Thursday, January 17, 2019

Webinar explores the evolving SEC whistleblower minefield

By Brad Rosen, J.D.

Since the establishment of SEC’s whistleblower program in 2012, which was part of the 2010 Dodd-Frank market reform legislation, more than $326 million has been awarded to 59 whistleblowers. Enforcement actions resulting from whistleblower tips have resulted in more than $1.7 billion in remedies, with approximately $900 million of that amount being returned to victimized investors as the disgorgement of ill-gotten gains.

In FY 2018, the SEC’s Office of the Whistleblower (OWB) received 5,282 whistleblower tips from all 50 states, the District of Columbia, and 72 foreign nations. Notably, more money was awarded to whistleblowers in FY 2018 than all prior years combined, including three of the program’s largest awards – a $49 million joint award to two individuals, as well as individual awards of $39 million and $33 million.

With these developments as a backdrop, a panel of experts came to together to discuss a multitude of legal and regulatory issues in a Securities Docket webinar titled Navigating the Minefield of Dodd-Frank’s Whistleblower Provisions (2018 Update). The conversation focused on developments within SEC’s OWB, the recent Supreme Court decision in Digital Realty Trust, Inc. v. Somer, the SEC’s resulting implementing regulations, as well as some key takeaways for compliance professionals. Panelists included Gibson Dunn attorneys Joseph Warin, John Chesley, Amanda Machin, Nicole Lee, as well as Sean McKessy from Phillips and Cohen LLP, a former SEC OWB chief, and Jim Barratt, a managing director from Ankura Consulting Group.

Digital Realty Trust, Inc. v. Somer revisited. The Supreme Court’s decision in early 2018 in Digital Realty Trust was front row and center in the panel’s discussion. In that case, the Court held that the whistleblower provisions of the Securities Exchange Act require that a person report a possible securities law violation to the SEC in order to qualify as a whistleblower protected against employment retaliation under Section 21F(h) of the Dodd-Frank legislation, and thereby invalidated the Commission’s rule interpreting that provision’s anti-retaliation protections to apply regardless of whether a report of possible securities law violations was made to the Commission, to a different government agency, or internally to an employer.

Proposed amendments to SEC Rule 21F being considered. The panel also noted that following the Digital Realty ruling, the Commission proposed amendments to bring the whistleblower rules in line with the holding of the Supreme Court. These proposed amendments would:
  • Incorporate a uniform definition of “whistleblower” covering only those who report to the SEC in accord with the statutory definition per Digital Realty Trust;
  • Permit the SEC to include amounts collected in connection with deferred prosecution agreements, non-prosecution agreements, and other alternative settlement vehicles in the calculation of “related action” awards;
  • Permit the SEC to consider the size of small (greater than $2 million) and large (less than $30 million) awards in setting the appropriate percentage of awards;
  • Permit the SEC to bar permanently applicants who submit multiple frivolous applications;
  • Create summary disposition procedures for non-conforming applications; eliminate potential duplicative recoveries for “related actions” subject to separate whistleblower award schemes; and
  • Clarify and enhance certain other policies and procedures. 
The public comment period for the proposed amendments ended in September 2018, with the SEC currently considering 100 unique comment submissions.

Some key takeaways for compliance personnel. Jim Barratt from Ankura Consulting Group had some suggestions for compliance personnel in light of recent developments in the whistleblowing space. His observations include the following:
  • Internal compliance processes are even more important in post-Dodd-Frank world. The Digital Realty Trust decision may encourage employees to bypass internal reporting processes and go directly to the SEC with complaints. Accordingly, companies should review compliance & HR policies and procedures to ensure that internal reporting is easy, accessible, and perceived as corporate priority.
  • 120 Days is the new standard for corporate internal investigations. In two separate rules passed as part of Dodd-Frank regulations, the SEC chose 120 days as key milestone for investigations. Moreover, internal investigations that place a company in position to make disclosure decision within 120 days should be deemed presumptively reasonable.
  • There is a need to adjust the voluntary disclosure calculus. Now, with the clear requirement that an individual report to the SEC to be protected against retaliation under the Dodd-Frank Act, together with growing whistleblower awards and plaintiffs’ bar, expect more external reporting overall. Highly publicized anti-retaliation enforcement actions are likely to encourage external reporting of not only securities fraud, but also of related misconduct.
Lastly, the panelists were in general agreement that the Dodd-Frank whistleblower provisions are likely here to stay. Notwithstanding campaign promises by President Trump of “dismantling” Dodd-Frank, the whistleblower program is somewhat an exception in that it has enjoyed broad bipartisan support.

The webinar can viewed in its entirely on replay by clicking here.