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Divided SEC Approves New Whistleblower Award Rules (1)

Sept. 23, 2020, 4:55 PM; Updated: Sept. 23, 2020, 8:25 PM

A divided SEC adopted new whistleblower rules that clarify the commission’s discretion to set awards required by the Dodd-Frank Act.

The Securities and Exchange Commission on Wednesday voted 3-2 in favor of final rules that didn’t ease Democratic concerns that they will let the agency limit massive bounties owed to employees who report securities law violations.

Tipsters receive awards of 10% to 30% of the money from cases that yield at least $1 million in enforcement sanctions against a company under the whistleblower program created by Dodd-Frank.

“Many market participants are familiar with the factors that we use when determining award amounts – for example, we look at the significance of information provided by the whistleblower, as well as the degree of assistance the whistleblower provided in the relevant action,” SEC Chairman Jay Clayton said before voting for the regulations. “But, as was evident during the rulemaking process, there was public confusion about the commission’s discretion in applying those factors.”

Clayton said the new rules were meant to bring transparency to the award determination process in place for nearly a decade.

Democrats, whistleblower advocates, and Sen. Charles Grassley (R-Iowa) said the 2018 proposal behind the rules could have inappropriately constrained awards to a $30 million “cap” in some cases. The plan would have given the commission more flexibility in curtailing bounties to whistleblowers who assist in cases that bring at least $100 million in penalties against a company.

Language about $100 million in penalties was removed from the final rules adopted Wednesday, but the same concerns remain among the SEC’s Democrats.

“The concerns with the original 2018 proposal were that it would allow the reduction of awards on the basis of a pure objection by the commission to the size of an award,” Democratic SEC Commissioner Allison Lee said before voting against the regulations. “I would not have supported writing that ability into our rules. Unfortunately, today’s rule simply assumes the existence of that ability and sets no real limitations on its use.”

Softer Approach

Whistleblower advocates had mixed feelings about the rules.

Lee and Democratic SEC Commissioner Caroline Crenshaw have legitimate concerns about the rules, said Stephen Kohn, chairman of the National Whistleblower Center. But the removal of the language about award flexibility in cases with at least $100 million in penalties was a major victory for whistleblowers, he said.

Kohn, who also is a partner at Kohn, Kohn & Colapinto LLP, sent the SEC more than a dozen comment letters on the proposal, including two this month, according to SEC records. He met with agency officials at least 10 times since 2018, agency documents show. His September outreach included meetings with various SEC commissioners and members of their staff.

“It’s our position no commissioner can reduce an award because of size alone,” Kohn said in an interview with Bloomberg Law.

Sean McKessy, the first chief of the SEC’s Office of the Whistleblower from 2011 to 2016, wasn’t content with the new regulations.

McKessy, now a partner at Phillips & Cohen LLP, called the rules “alarming,” saying they go against congressional intent by allowing commissioners to consider the amount of a bounty when determining the award percentage.

“The SEC whistleblower program has been extremely successful as it is, which is why it is so puzzling and disappointing that the SEC has passed rules that will undermine it,” he said in a statement.

About $523 million has been awarded to 97 whistleblowers under the program since 2012, according to the commission.

In addition to reaffirming the SEC discretion to set award amounts, the rule would allow a whistleblower to qualify for the maximum statutory award amount when a potential bounty is less than $5 million, among other changes.

(Adds comments from whistleblower advocates beginning in ninth paragraph)

To contact the reporter on this story: Andrew Ramonas in Washington at aramonas@bloomberglaw.com

To contact the editors responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com, Melissa B. Robinson at mrobinson@bloomberglaw.com

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