On June 28, 2018, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) voted in an open meeting on several final rules and rule proposals that will have a material impact on the Commission’s whistleblower program. Most notably, the SEC approved a rule proposal that would modify its Rule 21F, which defines who is a whistleblower and establishes anti-retaliation protection, to comport with the U.S. Supreme Court’s holding in Digital Realty Tr., Inc. v. Somers, 138 S. Ct. 767 (2018).

As detailed on our blog, in February, the U.S. Supreme Court unanimously held that the anti-retaliation provision of the Dodd-Frank Act only applies to individuals who have provided information regarding a violation of the securities laws to the SEC. In so holding, the Court ruled that the SEC’s Rule 21F-2, which enabled an individual to gain anti-retaliation protection from complaints not made directly to the SEC (such as internal company complaints), was in clear contravention of Congress’s instruction that a “whistleblower” is a person who provides “information relating to a violation of the securities laws to the Commission.”

The SEC’s proposed rule will comport with the Court’s holding by requiring, inter alia, that an individual seeking anti-retaliation protection report, in writing, information about possible securities laws violations to the SEC itself. The proposed rule would apply uniformly: to the SEC’s whistleblower award program, the heightened confidentiality program, as well as for employment anti-retaliation protection.

In addition, the SEC approved a proposed amendment to Rule 21F that would allow the Commission to grant whistleblowers a bounty award when their tips lead to deferred prosecution agreements and non-prosecution agreements with the Justice Department or a state attorney general, not just judicial or administrative proceedings. Further, the SEC approved a proposed rule which would allow the Commission to adjust a whistleblower’s award upward (although by no more than 30%) when the award formula would yield a payout of less than $2 million. The Commission stated that the additional discretion could help “better achieve the program’s objectives of rewarding meritorious whistleblowers and sufficiently incentivizing future whistleblowers.”

The Commission also included in its proposed rules a general inquiry for public comment as to whether it could establish a discretionary bounty award for whistleblowers whose tips lead to actions that do not currently meet the SEC’s requirements, either because the action is under the SEC’s $1 million threshold, the tip is based on publicly-available information, or where the monetary sanctions collected are minimal.

These proposed rule changes may be a latent response by the SEC to the fact that the number of whistleblower tips it receives annually has been leveling off in recent years. As documented in the SEC’s 2017 Annual Whistleblower Report, while the number of tips received by the Commission has increased year-on-year since the whistleblower program’s inception in 2011, the growth in the number of tips has slowed for three consecutive years. And, as in past years, the percentage of whistleblower tips that lead to actual awards is very low (that said, some believe that Digital Realty Trust itself may prompt an uptick in whistleblower tips, given that only complaints to the SEC are now protected).

As the Commission highlighted in its recent release, forty percent of the aggregate funds that the SEC’s whistleblower program has paid out across its seven-year history have been via a mere three awards. Accordingly, the SEC also voted in its open meeting to approve a proposed rule that would allow it to adjust large bounty awards (those above $30 million) downwards in order, in its own estimation, for it to be “a responsible steward of the public trust.” All of the SEC’s proposed rules will be open to public comment for sixty days following publication of the SEC’s release in the Federal Register.

Follow Proskauer’s Whistleblower Defense blog for further developments on these issues.

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Photo of Lloyd B. Chinn Lloyd B. Chinn

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative…

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative agencies in New York and across the country. Lloyd’s practice ranges from litigating compensation disputes to defending whistleblower, discrimination and sexual harassment claims. Although he represents employers in a wide range of industries, including law, insurance, health care, consulting, media, education and technology, he focuses a substantial portion of his practice on the financial services sector. He has tried to final verdict or arbitration award substantial disputes in this area.

Due to Lloyd’s litigation experience, clients regularly turn to him for advice regarding the full range of employment matters, including terminations, whistleblower policy and procedure, reductions in force, employment agreements, and employment policies. For example, in the wake of the financial crisis, he has counseled a number of firms through reductions in force and related bonus and deferred compensation disputes. Lloyd has also been retained to conduct internal investigations of allegations of workplace misconduct, including claims leveled against senior executives.

Lloyd has represented global businesses in matters involving Sarbanes-Oxley and Dodd-Frank whistleblower claims. He has taken an active role in the American Bar Association on these issues, currently serving as Co-Chair of the Whistleblower subcommittee of the ABA Employee Rights and Responsibilities Committee. Lloyd has spoken on whistleblowing topics before a numerous organizations, including the American Bar Association, ALI-ABA, Association of the Bar of the City of New York, and New York University School of Law. He has testified twice before Congressional subcommittees regarding whistleblower legislation and has also published blog postings, articles and client alerts on a variety of topics in this area, including the Dodd-Frank Act’s whistleblower provisions. Lloyd is a co-editor of Proskauer’s Whistleblower Defense Blog, and he has been widely quoted by on whistleblower topics by a number of publications, including the New York Times, the Wall Street Journal, the National Law Journal and Law 360.

Lloyd has also become active in the International Bar Association, presenting on a variety of subjects, including: the #MeToo movement, the COVID-19 pandemic and employment law, and cross-border harmonization of employment provisions in transactions. Lloyd also hosts a quarterly roundtable discussion among financial services industry in-house employment lawyers. He has also published articles and given speeches on a variety of other employment-law topics, including non-solicitation provisions, FINRA arbitration rules, cross-border discovery, e-discovery, and the use of experts.