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Statement at Open Meeting on Amendments to the Commission’s Whistleblower Program Rules

Chairman Jay Clayton

June 28, 2018

The final item on the agenda is consideration of amendments to our whistleblower program rules.  Approximately seven years ago, the Commission first opened the doors of its Office of the Whistleblower.  There was great anticipation for this groundbreaking program, with its three key components – monetary awards, heightened confidentiality, and anti-retaliation protections.  But no one knew what kind of effect it would have on the enforcement of the securities laws.  The key question in everyone’s mind was:  Would the Commission receive specific, timely, and credible high-quality tips that would lead to successful enforcement actions? 

Based on our experiences, I think the answer is a resounding “yes.”  The Commission’s whistleblower program has contributed significantly to our ability to detect wrongdoing and better protect investors and the marketplace, particularly where fraud is well-hidden or difficult to detect.  As we continue our pursuit of enforcement initiatives focused on misconduct that impacts the retail investor, the strength of our whistleblower program is a critical component in our investor protection toolbox.

After nearly seven years of administering the whistleblower program, the staff and, in particular, the Office of the Whistleblower and the Office of General Counsel, have identified various ways to make the program more effective.  The proposed rules would enhance the Commission’s ability to more appropriately and expeditiously reward those who voluntarily provide critical information that leads to successful enforcement actions.  Each of the proposed amendments is important to achieve this objective. 

A number of the amendments being proposed today are intended to provide us with greater flexibility to get more money into the hands of worthy whistleblowers.  On certain occasions, the rigidity of the current rules has prevented us from paying higher awards.  One of our proposals would allow the Commission to pay awards based on certain types of settlement agreements that are entered outside the context of judicial or administrative proceedings, such as non-prosecution agreements entered into by criminal authorities. 

Another proposal would provide the Commission with discretion (subject to the statutory maximum) to increase the amount of certain awards that are less than $2 million.  The Commission, by its own rule, currently is not permitted to consider the actual dollar amount of the award.  Instead, the Commission, based on various criteria, identifies a percentage between the statutory bounds of 10% and 30% and, then, the selected percentage is applied to our collection of monetary sanctions to determine the payment to the whistleblower.  Let’s call this “the percentage formula.”  I believe that, for awards below $2 million, this is too rigid and the Commission should have the authority to depart upward (but not downward) from the amount determined by the percentage formula.   

Historically, over 60% of the awards given out in our whistleblower program have been under this $2 million figure.  We want to incentivize potential whistleblowers by affording that majority of our whistleblowers the possibility of obtaining a larger award where they did everything right, yet our monetary collections may have been comparatively low.  Related to this objective, we are also seeking public comment on how we might be able to establish a potential discretionary award mechanism for whistleblowers who make significant contributions in Commission enforcement actions, but where the monetary sanctions collected are de minimis or otherwise do not qualify for an award.

At the same time, the proposed amendments are intended to make sure that we are responsible stewards of the public trust while in no way diminishing the monetary incentive to blow the whistle on wrongdoing.[1] 

Of the $266 million we have awarded in 50 separate awards, more than 40 percent of those funds have been paid out in only 3 awards.  As such, in a small subset of cases with large awards under the percentage formula, it is appropriate for the Commission to have discretion to consider the size of the payout.  We are thus proposing a rule that would allow us the ability to determine whether a truly large award was reasonably necessary to advance the program’s goals, or whether some reduction of the award amount is appropriate.

Importantly, in no case would an exercise of this discretionary authority result in an award of less than $30 million.  This $30 million minimum award threshold has been set to ensure that we are not in any practical way reducing the incentive to blow the whistle.  Our experience administering the program suggests that adding this discretion to our percentage formula for large awards but with a $30 million floor will not in any practical way affect incentives.  For example, historic data shows that large majority of corporate officers and other high-ranking executives that have come forward and submitted tips and received awards under the program have done so in return for monetary awards of less than $5 million.      

Beyond these amendments that would provide the Commission with additional flexibility, we are proposing amendments to the rules to comport with the Supreme Court’s recent decision in Digital Realty Trust, Inc. v. Somers[2] by, among other things, promulgating a uniform definition of “whistleblower” that would apply to all aspects of Exchange Act Section 21F.  Many have asked whether the SEC will continue to enforce the anti-retaliation provisions of Dodd-Frank.  Let me be clear:  retaliation protections are a key component of the whistleblower program, and we will bring charges against companies or individuals who violate the anti-retaliation protections when appropriate.

In addition to the foregoing amendments, we will consider several other amendments that are intended to clarify and enhance certain policies, practices, and procedures in implementing the program and to increase the efficiency of the claims review process.  

Since rulemaking presents an opportune time to solicit input from the public, we will also be considering proposed interpretive guidance to help clarify the meaning of “independent analysis” as that term applies to submissions of publicly available information under the program. 

I would like to acknowledge a number of individuals who have contributed to this rulemaking and to the success of the whistleblower program. 

From the Office of the Whistleblower:  Jane Norberg, Emily Pasquinelli, Kelly Breakey, Michael Hurwitz, Cree Kelly, Ami Mukerjee, Lisa Wardlaw, and Nikkia Wharton. 

From the Office of General Counsel:  William (Brooks) Shirey, Brian Ochs, Michael Conley, Laura Jarsulic, Thomas Karr, Stephen Yoder, Bryant Morris, and Connor Raso.

 From the Division of Economic and Risk Analysis:  Chyhe Becker, Hari Phatak, Vanessa Countryman, Y.C. Loon, Daniel Bresler, and Sai Rao.

And now, I will turn it over to Jane Norberg, the Director of the Office of the Whistleblower, and Brooks Shirey, in the Office of the General Counsel, for the staff's presentation of the recommendation.

 

[1] By law, once our Investor Protection Fund drops below $300 million, we are required to divert money to replenish the fund.  That money otherwise would go to the United States Treasury, where it could be used for other similarly important public purposes.  It is therefore important for us to make sure that the money in the fund is used efficiently.

[2] 138 S. Ct. 767 (2018). 

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