Friday, August 06, 2021

SEC announces interim whistleblower procedures during rule review; Roisman and Peirce lambaste action as ‘unwise’

By Lene Powell, J.D.

Following SEC Chair Gary Gensler’s announcement that staff is preparing potential revisions to whistleblower rules adopted last year, the Commission announced new interim procedures for reviewing whistleblower applications. The new procedures pertain to allowing awards for related actions and consideration of dollar amounts in making award determinations (Procedures for the Commission’s Use of Certain Authorities Under Rule 21f-3(B)(3) and Rule 21f-6 of the Securities Exchange Act of 1934, Release No. 34-92565, August 5, 2021).

Noting that the rule amendments are less than a year old and subject to litigation, Commissioners Elad Roisman and Hester Peirce issued a joint statement criticizing the move. In the commissioners’ view, the new procedures effectively nullify duly adopted rules and create a troubling precedent

2020 rule amendments. On September 23, 2020, the SEC adopted several amendments to rules governing the SEC whistleblower program established by the Dodd-Frank Act. At issue here are two particular amendments:
  • Related actions: an amendment provided that a law enforcement or separate regulatory action does not qualify as a "related action" if the Commission determines that there is a separate award scheme that more appropriately applies to such law-enforcement or separate regulatory action.
  • Award amounts: an amendment provided that award amounts are to be determined exclusively based on the application of the award factors set forth in the SEC’s whistleblower rules, with no separate assessment by the Commission of whether award amounts are too small or too large.
The amendments were criticized at the time by Commissioner Allison Herren Lee. Regarding related actions, she believed the rule amendments decreased certainty by introducing a new, subjective standard regarding whether agency’s whistleblower program has a "more direct or relevant connection to the action." She also believed the rule improperly allows the reduction of awards on the basis of an objection by the Commission solely to the size of an award.

Gensler announces rule review. On August 3, 2021, Gensler announced he has asked the Commission staff to prepare potential revisions to the above two rule changes, which critics believe will discourage whistleblowers from coming forward.

New procedures. Following on the heels of Gensler’s announcement, the Commission issued a Statement announcing the implementation of new interim procedures pending the staff review of the 2020 amendments.

Regarding related actions, the procedures provide that staff must consider whether to recommend that the Commission’s exemptive authority under Section 36(a) of the Exchange Act should be used to permit an award on a potential related action, regardless of the limitations of Rule 21F-3(b)(3), if:
  1. the alternative whistleblower program has an award cap or award range that could disadvantage the particular claimant; or
  2. the Commission is aware or the claimant demonstrates a likelihood that a condition or exclusion would apply to his or her award claim under the alternative award program and the staff determines that the claimant would likely obtain an award were he or she permitted to proceed under the SEC’s award program.
Further, if staff determines that an alternative whistleblower program has a "more direct or relevant connection" to the potential related action than the Commission’s award program, staff will inform the claimant of its assessment. The claimant may then request that the related-action award claim be held in abeyance during the Interim Policy-Review Period, and this will not impact the timely processing of the award claim.

Regarding award amounts, the new procedures provide that the Commission anticipates that, going forward, it will continue its practice of considering dollar amounts only in connection with provisions of the rules that explicitly contemplate the use of such discretion to raise awards. If staff or the Commission consider deviating from this practice, the staff will inform the claimant that such action is being considered. The claimant may then request that the matter be held in abeyance during the Interim Policy-Review Period.

Roisman and Peirce criticism. In their statement, Roisman and Peirce contended that the new procedures are designed to ensure the two rule provisions are substantively ignored while proposed amendments are formulated and considered. Effectively, this nullifies the rules under the guise of changes to "agency procedures," said the commissioners.

"This reduces the certainty of the law, a consequence that does not bode well for the Commission or those it regulates," said the commissioners.