SEC review of whistleblower rules applauded by ex-SEC whistleblower chief and whistleblower attorney

Securities and Exchange Commission Chair Gary Gensler’s decision to revisit whistleblower award rules that the SEC adopted last year is welcome news and a good sign for whistleblowers, say two partners at Phillips & Cohen LLP who represent SEC whistleblowers.

Phillips & Cohen partners Sean McKessy, who was the founding Chief of the SEC Office of the Whistleblower and the principal architect of the SEC whistleblower program, and Erika Kelton, who has won more SEC whistleblower awards for clients than any other attorney, say Gensler was right to instruct staff to review certain damaging changes to the rules the SEC made last September.

“As someone who led the team that built the SEC’s whistleblower program from the ground up, I am gratified that SEC Chair Gensler has taken this affirmative step to re-evaluate the unwarranted changes to the rules,” McKessy said. “I know first-hand that the changes have caused clients and potential clients to have serious concerns, and made them reluctant to come forward in some instances.”

Kelton said the SEC staff review of the changes in whistleblower award rules is an important development.

“The SEC under new leadership apparently recognizes that the changes last year in whistleblower award rules are likely to hurt the SEC whistleblower program, which overall has been very successful,” said Kelton, who has collected 10 SEC whistleblower awards for her clients. “It’s important for the SEC to reverse those changes.”

Two particular changes are being reviewed:

  • The SEC decided that it had the authority to consider the dollar amount of an award as a factor in determining the award amount, rather than deciding an award based on a percentage of the monetary sanctions collected as a result of the whistleblower’s information and assistance without regard to the amount ultimately awarded. Last year’s change gave the SEC the latitude to reduce awards simply because it considers them too large.
  • The SEC may grant an award based on only the monetary sanctions the SEC collects rather than sanctions collected by all government agencies in related enforcement actions that also were due to the whistleblower’s information, if those agencies also have whistleblower reward programs.

“The goal of these changes seems to be to reduce the amount of money the SEC pays to whistleblowers,” said McKessy. “That is a short-sighted view and will limit the success of the program.”

Kelton agreed.

“Whistleblowers need to know that the SEC will pay rewards based on what the law says they should get – not on the arbitrary and personal views of regulators,” said Kelton, whose clients include an international whistleblower who was awarded $32 million. “The SEC whistleblower award changes last year increased the uncertainty whistleblowers face when they make the already risky decision to blow the whistle.”

The Dodd-Frank Act states that the SEC will award whistleblowers 10% to 30% of the monetary sanctions the SEC collects as a result of enforcement actions based on the whistleblower’s information, if more than $1 million in sanctions are ordered. If monetary sanctions exceed $1 million, recoveries in related cases by other agencies also may be counted toward the whistleblower award.

In determining the percentage, the SEC should consider the following factors, according to the law:

  • The significance of the information provided.
  • The assistance provided by the whistleblower and the whistleblower’s attorney.
  • The “programmatic interest” of the SEC “in deterring violations of the securities law.”

“Congress designed the program to incentivize whistleblowers: The more the government collects in monetary sanctions, the more whistleblowers should get,” Kelton said. “That is how the law is written. That is how you get highly paid executives who know about pervasive, hidden fraud to risk their careers to come forward with information about schemes that hurt investors and markets.”

Gensler said in his statement that he expects the SEC to consider potential revisions to the rule changes later this year, after the staff review.

“We look forward to contributing to the upcoming dialogue to address the many ways that the program can be even further strengthened by re-examining some of the poorly considered revisions to the original rules,” McKessy said.

 

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