SEC Pauses Enforcement of Some Whistleblower Program Rules

A very welcome development for SEC whistleblowers was reported in the Wall Street Journal on August 6, 2021 by reporter Mengqi Sun. Attorney advocate Jordan Thomas was quoted regarding the subject and result, toward which he has extended considerable effort and personal resources.

In a nutshell, the development was an announcement by SEC Chairman Gary Gensler that Commission staff would be preparing revisions to two rules amendments that went into effect late last year, and following interim procedures in the meantime that would negate their effects. The amendments were widely regarded as disincentivizing whistleblowers from continuing to come forward by limiting and clouding the potential for awards.

One amendment prevents the SEC from awarding a whistleblower when their tip leads to success in an enforcement action brought by another law-enforcement or regulatory authority, if another whistleblower award program might also apply to the related action. This might have appeared justified to avoid double-dipping scenarios. However, the amendment is not necessary to prevent such results, whereas it could and would have caused some whistleblowers to lose any chance at an award where, for example, they were found ineligible for an award under an alternative whistleblower program for a technical reason (such as first reporting to the SEC).

The other amendment gives the SEC discretion to reduce awards simply by virtue of them being (in someone’s view) too large. Prior to the amendment, awards were statutorily set as a percentage of qualifying sanctions collected in an enforcement action that was successful based on a whistleblower tip. This amendment, of course, left potential whistleblowers with no ability to calculate whether an award was likely to be sufficient to compensate for the risks they’d be taking.

Jordan did not take these threats to his clients and an orderly, law-abiding securities industry lying down. Immediately after the amendments went into effect, he prepared and filed a federal lawsuit challenging their implementation on various grounds, including lawfulness. The SEC’s current course clearly demonstrates that Jordan’s concerns were well-founded. Jordan agreed to a further stay of the lawsuit only after the SEC publicly committed to follow new procedures allowing whistleblowers to avoid the ill effects of the amendments until they could be fixed.

“It’s a big event; we raised concerns in January, and less than six months later, the commission agreed to change the rules we challenged and abandoned enforcement of the two rules,” Jordan was quoted as saying. He summarized: “That’s a huge win for whistleblowers and a loss for those that have been championing Wall Street interests.”

Named one of the top whistleblower practices/attorneys in the country by The New York Times, Wall Street Journal, NPR and The New Yorker
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