well for the Commission or those it regulates.”