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Proposed SEC whistleblower rule changes are put on hold

The US Securities and Exchange Commission is reconsidering whether to adopt proposed new rules for the SEC whistleblower program that could have a significant impact on the program by limiting whistleblower rewards in certain cases. Photo by David, via Flickr (CC BY 2.0)

The US Securities and Exchange Commission is reconsidering whether to adopt proposed new rules for the SEC whistleblower program that could have a significant impact on the program by limiting whistleblower rewards in certain cases.

The SEC last year proposed several rule changes to its whistleblower program, but of particular concern is a proposed rule that would put a de facto cap on whistleblower rewards in cases where sanctions exceed $100 million.

In those cases, whistleblowers could see their awards limited to either the statutory minimum of 10 percent or to $30 million – whichever is greater. If the SEC collected sanctions that exceed $300 million from an enforcement action due to a whistleblower’s information and assistance, the whistleblower’s award would likely be limited to 10 percent of the money collected, rather than the 30 percent maximum allowed under the Dodd-Frank Act, even in cases where a whistleblower has done everything right in assisting the Commission’s enforcement efforts.

The rule change would convey to the top-level whistleblowers who bring in the biggest cases they will be treated worse than other whistleblowers, said Sean McKessy, a partner at Phillips & Cohen and the first Chief of the SEC’s Office of the Whistleblower.

“Why would you say it’s not reasonable to award somebody who stopped a billion-dollar fraud at the highest amount if they earned it?” he said in an interview with CFO Magazine.

Mr. McKessy, who now represents whistleblowers, says that the possible rule changes would minimize all of the hard work and immense risk whistleblowers endure. He met with SEC Chairman Jay Clayton to discuss the concerns of whistleblowers and their lawyers about the rule changes.

Erika Kelton, a partner at Phillips & Cohen, says limiting whistleblower awards would jeopardize the SEC whistleblower program’s phenomenal history of success. She has represented three whistleblower clients who have received SEC awards, including the largest SEC award to an international whistleblower – more than $32 million.

Kelton says the possibility of decreased awards is spooking whistleblowers who are still in the early stages of the process.

“There are [whistleblowers] who are contacting us at the beginning of the process and they’re raising this issue as a concern,” Kelton told The Wall Street Journal. “And it’s definitely coloring their decision whether to proceed and become an SEC whistleblower.”

When the SEC first proposed the limit on whistleblower cases with large sanctions, the Commission said it did so in order to not “exceed an amount that is reasonably necessary.” The proposed rule would also eliminate the possibility of doubled awards under different whistleblower programs.

The SEC was scheduled to vote on the rule changes on Oct. 23, but SEC Chair Jay Clayton postponed the vote indefinitely after strong pushback from whistleblower advocates on the Hill, including Sen. Chuck Grassley (R-IA) and Sen. Ron Wyden (D-OR) as well as whistleblower attorneys on the proposal to limit whistleblower awards in big cases. The SEC said it anticipates undertaking further consideration of adopting amendments to whistleblower rules in the near future.

McKessy, who met with Clayton to discuss the concerns of whistleblowers and their lawyers about the rule changes, opposes changing the SEC’s process for reviewing whistleblower claims and advocates for more flexible timeframes for whistleblowers and their counsel to provide the required paperwork to solidify their status as whistleblowers eligible for an award.

The SEC whistleblower program was created in 2010 as part of the Dodd-Frank Act and offers whistleblower confidentiality, anti-retaliation protection and rewards to incentivize whistleblowers to step forward with high-quality information. Whistleblowers who provide information that leads to monetary sanctions of over $1 million are entitled to a reward worth 10 percent to 30 percent of the amount collected by the government.  The SEC hired Mr. McKessy in 2011 to build and administer the Whistleblower Program.

The SEC whistleblower program is widely celebrated as a triumph, with its rewards program cited as a driver of its continuing success. Former SEC chair Mary Jo White called it a “game changer” for fraud enforcement.

In the fiscal year that ended Sept. 30, 2019, the SEC received over 5,200 reports from whistleblowers and awarded approximately $60 million to eight whistleblowers. Three of the whistleblowers reported from abroad, demonstrating the international reach of the whistleblower program and underscoring the worldwide appeal of whistleblower rewards.

The number of whistleblower reports last year decreased slightly from the number received in FY 2018. Kelton attributes this in part to whistleblowers’ concerns about the possible rules changes.

Since the SEC’s whistleblower program was founded in 2010, the SEC has awarded some $387 million to 70 whistleblowers.

About Phillips & Cohen

Phillips & Cohen is the nation’s most successful law firm representing whistleblowers. The firm’s cases have helped federal, state and local governments recover more than $12.3 billion in civil settlements and criminal fines. Phillips & Cohen represents whistleblowers in qui tam lawsuits as well as cases brought under the whistleblower programs of the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Internal Revenue Service. For a free, confidential review of your case, contact Phillips & Cohen via our encrypted form.

 

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