By Mark S. Nelson, J.D.
The law firm Kohn, Kohn & Colapinto, LLP recently submitted a petition for rulemaking to the Commission seeking public notice and comment on a provision that was added to a prior amendment to the Commission’s whistleblower rules regarding the authority of commissioners to review preliminary determinations made by Commission staff before those determinations are forwarded to whistleblowers. The rulemaking petition also seeks an interim suspension of commissioner reviews of preliminary determinations of whistleblower awards until the Commission can adopt finals rules clarifying how and when commissioners can review such determinations.
In September 2020, the Commission amended its whistleblower awards regulation primarily to address how the Commission and SEC staff review award determinations, to provide a uniform definition of “whistleblower,” and to make other changes that were intended to enhance the efficiency of the whistleblower claims process. According to the rulemaking petition, the final rules adopted by the Commission included the commissioner review provision without first allowing for a public comment period on that provision.
The provision at issue actually appears twice in slightly different formats in Exchange Act Rules 21F-10(d) and 21F-11(d). The former deals with whistleblower awards in SEC actions where monetary sanctions exceed $1 million, and the latter deals with award determinations based on a related action. The only significant difference between the two provisions can be found in the last several clauses of the relevant texts; the former contains more language regarding a “proposed award dollar and percentage amount, and the grounds therefore” while the latter speaks only of the “proposed award percentage amount.”
For purposes of example only, Rule 21F-10(d) states in relevant part: “Following a determination by the Claims Review Staff (and an opportunity for the Commission to review that determination), the Office of the Whistleblower will send you a Preliminary Determination setting forth a preliminary assessment as to whether the claim should be allowed or denied and, if allowed, setting forth the proposed award dollar and percentage amount, and the grounds therefore” (emphasis added).
As the rulemaking petition noted, the Commission offered little supplemental explanation for the addition of the commissioner review language. However, footnote 10 in the adopting release does contain a brief explanation:
“Exchange Act Rule 21F–10(d) and Rule 21F–11(d) authorizes the CRS to make a preliminary determination on an award application for a covered action and related action, respectively. Further, in accordance with Section 4A(b) of the Exchange Act, both rules now clarify that [sic] Commission will be provided the opportunity to review any preliminary determination before it is provided to a claimant. See id. (providing that ‘the Commission shall retain a discretionary right to review’ actions taken ‘[w]ith respect to the delegation of any of [the Commission’s] functions’)” (emphasis in original).
The rulemaking petition emphasized two points about the consequences of the amended language in the Rules 21F-10(d) and 21F-11(d). First, the rulemaking petition observed that commissioners may still exercise de novo review of preliminary determinations because the Commission still has the authority to issue a final determination. The rulemaking petition also claimed that review of preliminary determinations by commissioners before a final determination is made could increase the time needed to reach a final determination.
While asking the Commission to review and update its own work, the rulemaking petition was careful to avoid any suggestion that the Commission itself had engaged in improper conduct under the amended versions of Rules 21F-10(d) and 21F-11(d). The rulemaking petition closed by stating:
“We are not asserting that this procedure has ever been misused. Our primary concern is the potential for delay and inefficiency resulting from Commissioner review of an initial preliminary determination without strict limits on the time and manner of review,” said the rulemaking petition. “Additionally, the current regulations are unclear as to the purpose of this preliminary review, whether Commissioners can make recommendations to the Claims Review Staff concerning the merits of a claim, and what, if any, actions the Claims Review Staff must take after the Commissioners review a preliminary determination.”