Category: Alerts

The SEC Whistleblower Program Heading for Change


Since its inception in 2012, the SEC whistleblower program has awarded over $500 million to whistleblowers.1 Lately, the program is operating at a record setting pace as the SEC recently awarded its largest whistleblower award ever.2 Moreover, the number of Tips, Complaints, and Referrals has seen a 35% increase over last year.3 The whistleblower program is, however, about to be impacted by three different events the: (i) economic recovery after the COVID-19 crisis abates; (ii) SEC’s proposed new rules that govern its Whistleblower program;4 and, (iii) Supreme Court’s ruling in Liu v. Securities and Exchange Commission.5

The COVID-19 Crisis Lead to Increased Whistleblower Activity

From March to May of this year, during a major portion of the COVID crisis, the SEC has received 4,000 whistleblower tips.6 The increased rate of SEC whistleblower Tips, Complaints, and Referrals seems to be tied to the fallout from the COVID-19 pandemic for three reasons: (i) the economic devastation caused by COVID may not have been fully understood by companies causing missteps in reporting things like earnings;7 (ii) misrepresentations in the CARES act process;8 and, (iii) the increased number of employees who were laid off, furloughed or working remotely, disgruntled former employees and employees working from home.9 As the economy rebounds and employees get rehired or return to the office, reasons (i) and (iii) will be abated and as such, the increased pace of Whistleblower activity will likely slow.

SEC’s Proposed New Rules

While it is not clear what form the Proposed Reg. 21F will take, the SEC is expected to enact a revised rule this year. If the enacted rule is substantially like the Proposed Reg. 21F, it could affect the number of Whistleblowers willing to come forward.

The original SEC Whistleblower Program was created in 2010 under Section 922 of Dodd-Frank which added Section 21F to the Securities Exchange Act of 193410 entitled “Securities Whistleblower Incentives and Protection.” Section 21F of the Exchange Act provides that in order to receive a cash award a Whistleblower must voluntarily provide the SEC with original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million dollars.11 The amount of the award is left to the discretion of the SEC but must be at least 10 percent and no more than 30 percent of the monetary sanctions that the Commission and the other authorities are able to collect.12 The SEC’s discretion in setting the amount of an awards is, however, tempered by the requirement that the SEC “shall” consider:

1. the significance of the information provided by the whistleblower to the success of the covered judicial or administrative action;
2. the degree of assistance provided by the whistleblower and any legal representative of the whistleblower in a covered judicial or administrative action;
3. the programmatic interest of the Commission in deterring violations of the securities laws by making awards to whistleblowers who provide information that lead to the successful enforcement of such laws; and
4. such additional relevant factors as the Commission may establish by rule or regulation; and
5. shall not take into consideration the balance of the Fund.13

In order to implement its responsibilities under Section 21F of the Exchange Act, the SEC promulgated Regulation 21F (“Reg. 21F”) which became effective in 2011.14 Reg. 21F in addition to establishing procedures, follows the dictates of Section 21F of the Exchange Act.

In June 2018, the SEC proposed new rules to the Whistleblower Program (“Proposed Reg. 21F”).15 Notable among the changes is an increase in the SEC’s authority to establish awards. In situations where the Whistleblower award is likely to be under $2 million, the SEC would have the discretion to upwardly adjust the amount of the award.

Conversely, in situations where the award is likely to exceed $30 million, the SEC would have the discretion to limit the award (to the mandated minimum of 10%). The SEC’s proposed new power to adjust solely based on the award amount, seems to ignore the express statutory language. Section 21F of the Exchange Act instructs the SEC to consider, among other things, the: (i) actions of the whistleblower, such as degree of assistance; and (ii) significance of the information. The law does not reference the amount of the award as a factor to consider. Moreover, there is substantial disagreement concerning whether the SEC should amend Reg. 21F to permit the reduction of awards in large cases, many focused on the concern that it will discourage whistleblowers from coming forward.16 Senator Charles Grassley has echoed these disagreements by noted that by allowing the reduction of large awards the Proposed Reg. 21F “underestimate[s] the impact of very large awards on a potential whistleblower’s decision whether to report, and does not adequately consider the deterrent effect of very large sanctions and awards on future potential violators.”17

Proposed Reg. 21F would also limit the amount of whistleblower awards by eliminating double recoveries. Under Reg. 21F, the whistleblower award would also be based upon amounts collected in related actions brought by: (i) the Attorney General of the United States; (ii) an appropriate regulatory authority; (iii) a self-regulatory organization; or (iv) a state attorney general in a criminal case.18 Proposed Reg. 21F prevents double recovery from different whistleblower programs for the same whistleblower information by deeming the action related “only if the Commission finds (based on the unique facts and circumstances of the action) that its whistleblower program has the more direct or relevant connection to the action.” This provision could also discourage whistleblowers from coming forward where an applicable non-SEC whistleblower award program would allow for a much lower award. Thus, if a whistleblower reports bank fraud that results in one action under FIRREA19 and another under the Exchange Act, the whistleblower’s award may be subject to FIRREA’s $1.6 million cap unless the SEC decides that the predominant reported violation is securities fraud.

Section 21F of the Exchange Act defines “original information” as information derived from either the whistleblower’s independent: (i) “knowledge;” or, (ii) “analysis.” Reg. 21F emphasized that the original information should not include public information noting that “Congress primarily intended our program to motivate those with inside knowledge to come forward and assist the Government to identify and prosecute persons who have violated the securities laws.”20 Rule 21F, however, defines “independent analysis” to include publicly available information if the “examination and evaluation of information that may be publicly available, but which reveals information that is not generally known or available to the public.”

Proposed Reg. 21F changes this definition to require a whistleblower to show that their submission provided “evaluation, assessment, or insight beyond what would be reasonably apparent to the Commission from publicly available information.” Before it accepts that the independent analysis standard is met, the SEC would determine “whether the violations could have been inferred from the facts available in public sources.” This introduces a level of ambiguity which could deter whistleblowers from reporting.

Liu v. Securities and Exchange Commission

On June 22, 202 the Supreme Court held that the SEC’s practice of seeking discouragement under Section 21(d) of the Exchange Act can continue, subject to certain restrictions. The Court held that the disgorgement award: (i) must not exceed the wrongdoer’s profit (taking into account legitimate business expenses); and, (ii) should go back to the wrongdoer’s victims. This decision will likely cause a decrease in the total amount of monetary penalties recover by the SEC and thereby decrease the amount of whistleblower awards. Moreover, the determination and calculation of legitimate business expenses is likely to be complicated and time consuming and will likely delay the payment of any whistleblower award. Limiting the amount available for and delaying the payment of a whistler award my discourage whistleblowers from coming forward.


Even though the changes to the SEC whistleblower program may work to limit claims, firms should still take measures to address whistleblower liability. As a first step, firms should review and modify if necessary, their policies and procedures and compliance manuals, Codes of Ethics, confidentiality and employment agreements for accuracy and completeness. During this time of increased layoffs, firms should ensure that they do not inadvertently violate Reg. 21F-17. Reg. 21F-17 stipulates that “no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing or threatening to enforce, a confidentiality agreement… with respect to such communications.” Agreements including employment agreements and severance agreements may be violative of Reg. 21F-17 such as those that contain language restricting an employee’s: (i) right to collect monetary recovery related to any governmental investigation; or (ii) ability to make disclosures to a governmental agency, including the SEC.

Also, as the economic effect of COVID begins to recede, they should review: (i) the actual impact that his crisis has had on their business; (ii) public reporting statements; and, (ii) any CARES funds to ensure that the funds are properly used and that the CARES application was accurate.

For more information, please email or call (888) 243-5241 with any questions.

1 SEC Awards Record Payout of Nearly $50 Million to Whistleblower, SEC Press Release dated June 4, 2020.
2 Id.
3 From mid-March to mid-May 2020, the SEC has received over 4000 tips. S. Peiken, Keynote Address: Securities Enforcement Forum West 2020, May 12, 2020.
4 Whistleblower Program Rules, Release No. 34-83557; File No. S7-16-18 (“Proposed Reg. 21F”).
5 Liu v. Securities and Exchange Commission, No. 18-1501 (June 22, 2020).
6 See FN 2.
7 See e.g., Coronavirus (COVID-19), Division of Corporate Finance, Securities and Exchange Commission, CF Guidance: Topic No. 9, March 25, 2020.
8 See e.g., SEC Conducts Review of PPP Borrowers, Alaric Alert, May 29, 2020.
9 See, E.g. K. Johnson, Armed with whistleblower tips, U.S. SEC cracks down on coronavirus misconduct, May 26, 2020, Reuters. and Tips to SEC Surge as Working From Home Emboldens Whistleblowers. The Wall Street Journal, June 1, 2020.
10 The “Exchange Act,” 15 U.S.C. 78u-6.
11 Id.
12 Id.
13 15 USC §78u-6(c)(1)(B). The Fund refers to the Investor Protection Fund (“IPF”) which was established for payment of whistleblower awards by the SEC. 15 USC §78u-6(g).
14 17 CFR § 240.21F.
15 Proposed Reg. 21F.
16 There have been over 100,000 comments submitted to the SEC concerning proposed Reg. 21F. Comments on Proposed Rule: Amendments to the Commission’s Whistleblower Program Rules.
18 Reg. 21F.
19 18 USC § 3293, et seq.
20 3 76 FR 34300, 34311/3.

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