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SEC Announces Additional Incentives for SEC Whistleblowers

August 31, 2022

The SEC recently adopted amendments to its Whistleblower Program rules to allow for additional incentives for SEC whistleblowers.  The amendments pertain to two aspects of the SEC’s Whistleblower Program: 1) related action claims covered by other whistleblower programs and 2) discretion to consider the dollar amount of the award.

The full text of the amended rule may be found here.  As stated in the Release, the amendments will be effective thirty (30) days after publication in the Federal Register.  They will apply to any pending whistleblower award applications.

Dodd-Frank Act Created SEC Whistleblower Program

As a result of the financial crisis in 2008, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act which, among other things, included the formation of the SEC’s Office of the Whistleblower. One outcome was the creation of the SEC’s Whistleblower Program, codified at 17 CFR 240.21F-1 through 17 CFR 240.21F-18.  The Whistleblower Program incentivizes individuals to report wrongdoing leading to successful SEC enforcement actions.

The Whistleblower Program awards successful whistleblowers an amount equal to 10-30 percent of the monetary sanctions collected from the wrongdoers.   These incentives are clearly working since the SEC’s whistleblower program reported a record-breaking year in 2021. In 2020, a single whistleblower received an award of nearly $50 million.

SEC Expands the Definition of Related Actions for Purposes of Awards to Whistleblowers

Rule 21F-3(b)(3) states a whistleblower may be eligible for an award from the SEC for certain “related” non-SEC actions.  Rule 21F-3 currently states: “when both the SEC’s award program and another award program might apply to a non-SEC action, that action will be deemed a related action for purposes of an award from the Commission only if the SEC’s whistleblower program has the ‘more direct or relevant connection’ to the action.” [emphasis added.] SEC Release No. 34-95620.

The amendment to Rule 21F-3 identifies additional circumstances where a non-SEC action would qualify as a “related action.”  1) When the non-SEC program would result in significantly lower whistleblower award than would be paid under the SEC’s Whistleblower Program.  2) When the non-SEC program has discretion to deny payment of a whistleblower award, even if the specified award criteria and eligibility requirements are satisfied. 3) Lastly, if the maximum potential award by the SEC on the non-SEC action does not exceed $5 million.  The amendments would provide additional incentives to SEC whistleblowers. Because it expands the definition of “related action” to cases in which the SEC does not have a “more direct or relevant connection, ” additional whistleblowers may be incentivized to come forward.

SEC May Consider Dollar Amount of Award Only For Purposes of Increasing Award

In 2020, a prior amendment to the Whistleblower Program codified the SEC’s discretion to consider the dollar amount of a potential award when making an award determination.  Conceivably, the prior amendment allowed the SEC to decrease an award after considering the dollar amount.  The 2022 amendment to Rule 21F-6 removed that ambiguity and limits the discretionary authority to increasing the award amount.  Thus, the SEC may no longer use that discretion to decrease award amounts.

We Help SEC Whistleblowers File Successful Claims

We have assisted individuals in bringing successful SEC Whistleblower Claims.  For example, one client received an award equal to 30% of the monies recovered by the SEC and in a related action.

If you know of securities fraud, contact us for a free and confidential consultation.