SEC Will Not Subject Whistle-Blowing Awards to Enhanced Review

Allen Smith, J.D. By Allen Smith, J.D. November 19, 2020
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a montage of faces with one face blowing a whistle

​The recent election probably won't change the U.S. Securities and Exchange Commission's (SEC's) decision to not subject its largest whistle-blowing awards to enhanced review. More whistle-blowing activity may result from this decision and other recent SEC actions, though employers can take some steps to try to resolve whistle-blowing complaints internally.

The SEC also recently announced:

  • It would give whistleblowers the largest allowable percentage of its smaller awards—those under $5 million.
  • Whistleblowers must submit a claim in writing to the SEC to be protected from retaliation. To be protected, the worker must send the submission before the retaliation occurs.

 "There was a proposed amendment [to the Dodd-Frank Act] to subject awards of $30 million on recoveries of $100 million or more to enhanced review," said Meg Campbell, an attorney with Ogletree Deakins in Atlanta. "Some complained that the proposed enhanced review could function as a cap, disincentivizing whistleblowers. The commission did not approve the amendment, leaving the factors as they were." The original whistleblower program rules under the Dodd-Frank Act "did not provide for a cap and none was proposed," she added.

Whistleblower Award Program

Under the SEC's whistleblower program, as established by the Dodd-Frank Act, the SEC must grant whistleblowers an award between 10 percent and 30 percent of any sanction over $1 million resulting from the whistleblower's original information. So, if a company is sanctioned $10 million based on a whistleblower's information, the commission must award a qualified whistleblower no less than $1 million—10 percent—and no greater than $3 million—30 percent, noted Linda Jackson, an attorney with Arent Fox in Washington, D.C.

Greg Keating, an attorney with Choate, Hall & Stewart in Boston, said the SEC uses a list of factors to determine if an individual gets paid on the higher or lower end of the spectrum. These factors include:

  • Whether the individual first tried to report the problem internally.
  • Whether the individual himself or herself was culpable.
  • The overall value of the provided information.

"Despite its short history, since its inception, the work undertaken by the SEC's Office of the Whistleblower has led to enforcement actions resulting in more than $2 billion in financial remedies, and more than $500 million in awards to whistleblowers," Jackson said.

"The largest awards, which can be staggering, are the most effective advertisements for the SEC's program," said Paul Helms, an attorney with McDermott Will & Emery in Chicago and Washington, D.C.

The agency decided that for potential awards of less than $5 million, the SEC would presume that the whistleblowers would receive the maximum statutory award amount—30 percent of the sanction.

"The SEC's rationale for this approach is that approximately 60 percent of the whistleblower awards have been under $2 million," said Peter Spivack, an attorney with Hogan Lovells in Washington, D.C. "The SEC wants to ensure that whistleblowers who might otherwise be dissuaded by the low amount of the award are still incentivized."

The agency's action "will ensure that these individuals will receive the benefit of the maximum allowable award amount as long as there are no significant issues," said Connie Bertram, an attorney with Bertram LLP in Washington, D.C. "It is more of an opportunity for the agency to signal to would-be whistleblowers that it does not value one type of case over another."

Written Report

The SEC also decided that for purposes of protection from retaliation, an individual is required to report information about possible securities law violations to the commission in writing.

This requirement "will result in more potential liability for employers because a formal written complaint often generates more enforcement than an oral comment or statement to an investigator," Keating said.

He noted that the Supreme Court has held that in order to be protected from retaliation as a whistleblower under the Dodd-Frank Act, an individual must first go to the SEC. Internal complaints alone to an employer will not suffice to protect an individual as a whistleblower.

"Employers should understand, however, that even if Dodd-Frank does not protect employees who make internal reports only, other state and federal whistleblower statutes may give rise to anti-retaliation claims," Jackson said. In fact, the Supreme Court itself has noted that the Sarbanes-Oxley Act provides whistleblowers with broad anti-retaliation protections.

[Are you a small business with big legal questions? Check out the new SHRM LegalNetwork.]

Proactive Steps

Employees who don't trust their employers and call attorneys for advice when they sense internal problems will be advised to immediately write to the SEC in order to be protected as whistleblowers, Keating said.

He recommended that employers garner the confidence of their employees and:

  • Create multiple reporting channels within organizations.
  • Train all employees on their respective roles in a "speak-up" culture.
  • Take a hard look at investigation protocols to ensure that they are prepared for any kind of report.
  • Know how to respond and, depending on the circumstances, investigate.

In addition, Spivack recommended that employers:

  • Maintain an easy-to-read ethics policy and provide training on a periodic basis concerning the expected behavior standards.
  • Encourage open and early communication of potential concerns.
  • Conduct surveys about corporate ethics and reporting procedures.
  • Regularly assess and improve reporting and compliance procedures.
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