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SEC Adopts Amendments To Whistleblower Program – Securities


On Friday, the SEC, without holding an open meeting, adopted two
amendments to the whistleblower program that had been proposed in
February. The vote was three to two. Under the SEC’s
whistleblower program, the SEC may “make monetary awards to
eligible individuals who voluntarily provide original information
that leads to successful SEC enforcement actions resulting in
monetary sanctions exceeding $1 million and certain successful
related actions.” Awards must be in the range of 10% to 30% of
the monetary sanctions collected. The two new amendments relate to
changes that had been adopted in 2020 regarding awards under
related programs and award amounts. According to SEC Chair Gary
, the amendments will “help enhance the
whistleblower program. The first amendment expands the
circumstances in which a whistleblower who assisted in a related
action can receive an award from the Commission for that related
action rather than from the other agency’s whistleblower
program. The second amendment concerns the Commission’s
authority to consider and adjust the dollar amount of a potential
award. Under today’s amendments, when the Commission considers
the size of the would-be award as grounds to change the award
amount, it can do so only to increase the award, and not to
decrease it. This will give whistleblowers additional comfort
knowing that the Commission would not decrease awards based on
their size….I think that these rules will strengthen our
whistleblower program. That helps protect investors.” The
amendments to the whistleblower rule will become effective 30 days
after publication in the Federal Register.

Here is the press
, the fact
and the final

In September 2020, the SEC adopted a number of amendments to the
whistleblower rules, some of which were quite controversial. (See

this PubCo post
.) In August 2021, Gensler issued a
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. Gensler observed that
concerns had 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.” One of the 2020 amendments at issue precluded 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 2020 amendment permitted 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 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.” Those amendments were then
proposed in February. (See
this PubCo post

The fact sheet describes how the amendment to Rule 21F-3
regarding award claims for alternative programs will apply:

  • “Under Exchange Act Section 21F(b) and Rule 21F-11, a
    whistleblower who obtains an award based on a Commission covered
    action also may be eligible for an award based on monetary
    sanctions that are collected in an action brought by other
    statutorily-identified authorities.

  • The amendments allow the Commission to make an award for a
    related action that might otherwise be covered by an alternative
    whistleblower program even where the alternative whistleblower
    program has the more direct or relevant connection to the related
    action in certain circumstances.

  • If a claimant files a related-action award application, and the
    alternative award program is not comparable to the Commission’s
    program, the Commission will treat the non-Commission action as
    ‘related’ for purposes of the Commission’s award
    program (regardless of whether the alternative award program has a
    more direct or relevant connection to the action). Under the
    amendment, a program is not comparable if that program’s
    statutory award range is more limited, its awards are subject to an
    award cap, or it is discretionary and not mandatory. Further, the
    Commission will make an award on a potential related action without
    regard to which program had the more direct or relevant connection
    to the action if the maximum award that the Commission could pay on
    the action would not exceed $5 million.

  • Under the amendments, a whistleblower will be required to make
    an irrevocable waiver of any claim to an award from the other
    whistleblower award program.”

In addition, the fact sheet describes how the amendment to Rule
21F-6 regarding SEC consideration of the amount of a potential
award will apply:

  • “In 2020, amendments added language to Rule 21F-6 stating
    that the Commission has discretion to consider the dollar amount of
    a potential award when making an award determination.

  • The amendments affirm the Commission’s authority to
    consider the dollar amount of a potential award for the limited
    purpose of increasing the award amount but eliminate the
    Commission’s authority to consider the dollar amount of a
    potential award for the purpose of decreasing an award.”

In her
dissenting statement
, Commissioner Hester Peirce acknowledged
that the amendments were actually “inconsequential and
unlikely to inhibit” the success of the whistleblower program,
but she was still concerned that they “nonetheless carry
harmful consequences both for the whistleblower program and for the
Commission’s rulemaking processes.” In support of her
argument that the amendments were inconsequential, she pointed to
the economic analysis, which showed that, had the amendment to Rule
21F-3 been in effect since 2010, the additional payout to
whistleblowers would have been less than $10.5 million. By
comparison, the SEC’s whistleblower program has paid over $1.1
billion since 2010. Similarly, the economic analysis for the
amendment to Rule 21F-6, which was designed to encourage
high-quality tips, “admits that the Commission ‘cannot
determine with any reasonable degree of certainty if the revisions
to Rule 21F-6 will affect a whistleblower’s willingness to
report a potential securities law violation.'” In
addition, the authority eliminated is one that the SEC never used,
she said. Although the amendments were, in her view,
“inconsequential because they are not logical solutions to any
existing problems, they nonetheless further complicate the already
byzantine rules governing our whistleblower program,”
especially the changes to Rule 21F-3, which require a
“needlessly complex analysis that rests on poorly defined
terms.” Finally, she was critical of the SEC’s current
practice of rewriting rules; she observed that these amendments
“join the proxy advisor rules, shareholder proposal rules, and
perhaps the resource extraction rules in being reopened even though
the ink was barely dry on the last set of amendments.”

Commissioner Mark Uyeda’s
dissenting statement
echoed exactly that point—a concern
that he had also just expressed regarding the proxy advisor rules.
In his view, the SEC “is revisiting rules that were finalized
a little over a year and a half ago. Reversing rules shortly after
adoption, in the absence of a regulatory weakness or failure, sets
a bad precedent, risks eroding the Commission’s regulatory
credibility, and increases costs for market participants by
requiring frequent reevaluations of compliance obligations.”
And if there is a regulatory failure, it should be supported by
“robust evidence.” If not, the SEC “should monitor
the effectiveness of recently adopted rules, with a view to
refining any aspects that require adjustments, while avoiding
destabilizing wholesale revisions.”

In addition, he did not believe that the amendments were
directed toward “remediating any known or identified
weaknesses with the current whistleblower rules.” Rather, he
contended, the economic analysis showed that the program had been
very successful at incentivizing claimants, but that any benefits
that may result from the amendments were unclear. “Given that
the prior amendments were only recently adopted,” he
suggested, the SEC “should have continued to monitor the
whistleblower rules, rather than revise them without corresponding
data substantiating the need for such amendments.” A better
approach might have been the promotion of “greater visibility
into its claims and award determinations, and increasing the number
of high-quality tips from unrepresented persons. Such a review
could also evaluate the role played by lawyers representing
whistleblowers on a contingency fee basis and how they present tips
to the Commission.” That type of review might address in part
“recent scrutiny” of the program for “lack of
transparency,” in light of the $1.1 billion that it has paid
out to claimants.


The “recent scrutiny” to which Uyeda’s statement
alludes refers to a recent academic
and a recent lengthy article in
that were highly critical of the SEC’s
whistleblower program. The academic paper observed that the SEC
receives an average of 49 whistleblower tips every workday, and
examined the “role played by private whistleblower attorneys
in the tip-sifting process.” The author concluded that
“tipsters represented by lawyers significantly outperform
unrepresented ones, repeat-player lawyers outperform first-timers,
and lawyers who used to work at the SEC outperform just about
everybody. The upshot is that the SEC and CFTC have effectively
privatized the tip-sifting function that is at the core of the
WBPs. Private lawyers have likely extracted hundreds of millions of
dollars in fees and expenses from these programs, with a
disproportionate share going to a concentrated group of
well-connected, repeat players. Unlike traditional plaintiffs’
side securities attorneys and attorneys who represent clients
seeking government payments in many other contexts, private
whistleblower lawyers operate free from virtually all public
accountability, transparency, or regulation.” (See also
this article
in the WSJ.) Similarly, a Bloomberg
investigation found that the SEC whistleblower program
“often ignores its own rules, shields much of its work from
the public, and has been a financial boon for law firms that hired
former agency officials.”

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.


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