Whistleblower Program Rules, 34702-34752 [2018-14411]
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Federal Register / Vol. 83, No. 140 / Friday, July 20, 2018 / Proposed Rules
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 240 and 249
[Release No. 34–83557; File No. S7–16–18]
RIN 3235–AM11
Whistleblower Program Rules
Securities and Exchange
Commission.
ACTION: Proposed rule.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’) is
proposing for public comment several
amendments to the Commission’s rules
implementing its whistleblower
program. Section 21F of the Securities
Exchange Act of 1934 (‘‘Exchange Act’’)
provides, among other things, that the
Commission shall pay an award—under
regulations prescribed by the
Commission and subject to certain
limitations—to eligible whistleblowers
who voluntarily provide the
Commission with original information
about a violation of the federal
securities laws that leads to the
successful enforcement of a covered
judicial or administrative action, or a
related action. On May 25, 2011, the
Commission adopted a comprehensive
set of rules to implement the
whistleblower program. The proposed
rules would make certain changes and
clarifications to the existing rules, as
well as several technical amendments.
The Commission is also including
interpretive guidance concerning the
terms ‘‘unreasonable delay’’ and
‘‘independent analysis.’’
DATES: Comments should be received on
or before September 18, 2018.
ADDRESSES: Comments may be
submitted by any of the following
methods:
SUMMARY:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/proposed.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number S7–
16–18 on the subject line.
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Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number S7–16–18. This file number
should be included on the subject line
if email is used. To help us process and
review your comments more efficiently,
please use only one method of
submission. The Commission will post
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all comments on the Commission’s
internet website (https://www.sec/gov/
rules/proposed.shtml). Comments are
also available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly.
Studies, memoranda or other
substantive items may be added by the
Commission or staff to the comment file
during this rulemaking. A notification of
the inclusion in the comment file of any
such materials will be made available
on the Commission’s website. To ensure
direct electronic receipt of such
notifications, sign up through the ‘‘Stay
Connected’’ option at www.sec.gov to
receive notifications by email.
FOR FURTHER INFORMATION CONTACT:
Emily Pasquinelli, Office of the
Whistleblower, Division of
Enforcement, at (202) 551–5973; Brian
A. Ochs, Office of the General Counsel,
at (202) 551–5067, Securities and
Exchange Commission, 100 F Street NE,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The
Commission is proposing to amend 17
CFR 240.21F–3 (‘‘Rule 21F–3’’),
240.21F–4 (‘‘Rule 21F–4’’), 240.21F–6
(‘‘Rule 21F–6’’), 240.21F–8 (‘‘Rule 21F–
8’’) through 240.21F–13 (‘‘Rule 21F–
13’’). The Commission is also proposing
to add a new rule that would be codified
as 17 CFR 240.21F–18 (‘‘Rule 21F–18’’).
Table of Contents
I. Background
A. The Whistleblower Award Program
B. Overview of the Proposed Rule Changes
and Other Items
II. Discussion of Proposed Amendments
A. Proposed Amendment to Exchange Act
Rule 21F–4(d) Defining an ‘‘action’’
B. Proposed Amendment to Exchange Act
Rule 21F–4(e) Defining ‘‘monetary
sanctions’’
C. Proposed Amendment to Exchange Act
Rule 21F–3(b)(1) Defining ‘‘related
action’’
D. Proposed Amendment to Exchange Act
Rule 21F–6 Regarding Awards to a
Single Whistleblower Below $2 Million
or in Cases Yielding at Least $100
Million in Collected Monetary Sanctions
and Guidance on the Meaning of
‘‘unreasonable delay’’ Under Rule 21F–6
E. Proposed Amendment to Exchange Act
Rule 21F–2 Addressing Whistleblower
Status and Certain Threshold Criteria
Related to Award Eligibility, Heightened
Confidentiality From Identity Disclosure,
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and Employment Anti-Retaliation
Protection
F. Proposed Amendment to Rule 21F–8 To
Add New Paragraph (d) To Provide the
Commission With Additional Flexibility
Regarding the Forms Used in Connection
With the Whistleblower Program (and
Corresponding Amendments to Rule
21F–10, Rule 21F–11, and Rule 21F–12)
G. Proposed Amendment to Rule 21F–8 To
Add New Paragraph (e) To Clarify and
Enhance the Commission’s Authority To
Address Claimants Who Submit False
Information to the Commission or Who
Abuse the Award Application Process
H. Proposed Amendments to Rule 21F–9
To Provide Additional Flexibility and
Clarity Regarding Form TCR (and
Corresponding Technical Amendments
to Rule 21F–10, Rule 21F–11, and Rule
21F–12)
I. Proposed Amendment to Rule 21F–12
Regarding the Materials That May Form
the Basis of the Commission’s Award
Determination
J. Proposed Amendment to Rule 21F–13
Regarding the Administrative Record on
Appeal
K. Proposed Rule 21F–18 Establishing a
Summary Disposition Process
L. Technical Amendment to Rule 21F–
4(c)(2)
III. Proposed Interpretive Guidance
Regarding the Meaning and Application
of ‘‘independent analysis’’ as Defined in
Exchange Act Rule 21F–4(b)(3)
A. Background: ‘‘Original Information’’ and
Publicly Available Information
B. ‘‘Independent Analysis’’
C. Leads to Successful Enforcement
IV. Request for Comment Regarding a
Potential Discretionary Award
Mechanism for Commission Actions
That Do Not Qualify as Covered Actions,
Involve Only a De Minimis Collection of
Monetary Sanctions, or Are Based on
Publicly Available Information
V. General Request for Public Comment
VI. Paperwork Reduction Act
A. Background
B. Summary of the Proposed Amendments
C. Burden and Cost Estimates Related to
the Proposed Amendments
D. Mandatory Collection of Information
E. Confidentiality
F. Request for Comment
VII. Economic Analysis
A. Economic Baseline
1. Whistleblower Programs
2. Supreme Court Decision in Digital
Realty Trust, Inc. v. Somers
3. IPF and Awards Issued by the SEC
Whistleblower Program
4. Estimates of Current Annual Wages
B. Analysis of Benefits, Costs, and
Economic Effects of the Proposed Rules
1. Proposed Amendments to Rule 21F–2
2. Proposed Rule 21F–3(b)(4)
3. Proposed Rule 21F–4(d)(3)
4. Proposed Rule 21F–6(c)
5. Proposed Rule 21F–6(d)
6. Proposed Rule 21F–8(e)
7. Proposed Rule 21F–18
8. Proposed Interpretive Guidance
Regarding the Meaning and Application
of ‘‘independent analysis’’ as Defined in
Exchange Act Rule 21F–4(b)(3)
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C. Effects of the Proposed Rules on
Efficiency, Competition, and Capital
Formation
IX. Small Business Regulatory Enforcement
Fairness Act
X. Regulatory Flexibility Act Certification
XI. Statutory Basis
List of Subjects in 17 CFR Parts 240 and 249
Text of the Proposed Amendments
I. Background
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A. The Whistleblower Award Program
In July 2010, Congress amended the
Exchange Act to add new Section 21F.1
That provision, entitled ‘‘Securities
Whistleblower Incentives and
Protection,’’ established the
Commission’s whistleblower program.
Among other things, Section 21F directs
that the Commission pay awards,
subject to certain limitations and
conditions, to whistleblowers who
voluntarily provide the Commission
with original information about a
violation of the securities laws that
leads to the successful enforcement of
an action brought by the Commission
that results in a covered judicial or
administrative action 2 and certain
related actions.3
In May 2011, the Commission
adopted a comprehensive set of rules to
implement the whistleblower program.
Those rules, which are codified at 17
CFR 240.21F–1 through 240.21F–17,
provide the operative definitions,
requirements, and processes related to
the whistleblower program. Among
other things, these rules:
• Define key terms and phrases in
Section 21F that determine whether an
individual’s information qualifies for an
award—terms such as ‘‘original
information,’’ ‘‘voluntary,’’ and ‘‘leads
to successful enforcement’’;
• specify the form and manner in
which an individual must submit
information to qualify as a
whistleblower eligible for an award;
• establish the procedures for
anonymous submissions;
• exclude certain individuals from
eligibility, such as individuals who are,
or were at the time that they acquired
the original information provided to the
Commission, a member, officer, or
employee of a foreign government;
• explain which law-enforcement
proceedings undertaken by other
authorities may qualify for a related
action award from the Commission;
• establish the procedures for
determining awards both in
Commission actions and related actions;
and
1 15
U.S.C. 78u–6.
U.S.C. 78u–6(a)(1).
3 15 U.S.C. 78u–6(a)(5).
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B. Overview of the Proposed Rule
Changes and Other Items
After nearly seven years of experience
administering the whistleblower
program, we have identified various
ways in which the program might
benefit from additional rulemaking. We
believe that the changes that we are
proposing will build on the program’s
success by continuing to encourage
individuals to come forward and by
permitting us to more efficiently process
award applications, among other
potential benefits.
Based on our experience to date, we
propose the following substantive
amendments to our rules:
• Allowing awards based on deferred
prosecution agreements (‘‘DPAs’’) and
non-prosecution agreements (‘‘NPAs’’)
entered into by the U.S. Department of
Justice (‘‘DOJ’’) or a state attorney
4 The average (mean) of these awards was
approximately $38 million and the median award
was approximately $33 million.
2 15
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• identify the criteria that the
Commission will consider in setting the
percentage amount of an award.
The Commission’s whistleblower
program has made significant
contributions to the effectiveness of the
Commission’s enforcement of the
federal securities laws. The Commission
has received over 22,000 whistleblower
tips since the inception of the program
through the end of Fiscal Year 2017.
Original information provided by
whistleblowers has led to enforcement
actions in which the Commission has
obtained over $1.4 billion in financial
remedies, including more than $740
million in disgorgement of ill-gotten
gains and interest, the majority of which
has been or is scheduled to be returned
to harmed investors. The Commission
has ordered over $266 million in
whistleblower awards to 55 individuals
whose information and cooperation
assisted the Commission in bringing
successful enforcement actions and, in
some instances, other enforcement
authorities in bringing related actions
against wrongdoers. That said,
approximately $112 million of that
amount was paid to just four
individuals in connection with two
Commission enforcement actions and a
related action.4
We recognize that individuals who
step forward to provide information to
the Commission may do so at great
personal peril and professional sacrifice.
We view the three key tenets of the
program—monetary awards,
confidentiality, and retaliation
protections—as complementary and
critical to the success of the program.
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general in a criminal case, or a
settlement agreement entered into by
the Commission outside of the context
of a judicial or administrative
proceeding to address violations of the
securities laws: We propose an
amendment that would expressly allow
for the payment of awards based on
money collected under these types of
arrangements. Currently, our
whistleblower rules do not address
whether the Commission may pay an
award when an eligible whistleblower
voluntarily provides original
information that leads to a DPA or NPA
entered into by DOJ or a state attorney
general in a criminal proceeding. Nor do
our rules currently address whether the
Commission may pay an award to an
eligible whistleblower who voluntarily
provides information that leads to a
settlement agreement entered into by
the Commission outside of the context
of a judicial or administrative
proceeding to address violations of the
securities laws. We are proposing to
amend the definition of an ‘‘action’’ in
Rule 21F–4(d) 5 to include, as
administrative actions, these
arrangements, with the money paid
under such arrangements deemed to be
‘‘monetary sanctions’’ under Rule 21F–
4(e),6 and, thus to expressly permit us
to pay awards thereon.
• Elimination of potential double
recovery under the current definition of
related action: We propose an
amendment to our rules to clarify that
a law-enforcement action would not
qualify as a related action if the
Commission determines that there is a
separate whistleblower award scheme
that more appropriately applies to the
enforcement action. Although neither
Section 21F of the Exchange Act (nor
the whistleblower program rules
thereunder) expressly addresses this
situation, the Commission and the
Claims Review Staff in the context of
processing award applications have
interpreted the term ‘‘related action’’
under Section 21F to exclude those
matters brought by one of the entities
listed in Rule 21F–3(b)(1) 7 for which
there is a more directly applicable
award program. The proposed rule
would codify this interpretation.
• Additional considerations for small
and exceedingly large awards: In the
context of potential awards that could
yield a payout of $2 million or less to
a whistleblower, the proposed rules
would authorize the Commission to
adjust the award percentage upward
under certain circumstances (subject to
the 30% statutory maximum) to an
5 17
7 17
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CFR 240.21F–4(d).
CFR 240.21F–3(b)(1).
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amount that the Commission determines
more appropriately achieves the
program’s objectives of rewarding
meritorious whistleblowers and
sufficiently incentivizing future
whistleblowers who might otherwise be
concerned about the low dollar amount
of a potential award. Relatedly, in the
context of potential awards that could
yield total collected monetary sanctions
of at least $100 million, the proposed
rules would authorize the Commission
to adjust the award percentage so that it
would yield a payout (subject to the
10% statutory minimum) that does not
exceed an amount that is reasonably
necessary to reward the whistleblower
and to incentivize other similarly
situated whistleblowers; however, in no
event would the award be adjusted
below $30 million.8 Currently, the
whistleblower rules do not expressly
permit the Commission to consider
whether a relatively small or
exceedingly large potential payout is
appropriate to advance the program’s
goals of rewarding whistleblowers and
incentivizing future whistleblowers. We
are proposing to amend the
whistleblower program rules to include
these considerations as additional
award criteria.
The three proposed rule changes
described above are intended to serve
two important and related objectives.
First, the amendments are designed to
help ensure that an eligible, meritorious
whistleblower is appropriately
rewarded for his or her efforts when the
Commission or a related-action
authority recovers monetary sanctions
from wrongdoing that violates the
securities laws. Second, the
amendments would help ensure that the
Investor Protection Fund (IPF) that
Congress has established to pay
meritorious whistleblowers is used in a
manner that effectively and
appropriately leverages the IPF to
further the Commission’s lawenforcement objectives.9
8 In determining whether a large award would
provide a payout that goes beyond what would be
necessary to achieve the program’s goals, we
anticipate that the Commission would consider,
among other factors, the value of the
whistleblower’s information and the personal and
professional sacrifices made in reporting the
information.
9 By statute, the IPF ‘‘is established in the
Treasury of the United States’’ and ‘‘is available to
the Commission, without further appropriation or
fiscal year limitation,’’ to pay ‘‘awards to
whistleblowers’’ under Section 21F(b). Exchange
Act § 21F(g)(1), 15 U.S.C. 78–6(g)(1). The IPF may
also be used to fund certain limited activities of the
Inspector General and the Office of the
Whistleblower. As of the end May 2018, the balance
of the IPF for the first time fell below the $300
million threshold that triggers the statutory
replenishment mechanism; this occurred when the
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We believe that using the IPF to
compensate whistleblowers who come
forward with original information that
leads to a DPA or NPA entered into by
DOJ or a state attorney general, or a
settlement agreement entered into by
the Commission outside of the context
of a judicial or administrative
proceeding (provided the total money
required to be paid in the action,
including any other proceedings that
arise out of the same nucleus of
operative facts, exceeds $1,000,000)
achieves both of these objectives. We
similarly believe that these objectives
are furthered by providing the
Commission with additional discretion
to determine that an action does not
qualify as a related action if Congress or
another authority has established a more
directly applicable or relevant award
program. Additionally, we believe that
these two objectives are furthered by
authorizing the Commission to adjust
upward the award percentage in certain
cases where the award would otherwise
yield a payout of $2 million or less to
a whistleblower, as well as to consider
whether, in the context of an award
issued in connection with certain large
Commission or related actions, any
whistleblower award exceeds an
amount that is reasonably necessary to
advance the program’s goals. Absent
this last amendment, the Commission
may find itself faced with the possibility
of paying out significantly large awards
that are in excess of the amounts
appropriate to advance the goals of the
whistleblower program. These awards
could substantially diminish the IPF,
requiring the Commission to direct more
Commission paid $83 million—its largest payout to
date on an enforcement action—to three
individuals. For a complete description of the
mechanisms that Congress established to replenish
the IPF, see Section 21F(g)(3) of the Exchange Act,
15 U.S.C. 78–6(g)(3). Generally speaking, the IPF is
funded in the following way: (i) Deposits of any
monetary sanction collected by the Commission in
any judicial or administrative action brought by the
Commission under the securities laws that is not
added to a disgorgement fund or other fund under
section 308 of the Sarbanes-Oxley Act of 2002 (15
U.S.C. 7246) or otherwise distributed to victims of
a violation of the securities laws, unless the balance
of the IPF at the time the monetary sanction is
collected exceeds $300,000,000; (ii) deposits of any
monetary sanction added to a disgorgement fund or
other fund under section 308 of the Sarbanes-Oxley
Act of 2002 (15 U.S.C. 7246) that is not distributed
to the victims for whom the fund was established,
unless the balance of the disgorgement fund at the
time the determination is made not to distribute the
monetary sanction to such victims exceeds
$200,000,000; and (iii) if the amounts deposited in
the IPF under item (i) and (ii) above are not
sufficient to satisfy a whistleblower award, the
Commission must deposit money into the fund
from the monetary sanctions collected in the
covered action that the whistleblower’s information
led to (even if the money could have been directed
to victims of the violation) in an amount equal to
the unsatisfied portion of the award.
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funds to replenish the IPF rather than
making that money available to the
United States Treasury, where they
could be used for other important public
purposes.10
Beyond the amendments discussed
above, we are proposing to modify
Exchange Act Rule 21F–2.11 The
amendments that we are proposing to
this rule are in response to the Supreme
Court’s recent decision in Digital Realty
Trust, Inc. v. Somers.12 In that decision,
the Court held that Section 21F(a)(6) of
the Exchange Act unambiguously
requires that an individual report a
possible securities law violation to the
Commission in order to qualify for
employment retaliation protection, and
that the Commission’s rule interpreting
the anti-retaliation protections in
Section 21F(h)(1) more broadly was
therefore not entitled to deference.13 We
are proposing to modify Rule 21F–2 so
that it comports with the Court’s
holding by, among other things,
promulgating a uniform definition of
‘‘whistleblower’’ that would apply to all
aspects of Exchange Act Section 21F.
We are also proposing to provide certain
related clarifications to Rule 21F–2 and
to address certain other interpretive
questions that have arisen in connection
with the Court’s holding.
In addition to the foregoing
amendments, we are proposing several
other amendments that are intended to
clarify and enhance certain policies,
practices, and procedures in
implementing the program. We are
proposing to revise Exchange Act Rule
21F–4(e) 14 to clarify the definition of
‘‘monetary sanctions’’ so that it codifies
the agency’s current understanding and
application of that term. We are also
proposing to revise Exchange Act Rule
21F–9 15 to provide the Commission
with additional flexibility to modify the
manner in which individuals may
submit Form TCR (Tip, Complaint or
Referral). We are similarly proposing to
revise Exchange Act Rule 21F–8 16 to
provide the Commission with additional
flexibility regarding the forms used in
connection with the whistleblower
program.17 Further, we are proposing an
amendment to Exchange Act Rule 21F–
12 18 to clarify the list of materials that
the Commission may rely upon in
10 Any funds used to replenish the IPF otherwise
would be directed to the Treasury for use in
funding other public programs.
11 17 CFR 240.21F–2.
12 138 S. Ct. 767 (2018).
13 138 S. Ct. at 781–82.
14 17 CFR 240.21F–4(e).
15 17 CFR 240.21F–9.
16 17 CFR 240.21F–8.
17 17 CFR 249.1800 and 249.1801.
18 17 CFR 240.21F–12.
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making an award determination. We are
also proposing an amendment to Rule
21F–13 19 to clarify the materials that
may comprise the administrative record
for purposes of judicial review.
Two further changes are designed to
help increase the Commission’s
efficiency in processing whistleblower
award applications. We are proposing to
add paragraph (e) to Exchange Act Rule
21F–8 20 to clarify the Commission’s
ability to bar individuals from
submitting whistleblower award
applications where they are found to
have submitted false information in
violation of Exchange Act Section
21F(i) 21 and Rule 8(c)(7) 22 thereunder,
as well as to afford the Commission the
ability to bar individuals who
repeatedly make frivolous award claims
in Commission actions. We are also
proposing to add new Exchange Act
Rule 21F–18 to afford the Commission
with a summary disposition procedure
for certain types of likely denials, such
as untimely award applications and
those applications that involve a tip that
was not provided to the Commission in
the form and manner that the
Commission’s rules require.
We are also proposing a technical
correction to Exchange Act Rule 21F–
4(c)(2) 23 to modify an erroneous
internal cross-reference, as well as
several technical modifications to
Exchange Act Rules 21F–9, 10, 11, and
12 24 to accommodate certain of the
substantive and procedural changes
described above.
We have included two additional
items beyond the proposed amendments
to our rules. First, we are including
proposed interpretive guidance to help
clarify the meaning of ‘‘independent
analysis’’ as that term is defined in
Exchange Act Rule 21F–4 and utilized
in the definition of ‘‘original
information.’’ Second, we are including
a general inquiry for public comment
regarding whether the Commission in a
future rulemaking could establish a
potential discretionary award
mechanism for Commission
enforcement actions that either do not
qualify as covered actions, are based on
publicly available information (and not
‘‘original information’’ as that term is
defined in Exchange Act Rule 21F–
4(b)(1)(i) 25), or where the monetary
sanctions collected are de minimis.26
19 17
CFR 240.21F–13.
CFR 240.21F–8.
21 15 U.S.C. 78u–6(i).
22 17 CFR 240.21F–8(c)(7).
23 17 CFR 240.21F–4(c)(2).
24 17 CFR 240.21F–9 through 240.21F–12.
25 17 CFR 240–21F–4(b)(1)(i).
26 In July 2014, the Commission received two
petitions for rulemaking relating to the
20 17
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II. Discussion of Proposed Amendments
The proposed amendments are set
forth below.
A. Proposed Amendment to Exchange
Act Rule 21F–4(d) 27 Defining an
‘‘action’’ 28
Section 21F of the Exchange Act
authorizes us to pay whistleblower
awards in relation to the ‘‘successful
enforcement’’ of ‘‘covered judicial or
administrative actions’’ brought by the
Commission and certain ‘‘related
actions’’ of other authorities, most
notably DOJ.29 Awards range between
whistleblower program. The petitions for
rulemaking can be found on the Commission’s
website at this location: https://www.sec.gov/rules/
petitions.shtml. Both petitions sought the same or
similar amendments to the whistleblower program
rules in two respects. In connection with issuing
this proposing release, we have considered the two
petitions and determined to proceed as follows.
First, to the extent that the petitions requested
clarification through rulemaking in connection with
employment anti-retaliation protections for internal
reporting, we believe that the amendments we are
proposing to Exchange Act Rule 21F–2 (discussed
above) appropriately address this issue following
the Supreme Court’s recent decision in Digital
Realty. Second, to the extent the rulemaking
petitions request that we add clarifying language to
Exchange Act Rule 21F–17(a), 17 CFR 240.21F–
17(a), we find the amendments unnecessary at this
juncture because, as noted by the petitioners, ‘‘the
plain language of Rule 21F–17 and existing case law
compel the conclusion’’ that the contracts the
petitioners are concerned with are already
‘‘unenforceable[.]’’ See Exchange Act Rule 21F–
17(a), 17 CFR 240.21F–17(a) (providing that no
person may take any action to impede an individual
from communicating directly with the Commission
staff about a possible securities law violation,
including enforcing, or threatening to enforce, a
confidentiality agreement (other than agreements
dealing with information covered by § 240.21F–
4(b)(4)(i) and (ii) of the chapter related to the legal
representation of a client) with respect to such
communications.). In fact, the Commission has
successfully brought nine enforcement actions for
violations of Rule 21F–17. See generally SEC
National Exam Program Risk Alert: Examining
Whistleblower Rule Compliance at 1–2 & n. 3
(October 24, 2016), available at https://
www.sec.gov/ocie/announcement/ocie-2016-riskalert-examining-whistleblower-rule-compliance.pdf
(summarizing Commission enforcement actions).
Finally, in accordance with Rule 192 of the
Commission’s Rules of Practice, see 17 CFR
201.192, the Secretary of the Commission shall
notify the petitioners of the action taken by the
Commission following the publication of this
proposing release in the Federal Register.
27 17 CFR 240.21F–4(d).
28 The Commission anticipates that this proposed
rule change, if adopted, would apply to all new
DPAs, NPAs, and Commission settlement
agreements covered by the proposed rule that are
entered into after the effective date of the rules. The
proposed rule would not apply to any such
agreements entered on or before the effective date
of the rules.
29 15 U.S.C. 78u–6(b)(1). A ‘‘covered judicial or
administrative action’’ is any judicial or
administrative action brought by the Commission
under the securities laws that results in monetary
sanctions exceeding $1 million. Id. 6(a)(1). A
‘‘related action’’ is a judicial or administrative
action brought by any of several authorities
designated in the statute that is based upon the
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10 percent and 30 percent ‘‘of what has
been collected of the monetary
sanctions imposed’’ in the action.30
Proposed Rule 21F–4(d)(3) would
provide that, for purposes of making a
whistleblower award, a DPA or NPA
entered into by DOJ or a state attorney
general in a criminal case would be
deemed to be an ‘‘administrative action’’
and any money required to be paid
thereunder would be deemed a
‘‘monetary sanction.’’ The same result
would follow for a settlement agreement
entered into by the Commission outside
of the context of a judicial or
administrative proceeding to address
violations of the securities laws. The
premise of proposed Rule 21F–4(d)(3) is
the same as that underlying current Rule
21F–4(d)(1) 31: Our view that Congress
did not intend for meritorious
whistleblowers to be denied awards
simply because of the procedural
vehicle that the Commission (or the
other authority) has selected to pursue
an enforcement matter.32
Moreover, we also believe that the
statutory term ‘‘administrative action’’ is
sufficiently ambiguous and broad
enough to permit us to interpret the
term to include DPAs and NPAs when
these instruments are employed by DOJ
or a state attorney general, or settlement
agreements entered into by the
Commission outside of the context of
judicial or administrative proceedings,
as an appropriate resolution to a lawenforcement investigation.33 We find it
original information provided by a whistleblower
that led to successful enforcement of a Commission
covered action. Id. 6(a)(5).
30 Id. 6(b)(1)(A)–(B).
31 17 CFR 240.21F–4(d)(1).
32 See Securities Whistleblower Incentives and
Protections, Exchange Act Release No. 64545, 76 FR
34300, 34327 (June 13, 2011). Recognizing that an
‘‘action’’ is generally considered to be a single
captioned case or matter, the Commission adopted
Rule 21F–4(d)(1) to clarify that it would treat two
or more separate cases that arise out of the same
nucleus of operative facts as a single ‘‘action’’ for
purposes of making an award. In this way, the
sanctions ordered in closely connected proceedings,
even if individually under $1 million, are
aggregated for purposes of assessing whether the
actions reach the $1 million ‘‘covered action’’
threshold that is necessary to permit consideration
of whistleblower award claims. The critical
principle behind this rule is that a whistleblower
should not be denied an award for his or her
contributions to the closely connected cases or
matters merely because the Commission (or other
authority) determined not to bring these cases as
one captioned law-enforcement case.
33 In DOJ’s practice, DPAs and NPAs occupy an
important middle ground between declining
prosecution and obtaining the conviction of a
corporation in circumstances where the collateral
consequences of a corporate conviction for innocent
third parties would be significant. See United States
Attorneys’ Manual 9–28.200, 9–28.1100, available
at https://www.justice.gov/usam/united-statesattorneys-manual. As one example, DPAs and NPAs
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particularly telling that Congress used
the term ‘‘action’’ in Section 21F of the
Exchange Act, rather than the term
‘‘proceeding,’’ to describe the universe
of administrative enforcement outcomes
that might give rise to a whistleblower
award. As used elsewhere in Section
21F, as well as in other provisions of the
securities laws and the Commission’s
rules thereunder, the term ‘‘proceeding’’
refers to various specifically identified
formal processes instituted before the
Commission.34 Therefore, the use of the
term ‘‘administrative action’’ in
describing actions that can give rise to
whistleblower awards suggests that
Congress did not clearly intend to limit
the scope of the Commission’s authority
under Section 21F (outside of judicial
actions) to only the Commission’s
formal adjudicatory proceedings
specified in the securities laws (or
adjudicatory proceedings of designated
related action authorities).
The Commission has previously
exercised its interpretive authority to
pay a whistleblower award with respect
to a DPA entered into by DOJ on the
basis that such agreements are filed in
a federal court action that charges the
defendant with violations of law.35
However, as is further discussed below,
DOJ’s practice with respect to NPAs has
been not to commence an accompanying
proceeding in either a judicial or
administrative tribunal. Moreover, we
have entered into settlement agreements
outside of judicial or administrative
proceedings. Notwithstanding this
distinction in form (i.e., whether an
accompanying judicial or administrative
proceeding was undertaken), these
have been a prominent tool in DOJ’s criminal
enforcement of the Foreign Corrupt Practices Act
(‘‘FCPA’’), 15 U.S.C. 78dd–1 et seq., an area that
overlaps with our own enforcement jurisdiction. In
2017, DOJ entered into six DPAs or NPAs to resolve
FCPA investigations of corporate entities, securing
over $1.4 billion in monetary recoveries. See FCPA
Related Enforcement Actions: 2017, available at
https://www.justice.gov/criminal-fraud/case/
related-enforcement-actions/2017.
34 See, e.g., Exchange Act Sections 21F(h)(2)(A),
15 U.S.C. 78u–6(h)(2)(A) (disclosure of
whistleblower identities to a ‘‘respondent in
connection with a public proceeding instituted by
the Commission’’), 21B, 15 U.S.C. 78u–2 (‘‘Civil
Remedies in Administrative Proceedings’’), 21C, 15
U.S.C. 78u–3 (‘‘Cease-and-Desist Proceedings’’);
Securities Act of 1933 Section 8A, 15 U.S.C. 77h–
1 (‘‘Cease-and-Desist Proceedings’’); Investment
Advisers Act Section 203(i), 15 U.S.C. 80b–3(i)
(‘‘Money Penalties in Administrative Proceedings’’);
Investment Company Act Section 9(d), 15 U.S.C.
80a–9(d) (‘‘Money Penalties in Administrative
Proceedings’’); see also SEC Rule of Practice 101(4),
17 CFR 201.101(4) (defining ‘‘enforcement
proceeding’’).
35 See generally DOJ Criminal Division and SEC
Enforcement Division, A Resource Guide to the
Foreign Corrupt Practices Act at 74 (2012), available
at https://www.sec.gov/spotlight/fcpa/fcparesource-guide.pdf (‘‘FCPA Resource Guide’’)
(describing function and operation of DPAs).
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agreements are all similar in important
respects: Typically, they reward
meaningful cooperation, are premised
on significant remedial and compliance
commitments, and obtain monetary
remedies for past violations. Based on
our experience with the whistleblower
program, we are of the view that the
entry of each of these types of
agreements should be considered the
successful enforcement of an
administrative action within the
meaning of Section 21F, and that
whistleblowers who voluntarily provide
original information that leads to such
enforcement should not be
disadvantaged because DOJ, a state
attorney general in a criminal case, or
the Commission, in the exercise of
enforcement discretion, may elect to
proceed in a form that does not include
the filing of a complaint or indictment
in federal (or state) court, or the
institution of an administrative
proceeding.36 For this reason, we are
proposing Rule 21F–4(d)(3) to clarify
that these agreements would be treated
as ‘‘administrative actions’’ upon which
whistleblower awards may be based
(provided the total money required to be
paid in the Commission action,
including any other proceedings that
arise out of the same nucleus of
operative facts, exceed $1,000,000).
In arriving at this preliminary
interpretation, we have found several
considerations to be persuasive. First,
we believe that our rulemaking
authority under the Exchange Act and
our authority to define Exchange Act
terms is best read as permitting us to
incorporate such agreements within the
definition of an ‘‘action.’’ 37 Second, as
discussed above, we do not believe that
Congress’s use of the phrase
‘‘administrative action’’ in Section 21F
limits us to considering whistleblower
awards only when investigations are
resolved through formal adjudicatory
administrative proceedings. This is
especially so given that such an
36 See United States v. Fokker, 818 F.3d 733, 737
(D.C. Cir. 2016) (‘‘In certain situations, rather than
choose between the opposing poles of pursuing a
criminal conviction or forgoing any criminal
charges altogether, the Executive may conclude that
the public interest warrants the intermediate option
of a deferred prosecution agreement.’’).
37 Section 21F(j) of the Exchange Act, 15 U.S.C.
78u–6(j), grants us ‘‘the authority to issue such rules
and regulations as may be necessary or appropriate
to implement’’ the whistleblower award program.
Similarly, Section 23(a)(1) of the Exchange Act, 15
U.S.C. 78w(a)(1), expressly provides the
Commission the ‘‘power to make such rules and
regulations as may be necessary or appropriate to
implement the provisions’’ of the Exchange Act. In
addition, we have broad definitional authority
pursuant to Section 3(b) of the Exchange Act, 15
U.S.C. 78c(b), which provides us with the ‘‘power
by rules and regulations to define . . . terms used
in [the Exchange Act].’’
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approach would appear to draw
arbitrary distinctions among otherwise
meritorious whistleblowers based solely
on the vehicle that we, DOJ, or a state
criminal law authority, in the exercise
of enforcement discretion, may view as
the most appropriate in a particular
case. Third, we are cognizant of the
context in which Section 21F was
enacted. Congress enacted the
Commission’s whistleblower program in
2010, which is the same year that the
Commission initiated, as part of its
enforcement cooperation program,
forms of settlement agreements outside
of the context of a judicial or
administrative proceeding as an
alternative mechanism to resolve
securities law violations.38 Given that
Commission actions are the primary
focus of the whistleblower program, it is
reasonable to understand that Congress
may not have focused on the
implications of such agreements when
enacting Section 21F of the Exchange
Act.
For similar reasons, we believe that
the payments required of a company
under the terms of the agreements that
would be covered by the proposed rule
should be deemed to be ‘‘monetary
sanctions’’ within the meaning of
Section 21F of the Exchange Act.39
Section 21F(b)(1) authorizes us to pay
meritorious whistleblowers between 10
percent and 30 percent ‘‘of what has
been collected of the monetary
sanctions imposed in the action or
related actions.’’ 40 ‘‘Monetary
sanctions’’ are defined, in pertinent
part, as money that are ‘‘ordered to be
paid’’ as a result of a judicial or
administrative action.41 Although the
actions that would be covered by the
proposed rule take the form of an
agreement between a company and the
Government, payment of disgorgement
or other amounts is required of the
company in order to resolve a
Commission enforcement investigation
or a DOJ criminal investigation without
formal action by a court or agency.42
38 SEC Announces Initiative to Encourage
Individuals and Companies to Cooperate and Assist
Investigations, SEC Press Release 2010–6 (Jan. 13,
2010). To date, we have entered into 17 settlements
outside of judicial or administrate proceedings
requiring payment of disgorgement, prejudgment
interest, and penalties totaling more than $53
million.
39 Our view on this issue would not be impacted
by the revisions that we are proposing in the next
section to the definition of ‘‘monetary sanctions.’’
40 15 U.S.C. 78u–6(b)(1).
41 Id. (a)(4); 17 CFR 240.21F–4(e).
42 We believe that the agreements covered by this
proposed rule impose monetary sanctions for
purposes of Section 21F of the Exchange Act
because they effectively compel or require monetary
payments. For example, when the Commission has
utilized certain agreements entered outside of
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Accordingly, our view is that it is
reasonable to treat the monetary
components of the agreements that
would be covered by the proposed rule
as ‘‘monetary sanctions’’ that are
‘‘imposed’’ within the meaning of
Section 21F. Proposed Rule 21F–4(d)(3)
thus would clarify that any money
required to be paid under a DPA or NPA
will be deemed a monetary sanction.43
Finally, we are proposing conforming
amendments to Rule 21F–11(b) 44 to
make clear that the time period for filing
a claim for an agreement covered by this
proposed rule would run from earliest
public availability of the instrument
reflecting the arrangement if evidenced
by a press release or similar dated
publication notice, or, absent such
publication notice, the date of the last
signature necessary for the agreement.45
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Request for Comment
1. Should DPAs and NPAs entered by
DOJ or a state attorney general in a
criminal case be treated as
administrative actions, and the
judicial or administrative proceedings, the
Commission has reserved the authority under the
agreement to pursue an enforcement action if the
individual or company fails to pay the monetary
obligations. Enforcement Manual 6.2.2 (Nov. 28,
2017), available at https://www.sec.gov/divisions/
enforce/enforcementmanual.pdf. When the
Commission has utilized certain other settlement
forms entered outside of judicial or administrative
proceedings, the staff has to date retained its ability
to recommend an enforcement action to the
Commission against the individual or company. Id.
at 6.2.3. DOJ DPAs and NPAs have similar
mechanisms available to effectively require an
individual or company to comply with the
monetary obligations specified therein or face
prosecution for the violations that are the subject
of the agreement. See U.S. Gov’t Accountability
Off., GAO–10–110, DOJ Has Taken Steps to Better
Track Its Use of Deferred and Non-Prosecution
Agreements, but Should Evaluate Effectiveness at
11 (2009) (‘‘As part of DPAs and NPAs, companies
are generally required to comply with a set of terms
for a specified duration in exchange for prosecutors
deferring the decision to prosecute or deciding not
to prosecute,’’ including ‘‘monetary payments—
such as restitution to victims of crime, forfeiture of
the proceeds of the crime, and monetary penalties
imposed by DOJ . . . .’’) (emphasis added).
43 We believe the statute and our current rules
already authorize payment of a related action award
in connection with a settlement reached pursuant
to the Financial Industry Regulatory Authority’s
Acceptance, Waiver, and Consent (‘‘AWC’’) process.
An AWC is a form of FINRA disciplinary
proceeding in which sanctions, including fines can
be imposed on a member firm or associated person.
See FINRA Rule 9216, available at https://
finra.complinet.com/en/display/display_
main.html?rbid=2403&element_id=3926.
44 17 CFR 240.21F–11(b).
45 In a rare case where a claimant could
demonstrate that compliance with this proposed
rule was impracticable because an agreement
covered by it was not made available to the public
before the passage of the claim deadline calculated
under the rule, the Commission could consider
exercising its authority to waive compliance with
the rule. See Section 36(a) of the Exchange Act, 15
U.S.C. 78mm(a), and Exchange Act Rule 21F–8(a),
17 CFR 240.21F–8(a).
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monetary payments obtained through
these DPAs and NPAs treated as
monetary sanctions, for purposes of
making whistleblower awards? Should
the same result follow for settlement
agreements entered by the Commission
to resolve securities law violations?
Why or why not?
2. Are there other types of
arrangements (e.g., the use of
declination letters in cases where the
subject company pays all disgorgement,
forfeiture amounts and/or restitution
resulting from the misconduct at
issue 46) that should be included in any
rule the Commission adopts? How
would any such arrangements satisfy
the statutory requirements that they
constitute a ‘‘judicial or administrative
action brought by’’ the Commission or a
related-action authority and that they
include ‘‘monetary sanctions’’ (i.e.,
‘‘monies . . . ordered to be paid’’) that
are ‘‘imposed’’ in the action? 47
3. Are there specific standards that we
should apply in determining whether
other vehicles for resolving
investigations should be deemed to be
administrative actions upon which
whistleblower awards can be based? Is
it sufficient that a resolution results in
a monetary payment?
4. As discussed above, we are
proposing conforming amendments to
Rule 21F–11(b) 48 to make clear that the
time period for filing a claim for an
agreement covered by this proposed rule
would run from earliest public
availability of the instrument reflecting
the arrangement if evidenced by a press
release or similar dated publication
notice, or, absent such publication
notice, the date of the last signature
necessary for the agreement. Please
comment on whether this conforming
edit fully covers all potential
agreements covered by proposed Rule
21F–4(d)(3). If there are other types of
arrangements that should be included,
would any additional changes to this
rule be necessary or appropriate?
B. Proposed Amendment to Exchange
Act Rule 21F–4(e) 49 Defining ‘‘monetary
sanctions’’ 50
We propose to amend the definition
of ‘‘monetary sanctions’’ to provide
46 See United States Attorneys’ Manual 9–47.120
available at https://www.justice.gov/usam/usam-947000-foreign-corrupt-practices-act-1977#9-47.120.
47 See 15 U.S.C. 78u–6(a)(1), (4) and (5) and
(b)(1)(A)–(B).
48 17 CFR 240.21F–11(b).
49 17 CFR 240.21F–4(e).
50 The Commission anticipates that this proposed
rule change, if adopted, would be utilized by the
Commission after the effective date of the final rules
in determining whether an action qualifies as a
‘‘covered action’’ and in calculating any
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additional clarity concerning the class
of payments that fall within the term’s
scope. The proposed definition, which
is based on the Commission’s
experiences to date in administering the
program, codifies the understanding of
the term ‘‘monetary sanctions’’ that is
already employed by the agency.
Under Section 21F, the determination
of what qualifies as a monetary sanction
is important for two reasons. First, a
Commission action qualifies as a
‘‘covered action’’ for which a
whistleblower award might be made
only if the action ‘‘results in monetary
sanctions exceeding $1,000,000.’’ 51
Whether a payment obligation is a
‘‘monetary sanction’’ is thus a threshold
question for the Commission in
determining whether to post a Notice of
Covered Action.52 Second, to the extent
that one or more whistleblowers
receives an award, award payments are
calculated based upon the amount that
‘‘has been collected of the monetary
sanctions imposed in the action or
related actions.’’ 53
Section 21F(a)(4) of the Exchange Act
defines the term ‘‘monetary sanctions,’’
when used with respect to any judicial
or administrative action, to mean: (A)
Any monies, including penalties,
disgorgement, and interest, ordered to
be paid; and (B) any monies deposited
into a disgorgement fund or other fund
pursuant to section 308(b) of the
Sarbanes-Oxley Act of 2002 (15 U.S.C.
7246(b)), as a result of such action or
any settlement of such action.54
Exchange Act Rule 21F–4(e) is
substantively identical. Based on our
experience to date in administering the
program, we believe that it would be
beneficial to provide additional clarity
regarding the scope of the potential
payments that are encompassed within
subparagraph (A) of the statutory
definition.55
The language used in subparagraph
(A) of Section 21F(a)(4), when read in
isolation, could potentially be
understood to direct that the
Commission treat any order to pay
money that is entered in a judicial or
administrative action as a monetary
sanction for purposes of the
whistleblower award program.
Interpreted in this way, monetary
outstanding payments to be made to meritorious
whistleblowers.
51 15 U.S.C. 78u–6(a)(1).
52 See Exchange Act Rule 21F–10(a), 17 CFR
240.21F–10(a).
53 15 U.S.C. 78u–6(b)(1).
54 15 U.S.C. 78u–6(a)(4).
55 We are not proposing to provide any additional
clarification regarding subparagraph (B) as we
believe that it does not create uncertainty as to the
scope of the money that it covers.
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sanctions would include, for example,
orders to pay discovery sanctions,
receivership fees and costs, taxes, and
even attorney’s fees imposed under the
Equal Access to Justice Act (‘‘EAJA’’).56
We believe, however, that other
portions of Section 21F counsel in favor
of a narrower understanding of which
money ‘‘ordered to be paid’’ in an action
should be treated as monetary sanctions
for purposes of the whistleblower
program. We find particularly relevant
the definition of a ‘‘covered action’’ in
Section 21F(a)(1),57 which provides that
the Commission action must ‘‘result[ ] in
monetary sanctions exceeding
$1,000,000’’ in order for a whistleblower
award to be considered. We believe that
the phrase ‘‘results in’’ suggests that
Congress was addressing those
monetary obligations that the action
secures ‘‘as relief’’ for the violations that
are the subject of the Commission’s
enforcement action.58 Similarly, we
believe that the phrase ‘‘monetary
sanctions imposed in the action’’ in
Section 21F(b)(1) 59 indicates that the
congressional focus was on monetary
obligations that are in the nature of
relief for the violations. So, for example,
while in normal parlance a person
might say that civil penalties were
‘‘imposed’’ as a result of a securities-law
violation, we do not believe that one
would say that a court order approving
a court-appointed receiver’s request for
fees or costs ‘‘impos[ed]’’ a monetary
sanction.
Finally, we find support for our
proposed approach in the purpose of
Section 21F to reward whistleblowers
for their contributions to the ‘‘successful
enforcement’’ of Commission actions
and related actions,60 and in the
common-sense understanding that relief
against wrongdoers is perhaps the
essential measure of an action’s success.
Given this context, we believe that the
term ‘‘monetary sanctions’’ is better
understood to mean those requirements
to pay money that the Commission or a
related-action authority obtain ‘‘as
relief’’ in the underlying action.
Based on the language within Section
21F, therefore, we believe that the
language in subparagraph (A) of the
statutory definition is better understood
to encompass only those required
payments in a Commission action or
related action that are designed as relief
56 See
5 U.S.C. 504; 28 U.S.C. 2412.
U.S.C. 78u–6(a)(1).
58 See generally Black’s Law Dictionary 1541
(10th ed. 2014) (defining a ‘‘sanction’’ as ‘‘[a]
penalty or coercive measure that results from a
failure to comply with a law, rule, or order’’)
(emphasis added).
59 15 U.S.C. 78u–6(b)(1)(A) and (B).
60 See 15 U.S.C. 78u–6(b)(1).
57 15
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for the violations successfully resolved
in the action. Accordingly, we propose
to amend Exchange Act Rule 21F–4(e) to
provide that the term ‘‘monetary
sanctions’’ means: (1) A required
payment that results from a Commission
action or related action and which is
either (i) expressly designated as
disgorgement, a penalty, or interest
thereon, or (ii) otherwise required as
relief for the violations that are the
subject of the covered action or related
action; or (2) any money deposited into
a disgorgement fund or other fund
pursuant to section 308(b) of the
Sarbanes-Oxley Act of 2002 (15 U.S.C.
7246(b)), as a result of such action or
any settlement of such action.61
We believe that paragraph (e)(1)(i) of
the proposed definition should
generally be straightforward to apply.
This part of the rule encompasses any
payment requirement that is expressly
designated as disgorgement, a penalty,
or interest thereon. That money paid by
a wrongdoer in satisfaction of a
disgorgement or penalty obligation may
thereafter be used to pay costs of a
receiver, trustee, or fund administrator
would not change the analysis under
this part of the proposed rule. Because
the wrongdoer was ordered to pay such
money pursuant to a disgorgement or
penalty obligation, paragraph (e)(1)(i)
would be satisfied.
With respect to paragraph (e)(1)(ii),
only requirements to pay money as
relief for the underlying violations
would qualify. Thus, for example, if a
court orders an asset freeze and
appoints a receiver in a Commission
enforcement action, and, without
separately entering a disgorgement
order, the court subsequently issues an
order approving the receiver’s plan to
distribute money to injured investors,
we would treat that second order as a
monetary sanction under paragraph
61 Our use of the phrase ‘‘required payment’’
rather than ‘‘ordered’’ is intended to be consistent
with proposed Rule 21F–4(d)(3), and recognizes
that whistleblower tips may be important to
successful enforcement actions that the agreements
described in that proposed rule in which the
Commission, DOJ, or a state attorney general in a
criminal case require substantial monetary relief
that is not, however, contained in a Commission
order a court order, or an order issued by an
administrative-law judge. See discussion of
proposed Rule 21F–4(d)(3), supra. In our view, a
payment that is required as part of such a resolution
is reasonably treated as ‘‘ordered’’ when the agency
has some mechanism to compel the payment either
directly or indirectly. This could include, but does
not necessarily require, the ability to obtain a court
order requiring the payment. In the context of the
agreements described in proposed Rule 21F–4(d)(3),
the mechanism to compel the payment could
include the ability either to revive an action or to
bring an action if the signatory does not make the
payments provided for in the agreement.
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(e)(1)(ii) of the proposed rule.62
However, if the receiver requests
approval to use frozen funds to pay
creditors, taxes to a governmental
authority, attorney’s fees, or other costs
of the receivership, such payments
would not qualify ‘‘as relief’’ obtained
because of the successful enforcement
action and would not constitute
monetary sanctions under paragraph
(e)(1)(ii).
In proposing the amended rule
language, we have also considered the
legislative purpose underlying
whistleblower award provisions
generally. In our view, these types of
award programs are intended to allow a
whistleblower to receive a percentage of
the monetary relief that the government
is able to obtain as remedies for the
violations that are the subject of the
action to which the whistleblower’s
information led. The approach outlined
above would comport with this
understanding of how whistleblower
award programs generally operate.63 We
have also considered the fact that a
broader approach could lead to
potentially irrational results such as the
Commission paying whistleblowers a
share of any discovery sanctions or
EAJA fees imposed on the government,
even though such monetary sanctions
would have no connection to the
information the whistleblower provided
that led to the enforcement action and
that contributed to the success of that
action.
Request for Comment
5. Should ‘‘monetary sanctions’’ be
defined as those obligations to pay
money that are obtained ‘‘as relief’’ for
the violations that are charged in a
Commission enforcement action or a
related action? Why or why not?
6. Are there additional classes of
monetary requirements or payment
obligations (beyond those discussed
above) that may be ordered in an action
covered by the Commission’s
whistleblower award program that the
62 Where a receiver is appointed to gather assets
for potential distribution to harmed investors, an
award payment to a meritorious whistleblower
would not need to await actual distribution of the
receivership assets to the harmed investors. In our
view, the statutory requirements that the monetary
sanctions be both ‘‘ordered’’ and ‘‘collected’’ before
a payment to a whistleblower can be made would
typically be satisfied at the time a court approves
the distribution to the harmed investors of assets
within the receiver’s control. See Exchange Act
section 21F(a)(4) (‘‘ordered’’) & 21F(b)(1)
(‘‘collected’’), 15 U.S.C. 78u–6(a)(4), & 78u–6(b)(1).
63 Cf. S. Rep. 111–176 at 110 (2010) (‘‘The
Whistleblower Program aims to motivate those with
inside knowledge to come forward and assist the
Government to identify and prosecute persons who
have violated securities laws and recover money for
victims of financial fraud.’’).
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Commission should specifically
consider or address in clarifying the
definition of ‘‘monetary sanctions’’?
C. Proposed Amendment to Exchange
Act Rule 21F–3(b)(1) 64 Defining ‘‘related
action’’ 65
Under Exchange Act Section 21F(b) 66
and Rule 21F–11,67 any whistleblower
who obtains an award based on a
Commission enforcement action may be
eligible for an award based on monetary
sanctions that are collected in a related
action. Exchange Act Section
21F(a)(5) 68 and Rule 21F–3(b)(1) 69
provide that a related action is a judicial
or administrative action that is both: (i)
Brought by DOJ, an appropriate
regulatory authority (as defined in Rule
21F–4(g)),70 a self-regulatory
organization (as defined in Rule 21F–
4(h) 71), or a state attorney general in a
criminal case; and (ii) based on the same
original information that the
whistleblower voluntarily provided to
the Commission and that led to the
successful enforcement of the
Commission action.
The proposed amendment adding
paragraph (b)(4) to Rule 21F–3 would
apply in situations where both the
Commission’s whistleblower program
and a second, separate whistleblower
award scheme have potential
application to the same action. During
the implementation and administration
of our whistleblower program, it has
become increasingly apparent to us that
additional, separate whistleblower
award schemes might apply to an action
that could otherwise qualify as a related
action. In this regard we note that, since
the adoption of our whistleblower
program rules, two states have adopted
their own whistleblower award
programs in connection with state
securities-law enforcement actions.72
We are also aware that DOJ might
64 17
CFR 240.21F–3(b)(1).
Commission anticipates this proposed rule
change, if adopted, would apply only to coveredaction and related action award applications that
are connected to a Notice of Covered Action (see
Exchange Act Rule 21F–10(a), 17 CFR 240.21F–
10(a)) posted on or after effective date of the final
rules.
66 15 U.S.C. 78u–6(b).
67 17 CFR 240.21F–11.
68 15 U.S.C. 78u–6(a)(5).
69 17 CFR 240.21F–3(b)(1).
70 17 CFR 240.21F–4(g).
71 17 CFR 240.21F–4(h).
72 In 2011, Utah established a whistlebloweraward scheme to provide rewards of up to 30
percent of the money collected in state securitieslaw enforcement actions. Utah Code Annotated 61–
1–101 et seq. The following year, Indiana enacted
a whistleblower award scheme to provide rewards
up to 10 percent of the monies collected in a state
securities-law enforcement action. Indiana Code
23–19–7–1 et seq.
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pursue law-enforcement actions that
potentially implicate both the
Commission’s whistleblower program
and the whistleblower award program
that the Internal Revenue Service
(‘‘IRS’’) administers.73 Further, Congress
in 2015 established a new motorvehicle-safety whistleblower award
program that allows employees or
contractors of a motor-vehicle
manufacturer, parts supplier, or
dealership who report serious violations
of federal vehicle-safety laws to obtain
an award of 10 percent to 30 percent of
any monetary sanction over $1 million
that the Federal Government recovers
based on that information.74 To date, the
Commission has never paid an award on
a matter where a second whistleblower
program also potentially applied to the
same matter, nor has the Commission
ever indicated that it would do so.
Proposed paragraph (b)(4) would
expressly authorize two mechanisms for
the Commission to use in situations
where at least one other award scheme
might also apply. First, the first sentence
of proposed paragraph (b)(4) would
provide that, notwithstanding the
definition of related action in Rule 21F–
3(b)(1), if a judicial or administrative
action is subject to a separate monetary
award program established by the
Federal Government, a state
government, or a self-regulatory
organization, the Commission will deem
the action a related action only if the
Commission finds (based on the unique
facts and circumstances of the action)
that its whistleblower program has the
more direct or relevant connection to
the action.75 In analyzing this question,
the Commission will consider whether
Congress (or a state) has enacted a
specific whistleblower program that
appears to apply directly to the case at
hand; if so, we will generally determine
that Congress reasonably would not
have intended our more general,
secondary ‘‘related action’’ award
mechanism to sweep in the case. In
reaching this determinination, we
would look to the complaint in the
action, the overall monetary sanctions
recovered (e.g., are they principally tied
U.S.C. 7623.
U.S.C. 30172 (enacted by Section 24352 of
the Fixing America’s Surface Transportation Act of
2015 (FAST Act), Pub. L. 114–94).
75 Notably, the Utah whistleblower-award
program (see note 72, supra) provides that a person
may not receive an award thereunder if he or she
‘‘qualifies for an award as described in Section 21F
of the Securities Exchange Act, 15 U.S.C. Sec. 78u–
6, and regulations issued under that section.’’ We
assume that this provision is intended to prevent
a double recovery on a Utah criminal-enforcement
action brought by the State’s Attorney General that
could potentially be covered by both the
Commission’s whistleblower program and the Utah
program.
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74 49
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34709
to a different whistleblower program for
which Congress provided an award
mechanism), and the court’s final order
to assess which award program has the
closer relationship to the overall case.
We might also consult the agency
involved with that other case to obtain
its overall assessment of whether the
action is in fact one that is primarily
tied to violations for which Congress (or
the states) have established a more
specifically applicable whistleblower
program and for which our general,
‘‘related action’’ award mechanism
should not apply. Critically, this
standard would not yield a clear
brightline but would turn on the
particular facts and circumstances of the
case at hand and the Commission would
explain the grounds for its conclusion in
any final order.
Second, the second sentence of
proposed paragraph (b)(4) provides that
even if the Commission determines to
deem the action a related action, the
Commission will not make an award to
you for the related action if you have
already been granted an award by the
authority responsible for administering
the other whistleblower award program;
further, if you were denied an award by
the other award program, you will not
be permitted to readjudicate any issues
before the Commission that the
authority responsible for administering
the other whistleblower award program
resolved against you as part of the
award denial.76 The proposed rule
provides that, if the Commission makes
an award before an award determination
is finalized by the authority responsible
for administering the other award
scheme, the Commission would
condition its award on the meritorious
whistleblower making a prompt,
irrevocable waiver of any claim to an
award from the other award scheme.
The proposed rule also provides that,
in determining whether a potential
related action has a more direct or
relevant connection to the
Commission’s whistleblower program
than another award program, the
Commission would consider the nature,
scope, and impact of the misconduct
charged in the purported related action,
and its relationship to the federal
securities laws. This inquiry would
include consideration of, among other
things: (i) The relative extent to which
the misconduct charged in the potential
related action implicates the public
policy interests underlying the federal
securities laws (e.g., investor protection)
versus other law-enforcement or
76 This sentence of proposed paragraph (b)(4) is
modeled after existing Rule 21F–3(b)(3), 17 CFR
240.21F–3(b)(3), which is discussed further below.
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regulatory interests (e.g., tax collection
or fraud against the Federal
Government); (ii) the degree to which
the monetary sanctions imposed in the
potential related action are attributable
to conduct that also underlies the
federal securities law violations that
were the subject of the Commission’s
enforcement action; and (iii) whether
the potential related action involves
state-law claims and the extent to which
the state may have a whistleblower
award scheme that potentially applies to
that type of law-enforcement action.77
Thus, for example, if an action by DOJ
charges a scheme to avoid tax
obligations and imposes monetary
sanctions, we would expect that such an
action would lack a more direct or
relevant connection to the
Commission’s whistleblower program
relative to the IRS’s award program.78
As a second example, where a state
whistleblower award program is
available to award a whistleblower
whose tip leads to state criminal charges
in connection with a fraudulent
securities offering, we anticipate that
the Commission would not view such
an action as a related action under the
test in proposed paragraph (b)(4). In this
circumstance, the state program would
be the more direct or relevant program
and the appropriate avenue for the
whistleblower to seek an award.
In proposing paragraph (b)(4), we
acknowledge that, on its face, Exchange
Act Section 21F does not exclude from
the definition of related actions those
judicial or administrative actions that
have a less direct or relevant connection
to our whistleblower program than
another whistleblower scheme. We
nonetheless perceive ambiguity when
considering this language in the context
of the overall statutory scheme. We
believe that an understanding focused
exclusively on the statutory definition
of related action would produce a result
77 To the extent that a state adopts a
whistleblower award program relating directly to
securities law violations, we would generally
anticipate the Commission would find that the state
award scheme should apply over the Commission’s
award program. However, to the extent that the
particular state criminal action may implicate an
award scheme that is not directed at securities-law
violations (such as a state-award scheme focused on
consumer protection), the Commission might
conclude that our whistleblower program should
not apply based on an assessment of the particular
facts and circumstances of the state action.
78 By contrast, to the extent that a DOJ
enforcement action centers on insider-trading
violations that are based on the same misconduct
that was the subject of the Commission’s covered
action, and that most of the monetary sanctions
arise from the insider-trading violations, the
Commission would likely treat the matter as a
related action notwithstanding any potential
restitution ordered due to any tax violations
included within the case.
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that Congress neither contemplated nor
intended. We believe that our
rulemaking authority under the
Exchange Act and our authority to
define Exchange Act terms permit us to
reach this interpretation.79 We base this
determination on several
considerations.
First, when Congress established the
Commission’s whistleblower program, it
set a firm ceiling on the maximum
amount that should be awarded for any
particular action—‘‘not more than 30
percent, in total, of what has been
collected of the monetary sanctions
imposed’’ in the action.80 Indeed, it
appears that in establishing federal
whistleblower award programs in the
modern era Congress has determined
that an award of more than thirty
percent on any particular action is not
necessary or appropriate.81 Yet if both
the Commission’s whistleblower
program and another whistleblower
award scheme were to apply to the same
action, this would create the potential
for a total award exceeding the 30percent ceiling due to a dual recovery.
Second, the purpose of the related
action award component of the
Commission’s whistleblower program
was to allow meritorious whistleblowers
the opportunity to obtain additional
financial awards for the ancillary
recoveries that may result from the same
original information that the
whistleblowers gave to the Commission.
In this way, the potential for a related
action recovery can further enhance the
79 Section 23(a)(1) of the Exchange Act, 15 U.S.C.
78w(a)(1), expressly provides the Commission the
‘‘power to make such rules and regulations as may
be necessary or appropriate to implement the
provisions’’ of the Exchange Act, and has long been
understood to provide the Commission with broad
authority to issue rules and regulations carrying the
force of law. Similarly, Section 21F(j), 15 U.S.C.
78u–6(j), grants us ‘‘the authority to issue such rules
and regulations as may be necessary or appropriate
to implement’’ the whistleblower award program. In
addition, we have broad definitional authority
pursuant to Section 3(b) of the Exchange Act, 15
U.S.C. 78c(b), which provides us with the ‘‘power
by rules and regulations to define . . . terms used
in [the Exchange Act].’’
80 15 U.S.C. 78u–6(b)(1)(B).
81 See, e.g., 7 U.S.C. 26 (providing under the
CFTC’s whistleblower program for awards of ‘‘not
more than 30 percent, in total, of what has been
collected of the monetary sanctions imposed in the
action or related actions’’); 26 U.S.C. 7623(b)(1)
(providing under the IRS administered
whistleblower award program for ‘‘an award . . .
not more than 30 percent of the collected proceeds
(including penalties, interest, additions to tax, and
additional amounts)’’); 31 U.S.C. 3730 (providing in
a False Claims Action that a qui tam plaintiff shall
receive ‘‘not more than 30 percent of the proceeds
of the action or settlement’’). Our preliminary
analysis indicates that Congress’s determination not
to go above a 30-percent ceiling for awards appears
to comport with a similar determination by those
states that have adopted their own false claims acts
and securities-law whistleblower programs.
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incentives for an individual to come
forward to the Commission. But neither
the text of Section 21F, nor the relevant
legislative history 82 suggests that
Congress considered the unusual
situation in which there may be a
separate whistleblower award scheme
that has a more direct or relevant
connection to the judicial or
administrative action,83 and that would
therefore be providing a financial
incentive to encourage individuals to
report misconduct without the need for
the incentive effect produced by the
related-action component of the
Commission’s award program.
Third, we believe that permitting
potential whistleblowers to recover
under both our award program and a
separate award scheme for the same
action would produce the irrational
result of encouraging multiple ‘‘bites at
the apple’’ in adjudicating claims for the
same action and potentially allowing
multiple recoveries.84 In the adopting
release that accompanied the original
whistleblower rules, the Commission
recognized the irrational result that
would flow from allowing a
whistleblower to have multiple separate
opportunities to adjudicate his or her
contributions to a case and to
potentially obtain multiple separate
rewards on that same enforcement
action. Further, the Commission barred
this result from occurring in the specific
contexts that the Commission
considered at the time it adopted the
whistleblower program rules.
Specifically, the Commission adopted
Rule 21F–3(b)(3), which provides that
the Commission will not pay on a
related action if the whistleblower
program administered by the
Commodity Futures Trading
82 See generally S. Rep. No. 111–176 at 110–12
(2010).
83 See generally Radzanower v. Touche Ross &
Co., 426 U.S. 148, 153 (1976) (‘‘It is a basic
principle of statutory construction that a statute
dealing with a narrow, precise, and specific subject
is not submerged by a later enacted statute covering
a more generalized spectrum.’’); Anthony Scalia &
Bryan A. Garner, Reading Law: The Interpretation
of Legal Texts (2012) at 183 (noting that a
specifically applicable statutory provision should
govern a more general provision because ‘‘the
specific provision comes closer to addressing the
very problem posed by the case at hand and is thus
more deserving of credence’’); id. at 184 (explaining
that ‘‘the general/specific canon [of statutory
construction] does not meant that the existence of
a contradictory specific provision voids the general
provision[,]’’ but rather that ‘‘its application to cases
covered by the specific provision is suspended’’).
84 Mova Pharmaceutical Corp. v. Shalala, 140
F.3d 1060, 1068 (D.C. Cir. 1998) (‘‘If a literal
construction of the words of a statute be absurd, the
act must be so construed as to avoid the
absurdity.’’); see also United States v. X–Citement
Video, Inc., 513 U.S. 64, 68–69 (1994) (rejecting the
‘‘most natural grammatical reading’’ of a statute to
avoid ‘‘absurd’’ results).
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Commission (‘‘CFTC’’) has issued an
award for the same action, nor will the
Commission allow a whistleblower to
readjudicate any issues decided against
the whistleblower as part of the CFTC’s
award denial. In adopting that rule, the
Commission made clear its view that a
whistleblower should neither have two
recoveries on the same action nor
multiple bites at the adjudicatory
apple.85 Relatedly, the Commission
explained in the adopting release that it
would for similar reasons not make an
award to a whistleblower who was also
a qui tam plaintiff under the False
Claims Act.86 Although at the time of
the original rulemaking for the
whistleblower program the Commission
did not expressly consider the potential
for multiple separate awards due to the
existence of any other award schemes
(such as the whistleblower program
administered by the IRS), the principles
underlying Rule 21F–3(b)(3) appear
similarly relevant to that circumstance.
To illustrate the significance of our
existing rule and the rule that we are
proposing, consider a future DOJ
enforcement action involving
predominately tax claims that results
from the same original information that
a Commission whistleblower shared
with both the Commission and the
CFTC. In this scenario, it is entirely
possible based purely on the words of
the relevant statutes that the SEC and
the CFTC could each have to pay up to
30 percent on the DOJ action, and that
the IRS could have to pay an additional
30 percent; the Commission
whistleblower could thus take home an
amount that is equal to as much as 90
percent of the money collected for the
violations in the DOJ action. In our
view, this is an ‘‘obviously unintended’’
outcome that would ‘‘make[ ] no
substantive sense,’’ 87 and the rule that
we already have in place and the rule
that we are proposing would prevent it
and similar duplicative payments from
multiple whistleblower programs.
In addition to the foregoing, we are
also proposing two amendments to the
definition of ‘‘related action’’ in Rule
21F–3(b)(1). First, the proposed
amendment would add clarity to the
existing requirement that, to potentially
obtain an award for a related action, a
whistleblower must have provided to
the other entity (or the Commission
must have shared with the other entity)
the same original information that the
85 76
FR 34300, 34305/3.
n.52 (‘‘[W]e do not believe Congress
intended Section 21F of the Exchange Act to permit
additional recovery for the same action above what
it specified in the False Claims Act.’’).
87 Scalia & Garner, supra note 33, at 235, 239
(emphasis in original).
86 Id.
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whistleblower provided to the
Commission and that led to the
successful enforcement of the
Commission action.88 We think that
where the Commission staff determines
to share the whistleblower’s information
with the other entity, it is consistent
with the purposes of the program to
allow an award even if the
whistleblower did not directly step
forward to that agency.89
This new language to the definition of
‘‘related action’’ merely clarifies what is
already required by Exchange Act Rule
21F–11(c),90 which provides in relevant
part that a whistleblower must
‘‘demonstrate [that the whistleblower]
directly (or through the Commission)
voluntarily provided the governmental
agency, regulatory authority or selfregulatory organization the same
original information that led to the
Commission’s successful covered
action[.]’’ Further, we believe that this
interpretation is consistent with the
requirement in Section 21F(a)(5) of the
Exchange Act 91 that a related action
must be ‘‘based upon the original
information provided by a
whistleblower.’’ To be ‘‘based upon’’ the
whistleblower’s original information, in
our view, the same information that the
whistleblower provided to the
Commission must have been provided
to the other authority and that
information must have itself directly
contributed to the other authority’s
investigative or litigation efforts leading
to the success of that authority’s
enforcement action. In practice, this can
occur either because the whistleblower
provided the original information to the
other authority, or because the
Commission through its information
sharing mechanisms provided the
original information to the other
authority, and in either case the
authority utilized that information
directly in its own investigation and/or
its resulting enforcement action.
We note that, under our existing
interpretation of the ‘‘based upon’’
language in Section 21F(a)(5) and the
clarifying rule that we are proposing,
the other authority’s enforcement action
would not be a related action in
circumstances where the other
authority’s enforcement action was in
some manner ‘‘based upon’’ the results
or findings of the Commission’s
88 See Rules 21F–3(b)(2), 17 CFR 240.21F–3(b)(2),
and 21F–4(c)(1)–(3), 17 CFR 240.21F–4(c)(1)–(3).
89 Section 21F provides express authority for the
Commission to share information that may identify
a whistleblower with other authorities that may, in
turn, bring related actions. See 15 U.S.C. 78u–
6(a)(5) and (h)(2)(D)(i).
90 17 CFR 240.21F–11(c).
91 15 U.S.C. 78u–6(a)(5).
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enforcement action without the other
authority ever actually receiving and
utilizing the whistleblower’s original
information. Rather, in this situation the
whistleblower’s original information
could, at best, be described as a
derivative factor potentially
contributing to the success of the other
authority’s action, and we deem this too
attenuated a causal connection to meet
the ‘‘based upon’’ standard, which in
our view requires actual reliance on the
whistleblower’s original information by
the other entity.92 Indeed, in these
circumstances any claim for an award
would fail under Rule 21F–3(b)(2),
which unambiguously requires that the
success of a related action be based
upon ‘‘the same original information
that the whistleblower gave to the
Commission’’ as a predicate to the
Commission authorizing a related action
award.93
Second, we are making a technical
modification to the definition of
‘‘related action’’ in Rule 21F–3(b)(1) that
would make clear that the existing
clause ‘‘based on’’ the same original
information that the whistleblower
voluntarily provided to the
Commission, and that ‘‘led the
Commission to obtain monetary
sanctions totaling more than
$1,000,000,’’ applies to all related
actions and not just criminal actions
brought by a state attorney general. This
technical modification would conform
the definition in the rule to the
substantive requirements of the
statutory definition as set forth in
Section 21F(a)(6) of the Exchange Act.94
Request for Comment
7. Is the proposed ‘‘direct or relevant’’
standard appropriate for assessing
whether an action should qualify as a
92 The ‘‘based upon’’ language in Exchange Act
section 21F(a)(5), 15 U.S.C. 78u–6(a)(5) is separate
and distinct from the requirement that the
whistleblower’s original information must have
‘‘led to’’ the success of the other entity’s action, see
Exchange Act section 21F(b)(1), 15 U.S.C. 78u–
6(b)(1); see also Exchange Act Rule 21F–4(c), 17
CFR 240.21F–4(c). Even if a whistleblower satisfies
the ‘‘based upon’’ standard because his information
was directly provided to the other entity by the
whistleblower or the Commission, and used in
some fashion by that entity, this does not mean the
whistleblower’s information necessarily ‘‘led to’’
the success of that action.
93 17 CFR 240.21F–3(b)(2). Rule 21F–3(b)(2)
contemplates that ‘‘the Commission may seek
confirmation of the relevant facts regarding the
whistleblower’s assistance from the authority that
brought the related action,’’ and we will deny a
related action award where sufficient and reliable
information cannot be obtained from the other
authority. 76 FR 34300, 34305/1. These
requirements would be rendered null if the ‘‘based
upon’’ requirement could be satisfied without the
other authority actually receiving and utilizing the
whistleblower’s original information.
94 15 U.S.C. 78u–6(a)(6).
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related action? Are there alternative
formulations that should be adopted
instead?
8. Instead of adopting the proposed
rule, which would authorize the
Commission on a case-by-case basis to
consider whether an action should
qualify as a related action, should the
Commission adopt a categorical
exclusion from the definition of related
action for any judicial or administrative
action that may have an alternative
applicable award scheme?
9. As part of this rulemaking, we are
considering whether to repeal Exchange
Act Rule 21F–3(b)(3), 17 CFR 240.21F–
3(b)(3),95 so that proposed Rule 21F–
3(b)(4) would also apply to potential
related actions that might produce a
double recovery with the CFTC’s
whistleblower program. Existing Rule
21F–3(b)(3) applies somewhat
differently than our proposed Rule 21F–
3(b)(4), as it does not provide the
Commission express authority to
determine whether a potential related
action is more closely connected with
the SEC’s whistleblower program or the
CFTC’s whistleblower program. Should
we repeal existing Exchange Act Rule
21F–3(b)(3) so that proposed Rule 21F–
3(b)(4) would apply instead to afford a
uniform treatment for all potential
related actions for which multiple
whistleblower programs might apply?
Please explain.
D. Proposed Amendment to Exchange
Act Rule 21F–6 Regarding Awards to a
Single Whistleblower Below $2 Million
or in Cases Yielding at Least $100
Million in Collected Monetary
Sanctions 96 and Guidance on the
Meaning of ‘‘Unreasonable Delay’’
Under Rule 21F–6.
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Rule 21F–6 97 establishes the
analytical framework that the
Commission follows both in setting the
appropriate percentage amount of an
award in connection with a particular
Commission or related action and in
95 Exchange Act Rule 21F–3(b)(3) provides that
the Commission will not make an award to an
individual for a related action if the individual has
already been granted an award by the CFTC for the
same action pursuant to its whistleblower program
under Section 23 of the Commodity Exchange Act
(7 U.S.C. 26). Similarly, if the CFTC has previously
denied an award to an individual in a related
action, the individual will be precluded from
relitigating any issues before the Commission that
the CFTC resolved against the individual as part of
an award.
96 The Commission anticipates this proposed rule
change, if adopted, would apply only to coveredaction and related-action award applications that
are connected to a Notice of Covered Action (see
Exchange Act Rule 21F–10(a), 17 CFR 240.21F–
10(a)) posted on or after effective date of the final
rules.
97 17 CFR 240.21F–6.
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determining an individual percentage
award for each whistleblower where the
Commission makes awards to more than
one whistleblower in connection with
the same action. In the adopting release
accompanying the promulgation of the
whistleblower program rules, the
Commission explained that Rule 21F–6
‘‘provides general principles without
mandating a particular result’’ and ‘‘the
determination of the appropriate
percentage of a whistleblower award
will involve a highly individualized
review of the facts and circumstances
surrounding each award using the
analytical framework set forth’’ in the
rule.98
Rule 21F–6 identifies four criteria that
may increase an award percentage and
three criteria that may decrease a
whistleblower’s award percentage. As
provided in Rule 21F–6(a), the criteria
that may increase an award percentage
are: (1) Significance of the information
provided by the whistleblower; (2)
assistance provided by the
whistleblower; (3) law-enforcement
interest in making a whistleblower
award; and (4) participation by the
whistleblower in internal compliance
systems. As provided in Rule 21F–6(b),
the criteria that may decrease an award
percentage are: (1) Culpability of the
whistleblower; (2) unreasonable
reporting delay by the whistleblower;
and (3) interference with internal
compliance and reporting systems by
the whistleblower.
Proposed paragraph (c) would add to
Rule 21F–6’s existing analytical
framework by providing a mechanism
for the Commission to adjust upwards
any awards that would potentially be
below $2 million to a single
whistleblower. Specifically, proposed
Rule 21F–6(c) would provide that, if the
resulting award after applying the award
factors specified in paragraphs (a) and
(b) would yield a potential payout to a
single whistleblower below $2 million
(or any such greater amount that the
Commission may periodically establish
through publication of an order in the
Federal Register), the Commission may
adjust the award upward so that the
likely total award payout to the
whistleblower reflects a dollar amount
that the Commission determines is
appropriate to achieve the program’s
objectives of rewarding meritorious
whistleblowers and sufficiently
incentivizing future whistleblowers who
might otherwise be concerned about the
low dollar amount of a potential award;
provided that in no event shall this
provision be utilized to raise a potential
award payout (as assessed by the
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Commission at the time it makes the
award determination) above $2 million
(or by such other amount as the
Commission may designate by order) or
will the total amount awarded to all
whistleblowers in the aggregate be
greater than 30 percent.
We believe that proposed paragraph
(c) could provide an important new tool
for the Commission to ensure that even
in cases where the collected monetary
sanctions may be relatively small (and
award amounts correspondingly
modest), whistleblowers could receive
an appropriate award for their efforts in
coming forward to the Commission. We
also anticipate that, where the proposed
rule is triggered, there would be a
presumption in favor of some award
enhancement, though the precise
amount of the enhancement may vary
from case to case depending on the
unique facts and circumstances at issue.
In this way, we believe proposed
paragraph (c) could provide an
important additional incentive for
potential whistleblowers to come
forward.99
We note that the new authority
proposed in paragraph (c) would come
with important limitations. Specifically,
the Commission will not adjust an
award upward under the proposed
provision if any of the negative award
factors that are identified in Exchange
Act Rule 21F–6(b) 100—and which are
specified above—were found to be
present with respect to the
whistleblower’s award claim, or if the
99 We believe that proposed paragraph (c) would
in many respects work similar to proposed
paragraph (d), as discussed further below; this
would include, for example, how we would
determine whether the $2 million threshold is met
in cases involving joint whistleblowers. To the
extent that either proposed paragraph (c) or
proposed paragraph (d) is triggered by a potential
award, it would open up discretion for the
Commission to assess the award factors in Exchange
Act Rules 21F–6(a)–(b), 17 CFR 240.21F–6(a)–(b), in
terms of dollar amounts, not merely in terms of
award percentages. This would give the
Commission, for example, the authority to boost a
20 percent award upwards based on a reassessment
of the positive factors relative to the actual dollar
amounts at issue in the particular award. Thus,
even if the whistleblower might otherwise receive
a 20 percent award on a small case (for example,
one with collections of $100,000), the Commission
could reassess the whistleblower’s contributions in
dollar terms and determine to enhance the award
upwards (potentially up to the 30 percent
maximum, which in the particular example would
yield a payout of $30,000). The Commission could
do so if it determines that this enhancement in
dollar terms would better acknowledge the
whistleblower’s contribution and better help
incentivize similarly situated future
whistleblowers. Further, in assessing whether the
$2 million threshold has been, or likely will be
satisfied, the Commission will consider collectively
the total award amounts from all the Commission
and related actions that were the result of the
whistleblower’s original information.
100 17 CFR 240.21F–6(d).
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award claim triggers Exchange Act Rule
21F–16 (concerning awards to
whistleblowers who engage in culpable
conduct).101 Thus, for example, if a
whistleblower whose award claim might
otherwise be eligible for an
enhancement under this provision were
found by the Commission to have
unreasonably delayed reporting to the
Commission under Exchange Act Rule
21F–6(b)(2), then the Commission could
not increase his or her award under this
provision.
In addition, we are proposing a new
paragraph (d) that would add to Rule
21F–6’s existing analytical framework
by providing a mechanism for the
Commission to conduct an enhanced
review of awards in situations where a
whistleblower has provided information
that led to the success of one or more
covered or related actions that,
collectively, result in at least $100
million in collected monetary sanctions.
As we explain below, under proposed
paragraph (d), the Commission, first,
would consider the dollar amount of an
award at given percentage levels in
determining whether and how to adjust
the award based on the positive and
negative factors in paragraphs (a) and (b)
of this section; and second, the
Commission could determine that an
exceedingly large potential payout
resulting from the assessment under
paragraphs (a) and (b) was not
reasonably necessary to fulfill the
purposes of the program and thus
exercise its discretion to reduce the
award to an appropriate amount. The
Commission’s ability to reduce an
award under this provision would be
subject to two significant limitations.
First, in no event could the Commission
reduce the total payout for any award(s)
resulting from the whistleblower’s
original information below $30 million.
Second, the Commission could not
reduce the award for any specific action
such that the total amount paid to all
whistleblowers for that action would go
below the 10 percent minimum
statutory floor of collected monetary
sanctions in that action.102
An important principle underlying
proposed paragraph (d) is that, as the
101 17
CFR 240.21F–16.
example, if the collected amount is $150
million, the Commission could exercise its
discretion to reduce a potential payout of 25%
($37.5 million), but the Commission could not
reduce the award below $30 million. In another
example, if the collected amount is $400 million,
the Commission could exercise its discretion to
reduce a potential payout of 25% ($100 million),
but the Commission could not reduce the award
below 10% ($40 million). Finally, if the collected
amount is $150 million and the potential payout is
18% ($27 million), then the Commission could not
reduce that award because it already is below the
$30 million floor.
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dollar value of an award amount grows
exceedingly large, there is a significant
potential for a diminishing marginal
benefit to the program in terms of
compensating the whistleblower and
incentivizing future whistleblowers. In
these situations, we believe that it is in
the public interest that we scrutinize the
dollar impact of these awards more
carefully in considering award
enhancements and reductions under the
existing award criteria of paragraphs (a)
and (b) of this section and, further,
where appropriate, adjust an award
downward so that the dollar amount of
the payout is more in line with the
program’s goals of rewarding
whistleblowers and incentivizing future
whistleblowers from a cost-benefit
perspective (again, subject to the $30
million floor for any whistleblower
subject to a reduction under this
provision and the 10 percent statutory
minimum referenced above).
As an illustration of a potential
situation to which proposed paragraph
(d) might be utilized, consider the
settlements that the Commission and
DOJ entered with Siemens AG in 2008.
The total monetary sanctions collected
in these two actions was $800 million
(the Commission received $350 million
in disgorgement of profits 103 and DOJ
received $450 million in criminal
penalties 104). Suppose that these two
actions occurred today and that these
actions were based on original
information voluntarily provided to the
Commission by an eligible
whistleblower. In such a situation, the
Commission would be required to pay
an award to that whistleblower of
between $80 million (a 10 percent
award) and $240 million (a 30 percent
award) for the two actions. Critically,
under the existing framework of Rule
21F–6—without proposed paragraph
(d)—the Commission in setting the
appropriate amount of an award would
be unable to consider the
extraordinarily large dollar amounts that
would be associated with any
assessments and adjustments made
when applying the existing award
factors of Rule 21F–6; the Commission
would also lack the authority to adjust
the award amount downward if it found
that amount unnecessarily large for
purposes of achieving the whistleblower
103 See SEC Litigation Release No. 20829 (dated
Dec. 15, 2008) (discussing the settlement reached
SEC v. Siemens Aktiengellschaft, Civ. Action No.
08–CV–02167 (D.D.C.)).
104 See DOJ Press Release entitled ‘‘Siemens AG
and Three Subsidiaries Plead Guilty to FCPA
Violations and Agree to Pay $450 Million in
Combined Criminal Fines’’ (dated Dec. 15, 2008)
(available at: www.justice.gov/archive/opa/pr/2008/
December/08-crm-1105.html).
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34713
program’s goals. So if the hypothetical
meritorious whistleblower were an
individual who did everything right in
connection with his or her
whistleblowing (that is, he or she were
the model whistleblower), the
Commission would almost certainly be
obligated to pay this individual an
award at or near the maximum $240
million level under the existing rules.
What paragraph (d) would do, as we
explain below, is to afford the
Commission the discretion to determine
whether such an extraordinarily large
payout is actually necessary to further
the whistleblower program’s goals of
rewarding whistleblowers and
incentivizing future whistleblowers, and
if not, proposed paragraph (d) would
afford the Commission the ability to
adjust the actual payout to an award
amount that is closer to the $80 million
minimum that would be required to be
paid pursuant to Section 21F(b). We
believe that adopting paragraph (d) to
afford us a discretionary mechanism to
make such common-sense adjustments
to extraordinarily large awards to ensure
that they do not exceed an amount that
is appropriate to achieve the goals and
interests of the program is, to put it
simply, good public policy.
Turning to the text of proposed
paragraph (d), this new provision would
do two important things that should
help us ensure that any large awards are
in fact aligned with the program’s goals
and not unnecessarily large to achieve
the program’s goals. First, proposed
paragraph (d)(1) would permit the
Commission to consider the potential
dollar amount of the payout to a
whistleblower resulting from his or her
original information (in any
Commission actions or related actions,
collectively) when applying each of the
existing award criteria; when the
potential amount of an award payout
could be in the range of 10 to 30 percent
of at least $100 million, we believe it is
reasonable and appropriate to consider
the adjustments that we make for each
award factor in dollar terms rather than
to apply exclusively a percentage
assessment that does not take into
account what those percentage
adjustments would translate to in actual
dollars paid to the whistleblower.105
105 The statutory framework that Section 21F
establishes appears to permit—and at a minimum
does not expressly prohibit—the Commission from
considering the dollar amount of a potential award.
Indeed, the language in Section 21F refers to the
‘‘amount of the award,’’ which appears to afford the
Commission discretion to set the awards based on
a consideration of the appropriate dollar amount
that should be paid (provided that this dollar
amount is between 10 percent and 30 percent of the
collected monetary sanctions). Notwithstanding the
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This would allow us to consider the
relative (or marginal) value of the actual
dollar amounts associated with any
enhancements that we are considering
under the positive award factors. We
think that this is particularly important
where the percentage enhancements are
corresponding with particularly large
dollar enhancements because, to the
extent that individuals are motivated to
come forward based on a potential
award, it is the total dollar payout that
would be relevant to them. Allowing us
to assess each enhancement or
reduction in dollar terms should permit
us to more realistically and concretely
assess the appropriate amount that is
reasonably necessary to recognize a
whistleblower’s contributions in cases
involving large potential awards.
Second, proposed paragraph (d)(2)
would permit the Commission to adjust
the award downward if, after
consideration of the existing award
factors in paragraphs (a) and (b) of this
section, the Commission finds that the
potential award amount (from any
Commission actions and related actions,
collectively) exceeds what is reasonably
necessary to reward the whistleblower
and to incentivize similarly situated
whistleblowers.106 Importantly,
proposed paragraph (d)(2) would not
mandate that the Commission make a
downward adjustment. Further,
proposed paragraph (d)(2) would make
clear that any adjustment to a
whistleblower’s award under that
paragraph shall not yield a potential
award payout (as assessed by the
Commission at the time that it makes
the award determination) below $30
million, nor may any downward
adjustment result in the total amount
awarded to all the meritorious
whistleblowers, collectively, for each
covered or related action constituting
less than 10 percent of the monetary
sanctions collected in that action.
Critically, the $30 million reference in
proposed rule (d)(2) would not be a
ceiling on awards, and we do not intend
that it would be applied as such. Rather,
$30 million for a potential payout is the
floor below which we would not lower
statutory language, the Commission’s existing rules
do not expressly authorize the Commission to
consider the dollar amount of a potential award
when setting the award percentage. Proposed
paragraph (d) would make it clear that the
Commission may consider the dollar amount of a
potential award when setting the award percentage
where at least $100 million in monetary sanctions
has been collected.
106 Notably, this authority to make a downward
adjustment would be available only if the resulting
payout after applying the existing award factors
would be at least $30 million (or such greater
alternative amount that the Commission may
periodically establish through publication of an
order in the Federal Register).
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any award that is subject to a reduction
under the proposed rule. Further, the
proposed amendment would be
triggered only in situations where a
whistleblower (including two or more
individuals who acted together as a joint
whistleblower) provides information
that leads to the success of one or more
covered actions and related actions that
results in at least $100 million in
collected monetary sanctions.107 In the
nearly seven years of experience that we
have had in implementing and
administering the whistleblower
program, we have issued final orders
granting 50 whistleblower awards to 55
individuals (including, as explained
above, individuals who acted as joint
whistleblowers).108 To date, only two
Commission covered actions and related
actions have crossed the threshold of
collecting at least $100 million in
monetary sanctions and for which the
payout exceeded our proposed $30
million floor.109 Those two actions
107 In assessing whether the $100 million
threshold has been crossed to invoke proposed
paragraph (d), we preliminarily anticipate
considering not just the likely payout in any
Commission covered actions that resulted from the
whistleblower’s information, but also any potential
payout that might result from any related actions
that resulted from the whistleblower’s information.
Thus, for example, if a Commission covered action
and a related action brought by the Department of
Justice, and a related action brought by an
appropriate regulatory authority, collectively,
resulted in the collection of at least $100 million
in monetary sanctions based on a whistleblower’s
original information, then proposed paragraph (d)
would be triggered. We would then decide whether
one or more of the awards should be adjusted
downward to yield a total payout that complies
with the terms of the proposed rule. Further, we
note that in the context of a joint whistleblower, for
purposes of applying the proposed rule, we would
treat them collectively as one whistleblower in
applying proposed paragraph (d), including in
assessing whether the $100 million threshold is
satisfied; however, in determining whether and to
what extent to make a downward adjustment, we
would expect to consider the need to appropriately
incentivize individuals even when acting jointly to
come forward and report to the Commission.
108 These totals are through April 2018 and treat
as single awards several cases where
whistleblowers’ original information led to multiple
covered actions that were processed together in one
award Order recognizing the total contributions of
the whistleblower. Similarly, consistent with the
approach proposed above governing cases where we
grant an award for both a Commission enforcement
action and a related action by another agency based
on the same information provided by the
whistleblower (see 17 CFR 240.21F–3(b)), we
consider covered-action awards together with their
corresponding related action awards as single
whistleblower awards.
109 One of the awards that exceeded $30 million
was issued in September 2014 for more than $30
million in a Commission action and related actions.
See Order Determining Whistleblower Award Claim,
Exchange Act Release No. 34–73174 (Sept. 22,
2014), available at https://www.sec.gov/rules/other/
2014/34-73174.pdf. Two other awards were issued
in March 2018 for $49 and $33 million,
respectively, to three individuals (two of whom
were acting as joint whistleblowers) in a single
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taken alone involved the payment of
$112 million to four individuals.
We believe that the $100 million
collected-monetary-sanctions threshold
reflects the appropriate level at or above
which it would be reasonable for the
Commission to consider whether the
likely award payout from the collected
monetary sanctions will exceed an
amount that is appropriate to achieve
the program’s goals. For matters
involving collected sanctions at or
above the $100 million threshold, we
think the potential for a whistleblower
award to exceed the amount necessary
to achieve the program’s goals exists
and that awards based on $100 million
or more are sufficiently large to warrant
heightened scrutiny under the rule that
we are proposing. Our proposed
approach in triggering proposed
paragraph (d) based on the amount of
monetary sanctions collected is not
unlike the approach that the DOJ
utilizes (and which some courts also
utilize) in the context of the False
Claims Act (‘‘FCA’’) when determining
the appropriate amount of an award to
a relator. Specifically, DOJ has
developed a series of guidelines to
determine the appropriate size of an
award, and one consideration that may
lead to a downward adjustment is
whether the ‘‘FCA recovery was
relatively large.’’ 110
We similarly believe that the $30
million floor is appropriate. In our view,
there is a potential that as the payout to
a whistleblower grows beyond the $30
million floor, the marginal benefit of
each additional dollar paid may
decrease to such an extent that, in terms
of furthering the program’s overall goals,
the payout may be more than is
reasonably necessary. In our judgment
$30 million represents a reasonable line
at which to draw the floor.111 In this
covered action. See Order Determining
Whistleblower Award Claim, Exchange Act Release
No. 34–82897 (March 19, 2018), available at https://
www.sec.gov/rules/other/2018/34-82897.pdf.
110 See Claire M. Sylvia, The False Claims Act:
Fraud Against the Government section 8.4 (updated
June 2018) (citing DOJ Relator’s Guidelines,
reprinted in 11 False Claims Act and Qui Tam Q.
Rev. 17 (Oct. 1997); see also U.S. ex rel. Simmons
v. Samsung Electronics Am., Inc., 116 F. Supp. 3d
575, 580–81 (quoting and applying the DOJ award
guidelines).
111 See, e.g., WorldCom, Inc. v. FCC, 238 F.3d 449,
462 (D.C. Cir. 2001) (citation omitted) (explaining
that ‘‘[a]n agency has ‘wide discretion’ in making
line-drawing decisions and ‘[t]he relevant question
is whether the agency’s numbers are within a zone
of reasonableness’ ’’); see also, e.g., National
Shooting Sports Foundation, Inc. v. Jones, 716 F.3d
200, 214, (D.C. Cir. 2013) (citation omitted) (‘‘An
agency ‘is not required to identify the optimal
threshold with pinpoint precision. It is only
required to identify the standard and explain its
relationship to the underlying regulatory
concerns.’’).
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regard, we note that utilizing 2016 data
on net worth, an individual who
received just the $30 million floor—even
allowing for a reduction due to taxes—
would find himself or herself in the
range of the the top 99.5 percentile to
99.9 percentile of the U.S. population by
net worth.112 Further, the analysis
conducted in Part VII(B)(5)
demonstrates for us that even this sum
(again, allowing for a reduction due to
taxes) if modestly invested should
produce a reasonable lifetime income
stream for most potential
whistleblowers. We thus believe it is
appropriate and reasonable to afford the
agency a mechanism to more closely
scrutinize awards that exceed this floor
to determine whether and to what
extent they are necessary to reward the
whistleblower or incentivize similarly
situated whistleblowers.
While we believe that the $30 million
floor should reflect an amount that in
most cases would be an extremely
attractive inducement for company
insiders across many industries to come
forward to report securities-law
violations, we recognize that future
experience in the years ahead could
suggest that some adjustment is
appropriate.113 Accordingly, to the
extent that our experience with the
program in future years may suggest that
an adjustment to the floor is
appropriate, we propose to establish a
mechanism by which the Commission
may publicly notice an order
announcing such an increase by
publishing it in the Federal Register.
In considering the appropriateness of
the $30 million floor below which we
could not make a downward departure
for any payouts stemming from a
whistleblower’s original information,
we also note that the monetary incentive
may often be an important reason a
whistleblower comes forward, but it is
typically not the only reason in our
experience to date. In this regard, we
note that the monetary incentive is one
112 In 2016, approximately 0.5 percent of the U.S.
population had a net worth of $16.12 million while
0.1 percent of the U.S. population had a net worth
of $43.1 million. See https://dqydj.com/net-worthbrackets-wealth-brackets-one-percent/.
113 The economic analysis, infra Part VII,
discusses various potential annual incomes that a
meritorious whistleblower might obtain from
investing a $30 million award payout in various
types of annuities. We note that, to the extent that
certain whistleblowers may experience significant
harmful consequences, such as large financial
sacrifices or career-ending ramifications, as a result
of their whistleblowing activities, the proposed rule
(should it be triggered by the potential payout)
would allow the Commission the flexibility to
consider these particular facts and circumstances to
determine an appropriate award level. Proposed
paragraph (d) would allow the Commission similar
flexibility in situations involving multiple
individuals acting as a joint whistleblower.
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component in a package of reporting
incentives made available under Section
21F, which includes employment
retaliation protections and
confidentiality requirements (including,
critically, the ability of whistleblowers
to remain anonymous through the
course of an investigation and resulting
enforcement action).114 Indeed, our
experience to date has been that
approximately one-half of the
whistleblowers who have received
awards for information regarding their
current or former employers took
advantage of the opportunity to submit
their tips to the Commission
anonymously; the ability to report
anonymously is an additional attractive
feature of our program that helps to
encourage company insiders and others
to come forward by lessening their fear
of potential exposure.
In advancing proposed paragraph (d),
we are mindful of our own
responsibility to investors and the
general public to ensure that the
Investor Protection Fund (IPF) that
Congress established to fund awards is
used efficiently and effectively to
achieve the program’s objectives.115 We
recognize that the Commission has
obtained significant monetary
judgments against parties in
enforcement actions in recent years.
Several individual matters involved
orders in excess of $300 million in
monetary sanctions in FY–2016 and
FY–2017.116 If there were an eligible
whistleblower in one of these matters,
and assuming the Commission collected
the amounts ordered, an exceedingly
large whistleblower award, beyond what
we believe was intended when the
program was established, could result.
Multiple such awards would, in turn,
cause the funds in the IPF to be
diminished. As of the end May 2018,
the balance of the IPF for the first time
fell below the $300 million threshold
that triggers the statutory replenishment
mechanism; this occurred when the
Commission paid $83 million—its
largest payout to date on an enforcement
action—to three individuals.117
114 See 15 U.S.C. 78u–6(d) (anonymity); id. 78u–
6(h)(1) (employment retaliation protection); id.
78u–6(h)(2) (confidentiality protections); see also
17 CFR 240.21F–9(c) and 240.21F–10(c).
115 See Exchange Act section 21F(g), 15 U.S.C.
78u–6(g).
116 See, e.g., SEC Division of Enforcement Annual
Report for 2017 (Nov. 15, 2017), available at https://
www.sec.gov/files/enforcement-annual-report2017.pdf.
117 At the end of 2010, the IPF had just under
$452 million in it, with no awards having yet been
made. See Annual Report on the Dodd-Frank
Whistleblower Program, Fiscal Year 2011, at 8
(available at: https://www.sec.gov/files/
whistleblower-annual-report-2011.pdf), and by the
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Whenever the reserve in the IPF falls
below $300 million, Section 21F(g)(3)
requires the Commission to replenish
the IPF.118 These funds otherwise
would be directed to the Treasury,
where they could be made available for
use in funding other valuable public
programs.
In light of the foregoing, we believe
that, where a whistleblower’s original
information leads to Commission or
related actions that, collectively, involve
at least $100 million in collected
monetary sanctions, it is consistent with
the interests of investors and the
broader public interest that the
Commission have a mechanism to
ensure that the payout does not exceed
an amount beyond what is reasonably
necessary to achieve the program’s goals
and, to the extent that it is, to adjust the
award percentage so that it better aligns
with those goals. In our view, proposed
paragraph (d) would provide such a
mechanism if adopted.
We generally anticipate that the
Commission’s application of proposed
paragraph (d) would be based on the
unique facts and circumstances of each
award matter. We believe that in
determining whether a payout exceeds
what is appropriate to achieve the
program’s objectives, the Commission
would carefully assess the potential
payout in relation to both any unusually
detrimental circumstances that impact
the whistleblower and the level of
financial incentive that may be
necessary to encourage future similarly
situated whistleblowers to come
forward. Facts that would be relevant to
determining whether the large payout
may be appropriate given the specific
whistleblower’s circumstances include,
for example, whether the whistleblower
made an extraordinary and highly
unusual sacrifice by coming forward
(such as placing himself or herself in
legal jeopardy to bring the Commission
information that it would otherwise not
have been able to obtain or
demonstrably suffering career-ending
consequences commensurate with the
potential large award). In a situation
involving two or more individuals
acting as a joint whistleblower, we
would consider the need to
appropriately incentivize individuals
even when acting jointly to come
forward and report to the Commission.
end of fiscal year 2017, the IPF had approximately
$322 million in it. Thus, from the end of 2010 until
the end of fiscal year 2017, approximately $130
million in awards were paid out. The $83 million
awards that were just paid for a single enforcement
action were approximately equal to 64% of the sum
of all of the other awards that the Commission had
paid up through fiscal year 2017.
118 See 15 U.S.C. 78u–6(g)(3).
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Facts that would be relevant to
determining whether the large payout is
necessary and appropriate to encourage
future similarly situated whistleblowers
to come forward include the industry in
which knowledgeable whistleblowers
might work, the type of position held by
that whistleblower,119 and the
compensation levels within that
industry,120 and whether potential
whistleblowers may be located overseas
and the likely compensation levels in
those countries (to the extent
available).121
In making any downward adjustment
to a large award, the Commission would
retain discretion to determine the
appropriate award amount and
proposed paragraph (d) is not intended
to mandate any specific reduction or
one-size-fits-all result. Nonetheless, we
anticipate that in those cases where
proposed paragraph (d) is triggered and
the Commission determines that a
downward adjustment is warranted, the
extent to which the Commission
exercises its authority to decrease such
awards would vary along a sliding scale
that corresponds with the overall size of
the potential award in dollar terms. For
example, we generally anticipate that
the nature and magnitude of any
decrease applied to an award in the
$35–40 million range would typically be
less than the magnitude of the decrease
applied to an award in the $100–$150
million range. In our view, this slidingscale approach would make sense
because the larger the dollar amount of
a payout away from the $30 million
floor, the greater the likelihood of
diminishing marginal benefits to the
program from each additional dollar
paid to the whistleblower. In no event,
however, would the Commission
decrease an award below the $30
119 According to the Office of the Whistleblower,
of the 55 individuals who have received awards,
approximately 10 percent were high-ranking
corporate executives at companies of varying sizes.
Each whistleblower award determination is based
on the facts and circumstances of the case,
including the monetary sanctions collected. Based
on this subset of prior cases, a large majority of
these executives received awards that were under
$5 million.
120 We would generally contemplate using
publicly available data on compensation levels in
making this determination. Award applicants could
submit information as part of their award
application to the extent that they are concerned
that the proposed rule might be implicated by their
application.
121 The existence of any of these facts would not
foreclose the Commission from finding that any
large payout that exceeded the $30 million floor in
proposed rule 21F–6(d) was nonetheless not
reasonably necessary to achieve the program’s goals
and to thus reduce the award to an appropriate
amount. Conversely, the absence of special
circumstances or extraordinary sacrifices does not
mean that the Commission would in all cases
determine to reduce the amount of the award.
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million floor (or whatever future floor
the Commission might establish by
order) using the authority afforded to
the Commission pursuant to the
proposed rule.
We preliminarily contemplate that
proposed paragraph (d) would be
applied in any instance where the
Commission determines to process two
or more separate covered actions
together in the same final order,
provided that both actions involve the
same information submitted by the
whistleblower. We would similarly
expect that the Commission could apply
this rule if, after having made an award
to a whistleblower, the Commission
subsequently processes an award
application for that whistleblower
(either in connection with a second
covered action or a related action) and
the subsequent award application is
based on the same general information
from the whistleblower as the earlier
award determination.
We do not believe that the proposed
rule conflicts with the statutory
directive in Section 21F(c)(1)(B)(ii) 122
that ‘‘[i]n determining the amount of an
award,’’ the Commission ‘‘shall not take
into consideration the balance of the
[IPF].’’ This statutory provision prevents
the Commission from adjusting an
individual award based on the
availability of money in the IPF.
Critically, proposed paragraph (d)
would not permit the Commission to
consider the balance of the IPF when
determining whether an award should
be reduced. Rather, as noted above,
paragraph (d) would only authorize the
Commission to consider whether a
potential award payout exceeds an
amount that is reasonably necessary to
achieve the program’s goals. In this way,
proposed paragraph (d) would provide a
mechanism for the Commission to
ensure that it is granting awards in an
efficient and effective manner that
serves the ‘‘twin goals of protecting
investors and increasing public
confidence in the markets’’ 123 and our
adoption of this proposed rule would be
within our authority to adopt
‘‘additional relevant [award] factors.’’ 124
To make this clear, we are adding a
provision to proposed pararagraph (d)
stating that the Commission shall not
take into account the balance of the IPF
in determining whether to make a
downward adjustment under the
proposed paragraph or in making any
U.S.C. 78u–6(c)(1)(B)(ii).
FR 34300, 34356/2.
124 Exchange Act section 21F(c)(1)(B)(iv); 15
U.S.C. 78u–6(c)(1)(B)(iv).
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123 76
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other award determinations under
Exchange Act Rule 21F–6.
Finally, the proposed rule would
provide certain standards for the
Commission to consider in determining
whether to issue an order that adjusts
the $2 million award threshold, the
$100 million threshold, and the $30
million award(s) floor under proposed
paragraphs (c) or (d), respectively.
Specifically, the proposed rule would
state that in issuing such an order ‘‘the
Commission shall consider (among
other factors that it deems relevant)
whether the adjustment is necessary or
appropriate to encourage
whistleblowers to come forward and the
potential impact the adjustments might
have on the Investor Protection Fund.’’
*
*
*
*
*
Guidance regarding the meaning of
‘‘unreasonable delay’’ in existing Rule
21F–6(b)(2) and proposed Rule 21F–6(c).
In proposing the foregoing
modifications to the criteria that govern
award determinations, we believe it is
appropriate to provide guidance on our
approach regarding ‘‘unreasonable
delay’’ as relates to an award
determinations. We believe that any
delay in reporting to the Commission
beyond 180 days is presumptively
unreasonable. In light of the Supreme
Court’s recent decisions in Kokesh v.
SEC 125 and Gabelli v. SEC,126 delay on
the part of a whistleblower can have a
debilitating impact on the Commission’s
ability to make a full recovery of illgotten gains and to obtain civil penalties
and, in this way, delay may impair our
ability to return funds to investors who
have been harmed by the wrongdoing.
Further, although this 180-day
presumption is not expressly codified in
either Exchange Rule 21F–6(b)(2),127
which deals with ‘‘unreasonable
delays,’’ or the rule that we are
proposing, we would typically expect to
treat any delay exceeding this period as
unreasonable for purposes of both rules
going forward. That said, in assessing
unreasonable delay under both the
existing rule and the proposed rule, we
would still consider any highly unusual
facts and circumstances of a particular
award application in assessing
unreasonable delay, such that the
general presumption of ‘‘unreasonable
delay’’ might be overcome in certain
rare instances. Finally, we caution that
125 137 S. Ct. 1635 (2017) (providing that the
Commission must bring any enforcement action
seeking to obtain disgorgement within five years of
the date the violation occurred).
126 568 U.S. 442 (2013) (providing that the
Commission must bring any enforcement action
seeking to obtain civil penalties within five years
of the date the violation occurred).
127 17 CFR 240.21F–6(b)(2).
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shorter periods of delay (i.e., less than
180 days) may also readily qualify as
unreasonable depending on the
particular facts and circumstances at
issue, including, for example, whether
the violations were ongoing, whether
investors continued to experience harm
or the whistleblower continued to profit
from the wrongdoing during the period
of the whistleblower’s delay or whether
the delay had a discernable impact on
the monetary sanctions that were
ordered in the enforcement action. Put
simply, a whistleblower who delays
reporting to the Commission should
expect that his or her ‘‘reward’’ for
reporting might well be negatively
impacted.
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Request for Comment
10. With respect to proposed
paragraph (c), is it appropriate to
consider increasing smaller awards and
would doing so help to further
incentivize insiders and others to come
forward with tips? If so, is the $2
million ceiling for invoking the rule
appropriate or is it either too high or too
low? Please explain.
11. With respect to proposed
paragraph (c), should the enhancement
authority be unavailable in the situation
where a whistleblower’s award was
reduced under Rule 21F–6(b) or Rule
21F–16? Please explain.
12. Would the proposed amendments
to paragraph (d) of Rule 21F–6
appropriately balance the Commission’s
various programmatic interests, in
particular encouraging company
insiders and others to come forward
while also ensuring that awards are not
unnecessarily large beyond an amount
that is sufficient to compensate
whistleblowers and achieve the
Commission’s law-enforcement
interests? If not, is there an alternative
formulation of the proposed rule that
the Commission should adopt to guard
against payouts that are in excess of
amounts that are reasonably necessary
to further the Commission’s goals?
13. With respect to proposed
paragraph (d), are the $100 million
collected sanctions threshold and the
$30 million floor appropriate? Is there
another threshold or floor that the
Commission should adopt? If so, please
explain what should be the appropriate
threshold or floor.
14. In considering whether to make a
downward adjustment to a potential
award under proposed paragraph (d), is
it reasonable for the Commission to
consider the likely amount of the award
in relation to the whistleblower
program’s goals of rewarding
meritorious whistleblowers and
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sufficiently incentivizing future
similarly situated whistleblowers?
a. In the release, we explain that facts
that would be relevant to determining
whether the large payout may be
appropriate given the specific
whistleblower’s circumstances include,
for example, whether the whistleblower
made an extraordinary and highly
unusual sacrifice by coming forward
(such as placing himself or herself in
legal jeopardy to bring the Commission
information that it would otherwise not
have been able to obtain or
demonstrably suffering career-ending
consequences commensurate with the
potential large award). Are there other
(or additional) considerations that the
Commission should assess in making
that determination?
b. Also in the release, we explain that
facts that would be relevant to
determining whether the large payout is
needed and appropriate to encourage
future similarly situated whistleblowers
to come forward include the industry in
which knowledgeable whistleblowers
might work, the type of position held by
that whistleblower, and the
compensation levels within that
industry, and whether potential
whistleblowers may be located overseas
and the likely compensation levels in
those countries (to the extent available).
Are there other (or additional)
considerations that the Commission
should assess in making that
determination?
15. In the context of two or more
individuals acting together as a
whistleblower, should the $30 million
floor in proposed paragraph (d) apply
where the aggregate award to both
individuals exceeds $30 million or
where the award to each individual
would potentially exceed $30 million?
Please explain the reasons for your
views.
16. In determining whether the $100
million threshold has been met for
application for the proposed rule,
should the Commission consider not
just the likely payout in any
Commission covered action that results
from the original information that the
whistleblower provided to the
Commission, but also any potential
payout that might result from any
related actions? Why or why not?
17. As discussed above, the
Commission could apply proposed
paragraph (d) if, after having made an
award to a whistleblower, the
Commission subsequently processes an
award application for that
whistleblower (either in connection
with a second covered action or a
related action) and the subsequent
award application is based on the ‘‘same
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34717
general information’’ from the
whistleblower as the earlier award
determination. Is there a different
standard that the Commission should
apply for invoking the rule in these
situations? In particular, should the
proposed rule be applicable in either a
narrower or a broader set of
circumstances where information
provided by a whistleblower results in
multiple actions? Please explain the
reasons for your view.
18. Proposed paragraph (d) would
permit the Commission to consider the
potential dollar amount of the award
when applying each of the existing
award criteria in Exchange Act Rule
21F–6(a) and 6(b), provided that the
Commission determined that the likely
total payout to the whistleblower
resulting from the original information
that he or she provided was $100
million or greater. As explained above,
this would allow the Commission to
consider each award factor in dollar
terms rather than to apply exclusively a
percentage assessment that does not
take into account what those percentage
adjustments would translate to in actual
dollars paid to the whistleblower.
a. Should the Commission consider
the dollar value of an award that
involves the collection of at least $100
million in monetary sanctions in
determining the size of the award? Why
or why not?
b. As part of this rulemaking, should
we expand this approach so that it
would cover all awards considered
under Exchange Act Rule 21F–6, even
those below the $100 million threshold?
Would such a revision to the award
determination approach under
Exchange Act Rule 21F–6 allow us to
better assess each enhancement or
reduction in dollar terms (as well as
percentage terms) so that we could more
realistically and concretely assess the
impact of each award factor on the
overall award to ensure that we are
appropriately rewarding the
whistleblower and incentivizing future
whistleblowers? Why or why not?
19. With respect to the interpretive
guidance concerning ‘‘unreasonable
delay,’’ is the 180-day rebuttable
presumption of unreasonable delay
appropriate? Does establishing such a
presumption help to put individuals on
notice that they should come forward
without an inappropriate delay? Please
explain.
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E. Proposed Amendment to Exchange
Act Rule 21F–2 128 Addressing
Whistleblower Status and Certain
threshold Criteria Related to Award
Eligibility, Heightened Confidentiality
From Identity Disclosure, and
Employment Anti-Retaliation
Protection 129
As adopted by the Commission in
2011, Rule 21F–2(a) 130 describes the
qualifications to be a whistleblower for
purposes of the award program and
heightened confidentiality protections,
and Rule 21F–2(b) 131 provides a
separate, broader definition of the term
that is applicable to the employment
anti-retaliation provisions in Section
21F(h)(1) of the Exchange Act.132
Specifically, unlike Rule 21F–2(a), Rule
21F–2(b) defines a whistleblower not by
reference to the statutory definition of
the term in Exchange Act Section
21F(a)(6) 133—i.e., as one who reports to
the Commission—but instead by
reference to the protected activities
described in Section 21F(h)(1)(A)(i)–
(iii), including the internal reporting
described in clause (iii) of that
provision.134 The Supreme Court
recently held in Digital Realty Trust,
Inc. v. Somers,135 however, that a
whistleblower under Section 21F of the
Exchange Act must report a possible
securities law violation to the
Commission in order to qualify for
employment retaliation protection
under Section 21F(h)(1), and that the
Commission’s rule interpreting the term
more broadly in connection with
Section 21F’s retaliation protections was
therefore not entitled to deference.136
The Court reasoned that Dodd-Frank’s
definition of ‘‘whistleblower,’’ codified
in Section 21F(a)(6), requires such a
report to the Commission as a
prerequisite for anti-retaliation
protection, and that this definition is
‘‘clear and conclusive.’’ 137 The Court
also determined that strict application
of the definition’s reporting requirement
128 17
CFR 240.21F–2.
Commission anticipates that this
proposed rule change, if adopted, would apply as
follows: With respect to employment retaliation
claims, the proposed rule would apply only to
employment-retaliation violations occurring after
the effective date of the rules; with respect to award
eligibility and confidentiality protections, the
proposed rule would apply only to information
about a potential securities law violation that is
submitted for the first time by an individual after
the effective date of the rules.
130 17 CFR 240.21F–2(a).
131 17 CFR 240.21F–2(b).
132 15 U.S.C. 78u–6(h)(1).
133 15 U.S.C. 78u–6(a)(6).
134 15 U.S.C. 78u–6(h)(1)(A)(i)–(iii).
135 138 S. Ct. 767 (2018).
136 Digital Realty, 138 S. Ct. at 781–82.
137 Id.
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129 The
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in the employment anti-retaliation
context is consistent with Congress’s
core objective of ‘‘ ‘motivat[ing] people
who know of securities law violations to
tell the SEC.’ ’’ 138
Accordingly, we believe that it is
appropriate to amend Rule 21F–2 to
conform to the Supreme Court’s
construction of Section 21F. Proposed
Rule 21F–2(a) would provide a uniform
definition for whistleblower status to
apply for all purposes under Section
21F—award eligibility, confidentiality
protections, and anti-retaliation
protections—consistent with the
Supreme Court’s application of the
whistleblower definition in Section
21F(a)(6), which defines the term
‘‘whistleblower’’ as any individual who
provides, or 2 or more individuals
acting jointly who provide, information
relating to a violation of the securities
laws to the Commission, in a manner
established, by rule or regulation, by the
Commission.139
Proposed Rule 21F–2(a) would track
this whistleblower definition by
conferring whistleblower status only on
(i) an individual (ii) who provides the
Commission with information ‘‘in
writing’’ and only if (iii) ‘‘the
information relates to a possible
violation of the federal securities laws
(including any law, rule, or regulation
subject to the jurisdiction of the
Commission) that has occurred, is
ongoing, or is about to occur.’’ We
address these three points in turn.
First, proposed Rule 21F–2(a)(2)
would provide whistleblower status to
individuals and not to legal entities
(such as corporations). This proposed
provision would carry forward the
similar language in existing Rule 21F–
2(a)(1) without substantive change. We
believe this position follows from the
use of the term ‘‘individual’’ in the
whistleblower definition in Section
21F(a)(6) and is consistent with the
focus in Section 21F(h)(1)(A) on
retaliation by employers in the terms
and conditions of employment.
Second, proposed Rule 21F–2(a)(1)
would afford whistleblower status only
to an individual who provides the
Commission with information ‘‘in
writing.’’ As the Supreme Court
recognized,140 the whistleblower
definition in Section 21F(a)(6) gives the
Commission express authority to
establish the required ‘‘manner’’ of
138 Id. at 777 (quoting S. Rep. No. 111–176, at 38
(2010)).
139 15 U.S.C. 78u–6(a)(6).
140 Digital Realty, 138 S. Ct. at 781 (‘‘[T]he statute
expressly delegates authority to the SEC to establish
the ‘manner’ in which information may be provided
to the Commission by a whistleblower.’’) (citing
Section 21F(a)(6)).
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reporting by rule or regulation. In the
awards eligibility and confidentiality
contexts, our whistleblower rules
(specifically, Rule 21F–2(a)(2) 141 and
Rule 21F–9(a) 142) already require that
information be provided to the
Commission in writing either through
the online portal at www.sec.gov or by
mailing or faxing a Form TCR (Tip,
Complaint or Referral) to the
Commission’s Office of the
Whistleblower. We now believe it is
appropriate to exercise our discretion to
require that an individual provide
information ‘‘in writing’’ to the
Commission to qualify as a
‘‘whistleblower,’’ not only in the awards
and confidentiality context but also in
the anti-retaliation context.143 Our
experience to date in the awards context
suggests that requiring that information
be provided in writing presents, at most,
a minimal burden to individuals who
want to blow the whistle to the
Commission while facilitating the staff’s
ability to track its use of the
information. Moreover, if we recognized
additional manners of reporting for antiretaliation purposes (such as placing a
telephone call), the Commission’s staff
could be ensnared by disputes in private
anti-retaliation lawsuits over what
information was provided to whom on
what dates. Requiring that any reporting
be done in writing obviates these
difficulties.144
Third, proposed Rule 21F–2(a)(1)
would afford whistleblower status only
to an individual who provides the
Commission with information that
‘‘relates to a possible violation of the
141 17
CFR 240.21F–2(a).
CFR 240.21F–9(a).
143 We believe that Section 21F(a)(6) and Digital
Realty do not require a uniform ‘‘manner’’ of
providing information for all purposes under
Section 21F, and that we have discretion whether
to specify different manners for the awards,
confidentiality, and retaliation contexts. But we
believe that specifying a uniform ‘‘manner’’ of
providing information—that is, in writing—for all
three contexts is appropriate for the reasons that
follow in the discussion above. See also 15 U.S.C.
78u-6(c)(2)(D) (‘‘No award under subsection (b)
shall be made . . . to any whistleblower who fails
to submit information to the Commission in such
form as the Commission may, by rule, require.’’).
144 We believe it appropriate not to enumerate the
activities in Section 21F(h)(1)(A)(ii) (specifically,
‘‘initiating, testifying in, or assisting in any
investigation or judicial or administrative action of
the Commission’’) as additional manners of
providing information to the Commission under
Section 21F(a)(6). See Digital Realty, 138 S. Ct. at
781 (‘‘Nothing in today’s opinion prevents the
agency from enumerating additional means of SEC
reporting—including through testimony protected
by clause (ii)’’ of Section 21F(h(1)(A).). Given clause
(ii)’s cross-reference to ‘‘such information’’
provided under clause (i), we believe that clause (ii)
is best read as extending employment retaliation
protections to acts of continued cooperation by a
person who has already provided information to the
Commission.
142 17
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federal securities laws (including any
law, rule, or regulation subject to the
jurisdiction of the Commission) that has
occurred, is ongoing, or is about to
occur.’’ Much of this language carries
over from existing Rule 21F–2 145 and
simply reflects the extent to which that
provision already tracked the
whistleblower definition in Section
21F(a)(6). At the same time, we are
mindful of the whistleblower
definition’s focus on ‘‘information
relating to a violation of the securities
laws’’ 146 and of the Supreme Court’s
admonition that Section 21F, as enacted
by Dodd-Frank, is ‘‘a law concerned
only with encouraging the reporting of
‘securities law violations,’ ’’ as opposed
to other types of misconduct.147
Consistent with that statutory language
and purpose, we believe it is
appropriate to clarify what is implicit in
the phrase ‘‘securities laws’’—namely,
that whistleblower status (and thus
Section 21F’s employment retaliation
protection) extends only to reports of
possible violations of federal law, not
state law, and that it extends broadly to
reports of possible violations of any law,
rule, or regulation subject to the
jurisdiction of the Commission.148
Although Section 3(a)(47) of the
Exchange Act defines the phrase
‘‘securities laws’’ more narrowly as
encompassing only certain statutes,149
by its terms that definition only applies
‘‘unless the context otherwise
requires.’’ 150 We believe that the
context of Section 21F requires
departing from that definition, given the
textual clues that Congress designed
Section 21F to encompass
whistleblowing with respect to the full
sweep of federal securities statutes,
rules, and regulations,151 given
145 17
CFR 240.21F–2(a)(1).
U.S.C. 78u–6(a)(6) (emphasis added).
147 Digital Realty, 138 S. Ct. at 781 (quoting S.
Rep. No. 11–176, at 38).
148 As proposed, Rule 21F–2 would not repeat the
parenthetical ‘‘(including any law, rule, or
regulation subject to the jurisdiction of the
Commission)’’ when the phrase ‘‘federal securities
laws’’ reappears later in the rule. This would be
strictly for concision and ease of reading, and not
to imply any difference of meaning.
149 Section 3(a)(47) of the Exchange Act states that
the term ‘‘securities laws’’ means the Securities Act
of 1933 (15 U.S.C. 78a et seq.), the Securities
Exchange Act of 1934 (15 U.S.C. 78a et seq.), the
Sarbanes-Oxley Act of 2002, the Trust Indenture
Act of 1939 (15 U.S.C. 77aaa et seq.), the Investment
Company Act of 1940 (15 U.S.C. 80a–1 et seq.), the
Investment Advisers Act of 1940 (15 U.S.C. 80b et
seq.), and the Securities Investor Protection Act of
1970 (15 U.S.C. 78aaa et seq.).
15 U.S.C. 78c(a)(47).
150 15 U.S.C. 78c(a).
151 See, e.g., Section 21F(h)(1)(A)(iii) (protecting
‘‘disclosures that are required or protected under
. . . any other law, rule, or regulation subject to the
jurisdiction of the Commission’’).
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Congress’s core objective of
‘‘ ‘motivat[ing] people who know of
securities law violations to tell the
SEC,’ ’’ 152 and given the many securities
regulations whose reported violations
would fail to trigger award eligibility
and anti-retaliation protection if
‘‘securities laws’’ were more narrowly
defined.153
Additionally, proposed Rule 21F–2(a)
would confer whistleblower status ‘‘as
of the time that’’ an individual meets all
three of the above conditions. We
believe that this language would clarify
that whistleblower status is conferred
only prospectively and not
retrospectively once all three conditions
to achieve whistleblower status are met.
Proposed Rule 21F–2(b), (c), and (d)
would specify how the whistleblower
status conferred by subsection (a)
operates across the various contexts of
awards eligibility, confidentiality
protections, and anti-retaliation
protections, respectively. Much like
current Rule 21F–2(a), proposed Rule
21F–2(b) would specify that, to be
eligible for an award in a Commission
action based on information provided to
the Commission, a person ‘‘must
comply with the procedures and the
conditions described in Rules 21F–4,
21F–8, and 21F–9 (respectively, sections
240.21F–4, 240.21F–8, and 240.21F–9 of
this chapter).’’ 154 Proposed Rule 21F–
152 Digital Realty, 138 S. Ct. at 777 (quoting S.
Rep. No. 111–176, at 38).
153 See American Bankers Assn v. SEC, 804 F.2d
739, 753 (D.C. Cir. 1986) (‘‘We read the context
clause [in Section 3 of the Exchange Act] as
meaning only that if in the case of a frequently
occurring statutory term, its immediate context
suggests that a literal application of the statutory
definition would produce absurd consequences or
run counter to the obvious thrust of the section, the
agency may appropriately modify the definition.’’)
(emphasis added).
154 We note that, under the Commission’s existing
rules, in order to make an award in connection with
a related action brought by one of the regulatory or
law-enforcement entities listed in Rule 21F–3(b)(1)
(17 CFR 240.21F–3(b)(1)), we must determine that
the same original information that the
whistleblower gave to the Commission also led to
the successful enforcement of the related action
under the same criteria that govern awards made in
connection with Commission actions (see Rule
21F–3(b)(2), 17 CFR 240.21F–3(b)(2)). This means
that a whistleblower must comply with the other
procedures and conditions described in Rules 21F–
4 and 21F–8 (17 CFR. 240.21F–4 and 240.21F–8) for
a related action in the same manner and to the same
degree as is required for the Commission action to
which the other entity’s action is related. For
example, under Rule 21F–4(c) (17 CFR 240.21F–
4(c)) the whistleblower must provide the same
original information that he or she provided to the
Commission directly to the other regulatory or lawenforcement entity and that the information the
whistleblower gave to the other entity must lead to
successful enforcement of that entity’s action using
the same criteria described in Rule 21F–4(c)(1)–(3)
(17 CFR 240.21F–4(c)(1)–(3)) for Commission
enforcement actions. However, we are proposing to
modify this requirement through our amendments
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2(b) reiterates, ‘‘You should carefully
review those rules before you submit
any information that you may later wish
to rely upon to claim an award.’’ We
believe that this proposed language will
adequately alert individuals who intend
to claim an award that they must
comply with the cross-referenced rules,
especially proposed Rule 21F–9(a) and
(b), which require the submission of
information to the Commission either
on Form TCR or through www.sec.gov,
accompanied by a declaration sworn
under penalty of perjury that the
information submitted is true and
correct.155 In our experience to date in
the awards context, compliance with
existing Rule 21F–9(a) has proven to be
beneficial for enabling the Commission
to determine, in a precise and reliable
manner, which persons submitted
which information on which dates.
Proposed Rule 21F–2(c) would
specify that, to qualify for
confidentiality protections afforded by
Section 21F(h)(2) of the Exchange
Act 156 based on information provided
to the Commission, a person ‘‘must
comply with the procedures and the
conditions described in’’ Rule 21F–
9(a)—that is, must submit information
using the Commission’s online portal or
Form TCR.157 We believe it is
appropriate to adopt this provision both
to codify the current practice of the
Commission’s staff and to clarify for
future whistleblowers the conditions for
receiving confidentiality protections.
Further, requiring whistleblowers to
adhere to the procedures specified in
Rule 21F–9(a) helps the staff to
appreciate quickly and clearly which
whistleblowers are seeking the
heightened confidentiality protections
provided by Section 21F(h)(2) of the
Exchange Act when, among other
things, sharing the whistleblowers’
information with other governmental
agencies.158
to Exchange Act Rule 21F–3 (17 CFR 24.21F–3) to
also permit an award in situations where the
Commission itself shares the whistleblower’s
information with the other agency.
155 We believe that additional express authority in
this regard is conferred by Section 21F(c)(2)(D) of
the Exchange Act. See 15 U.S.C. 78u–6(c)(2)(D)
(‘‘No award under subsection (b) shall be made . . .
to any whistleblower who fails to submit
information to the Commission in such form as the
Commission may, by rule, require.’’).
156 15 U.S.C. 78u–6(h)(2).
157 17 CFR 240.21F–9(a).
158 We are proposing to make a conforming
amendment to Exchange Act Rule 21F–7(a) (17 CFR
240.21F–7(a)) to acknowledge the proposed
requirement that a whistleblower must submit
information according to the procedures specified
in Exchange Act Rule 21F–9(a) (17 CFR 240.21F–
9(a)) in order to qualify for the heightened
confidentiality protections provided for in
Exchange Act 21F(h)(2), 15 U.S.C. 78u–(h)(2).
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Proposed Rule 21F–2(d) would revise
existing Rule 21F–2(b) to define the
scope of anti-retaliation protections in a
way that mirrors the Supreme Court’s
authoritative reading of Section 21F. As
the Court explained in Digital Realty,
the whistleblower definition in Section
21F(a)(6) ‘‘first describes who is eligible
for protection—namely, a whistleblower
who provides pertinent information ‘to
the Commission,’ ’’ 159 while ‘‘[t]he three
clauses of [Section 21F(h)(1)(A)] then
describe what conduct, when engaged
in by a whistleblower, is shielded from
employment discrimination.’’ 160
Consistent with that reading, proposed
Rule 21F–2(d) would explain both who
is eligible for protection as a
whistleblower and also what conduct by
such a person is protected from
employment retaliation, by requiring a
person to satisfy several criteria listed in
paragraph (d)(1).
In explaining who is eligible for
employment retaliation protection,
proposed Rule 21F–2(d)(1)(i) would first
require that a person ‘‘qualify as a
whistleblower under subsection (a)
before experiencing the retaliation’’ for
which redress is sought. We believe that
this proposed rule implements the most
natural reading of Section 21F(h)(1)(A),
which prohibits retaliation ‘‘against[ ] a
whistleblower’’ (emphasis added) 161
and also follows from the Supreme
Court’s focus in Digital Realty on
whether the plaintiff had reported to the
Commission before the alleged
retaliation.162 In addition, proposed
Rule 21F–2(d)(1)(ii) would carry
forward the requirement in existing
Rule 21F–2(b)(1)(i) 163 that the person
‘‘reasonably believe’’ that the
information provided relates to a
possible securities law violation.
In explaining what conduct is
protected from retaliation, Rule 21F–
2(d)(1)(iii) requires that a person must
perform a ‘‘lawful act’’ that both is
performed in connection with any of the
activities described in Section
21F(h)(1)(A)(i)–(iii) 164 and ‘‘relate[s] to
the subject matter of’’ the person’s
submission to the Commission under
proposed Rule 21F–2(a).165 We believe
159 138 S. Ct. at 777 (quoting Section 21F(a)(6), 15
U.S.C. 78u–6(a)(6)).
160 Id. (citing Section 21F(h)(1)(A)(i)–(iii), 15
U.S.C. 78u–6(h)(1)(A)(i)–(iii)).
161 15 U.S.C. 78u–6(h)(1)(A).
162 See 138 S. Ct. at 778 (‘‘Somers did not provide
information ‘to the Commission’ before his
termination, § 78u–6(a)(6), so he did not qualify as
a ‘whistleblower’ at the time of the alleged
retaliation. He is therefore ineligible to seek relief
under § 78u–6(h).’’).
163 17 CFR 240.21F–2(b)(1)(i).
164 15 U.S.C. 78u–6(h)(1)(A)(i)–(iii).
165 We are not proposing to define the term
‘‘lawful act’’ under Section 21F(h)(1)(A) or
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that extending protection to all such
lawful acts is most consistent with the
text of Section 21F(h)(1)(A), which
prohibits retaliation not simply for the
activities described in Section
21F(h)(1)(A)(i)–(iii) but for ‘‘any lawful
act done by the whistleblower’’ in
performing those activities. Given the
breadth of Congress’s language, we
preliminarily anticipate that antiretaliation protection under proposed
Rule 21F–2(d)(1)(iii) will properly
encompass actions that are preparatory
to the conduct described in Section
21F(h)(1)(A)(i)–(iii), such as printing
and completing a Form TCR and
depositing the completed form in a
mailbox. We also preliminarily
anticipate that protected conduct under
proposed Rule 21F–2(d)(1)(iii) will not
be limited strictly to reports to the
Commission, since that limitation
would render clauses (ii) and (iii) of
Section 21F(h)(1)(A) superfluous, given
clause (i)’s express coverage of
Commission reports.166
At the same time, proposed Rule 21F–
2(d)(1)(iii) would limit anti-retaliation
protection to lawful acts that ‘‘relate to
the subject matter’’ of the person’s
submission to the Commission under
proposed Rule 21F–2(a). Given the
silence of Section 21F and the Supreme
Court’s reluctance to address whether
any subject-matter connection should be
required,167 we believe it appropriate to
clarify that, to receive protection, a
lawful act must relate to the subject
matter of the submission to the
Commission.168
otherwise to offer guidance as to its meaning. We
note that the term does appear in a number of
federal employment anti-retaliation statutes, but it
does not appear that any of these statutes define the
term. See, e.g., Marcella Auerbachian and Michael
W. Paddock, Legal Ethics: Lines in the Sand—The
Intersection of Bringing and Defending a Qui Tam
False Claims Act Case, 20141006 AHLA Seminar
Papers 19 (Oct. 6, 2014) (available on Westlaw)
(‘‘The FCA does not define ‘lawful acts’ ’’).
166 We are aware of one circuit decision
suggesting in dicta, before the Digital Realty
decision, that anti-retaliation protection under
Section 21F(h)(1) should be limited exclusively to
reports to the Commission. See Martensen v.
Chicago Stock Exch., 882 F.3d 744, 746 (7th Cir.
2018). We preliminarily believe that, in this respect,
Martensen is inconsistent with the Supreme Court’s
subsequent decision in Digital Realty. See 138 S. Ct.
at 779 (‘‘With the statutory definition incorporated,
clause (iii) protects a whistleblower who reports
misconduct both to the SEC and to another entity,
but suffers retaliation because of the latter, nonSEC, disclosure.’’).
167 See Digital Realty, 138 S. Ct. at 780–81.
168 We preliminarily believe that this clarification
helps avoid the incongruous result that a person
could qualify just once as a whistleblower and then
receive lifetime protection for any non-Commission
reports described in clause (iii) with respect to
distinct securities law violations that occur years
later. Given the Supreme Court’s instruction that
Congress’s core objective was to encourage reports
to the Commission, 138 S. Ct. at 777, it makes more
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Proposed Rule 21F–2(d)(2) would
address a timing issue under Section
21F’s anti-retaliation provisions by
clarifying that a person does not need to
qualify as a whistleblower under Rule
21F–2(a) before performing the lawful
act described in Rule 21F–2(d)(1)(iii), in
order to be eligible for anti-retaliation
protection. In other words, whether
conduct is protected from retaliation
would not depend on whether the
person performing that conduct
reported to the Commission beforehand
or afterward (in order to qualify as a
whistleblower). Section 21F is silent on
this issue, and we believe that this
clarification will help maintain
appropriate incentives for persons to
make the internal reports described in
Section 21F(h)(1)(A)(iii) before or at the
same time as reporting to the
Commission. Proposed Rule 21F–2(d)(2)
would reiterate, however, that a person
must qualify as a whistleblower under
proposed Rule 21F–2(a) before
experiencing retaliation. Thus, for
example, an individual who experiences
repeated retaliation for a prior lawful
act, and who first reports to the
Commission while the retaliation is still
ongoing, would be protected with
respect to any retaliation experienced
after the Commission report but not for
any retaliation experienced before the
Commission report.
Proposed Rule 21F–2(d)(3) would
carry forward existing Rule 21F–
2(b)(1)(iii) 169 without substantive
change. That provision states that the
anti-retaliation protections apply
regardless of whether a person satisfies
the procedures and conditions to qualify
for an award described in Rules 21F–4,
21F–8, and 21F–9 (such as, for example,
submitting the information to the
Commission using the electronic TCR
portal on whe Commission’s website or
completing the required declaration as
to the accuracy of the information
submitted in the whislteblower’s tip).
Proposed Rule 21F–2(d)(4) would
carry forward existing Rule 21F–
2(b)(2) 170 without substantive change.
That provision states that the retaliation
prohibition in Section 21F(h)(1) 171 and
the rules thereunder shall be
enforceable in an action or proceeding
brought by the Commission.
To illustrate how we anticipate
proposed Rule 21F–2 would operate in
practice, consider the following
hypothetical scenario: An employee at a
sense that such a person needs to return to the
Commission to report the later violations in order
to receive protection.
169 17 CFR 240.21F–2(b)(1)(iii).
170 17 CFR 240.21F–2(b)(2).
171 15 U.S.C. 78u–6(h)(1).
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publicly traded issuer overhears a
conversation by colleagues discussing a
scheme to create an artificial boost for
reported sales. The employee
investigates and discovers that sales
invoices are being generated without
any corresponding movement of
inventory, and then reports the possible
misconduct to the issuer’s chief
compliance officer. But a week passes
without any action being taken on the
report. If the Commission then receives
an email from that employee in which
the employee reports the same possible
misconduct, and in sending the email
the employee reasonably believed that
the report relates to a possible securities
laws violation, then the employee
would qualify as a whistleblower under
Rule 21F–2(a) and would be eligible for
anti-retaliation protections under Rule
21F–2(d)(1)(i)–(ii) as of the time the
employee provides the information to
the Commission. Assuming that the
employee’s internal report was within
the scope Section 806(a) of SarbanesOxley, that internal report itself would
be a protected ‘‘lawful act’’ under Rule
21F–2(d)(1)(iii). The fact that the
employee made the internal report
before the Commission report would not
make a difference for anti-retaliation
protections under Rule 21F–2(d)(2).
That said, if the employee wanted to be
eligible for an award under Rule 21F–
2(b) and to qualify for confidentiality
protections under Rule 21F–2(c), he or
she would need to make his or her first
report of that information to the
Commission using Form TCR or through
the online portal at www.sec.gov, as
required by Rule 21F–9(a), and not
through an email to the Commission. To
qualify for an award, the employee
would additionally need to comply with
the procedures and the conditions
described in Rules 21F–4, 21F–8, and
21F–9.
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Request for Comment
20. Is it reasonable to require that an
individual provide information to the
Commission ‘‘in writing’’ to qualify as a
whistleblower? Is this approach either
too restrictive or too broad? Are there
situations in which only some other
form of communication would be
possible or preferred? Please explain.
21. Should our whistleblower rules
enumerate any other ‘‘manner’’ of
providing information to the
Commission for purposes of antiretaliation protection? For example,
should our rules enumerate testifying
under oath in an investigation or
judicial or administrative action of the
Commission as an additional ‘‘manner’’
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of providing information to the
Commission? 172
22. Does the proposed rule reasonably
require that the lawful acts done by the
whistleblower must relate to the subject
matter of the whistleblower’s
submission to the Commission in order
for the employment retaliation
protections to apply? Should a different
standard apply? Why or why not?
23. Does the proposed rule
appropriately address the timing of an
individual’s report to the Commission
relative to the protected conduct and to
any retaliation?
24. In determining the amount of an
award, the Commission considers
participation in internal compliance
systems. Given the change in antiretaliation protections, should the
Commission still use this criteria in
determining the size of whistleblower
awards? Why or why not?
25. Would it be necessary or
appropriate to specify additional types
of misconduct that fall within the
prohibition in Section 21F(h)(1)(A)
against ‘‘any other manner [of]
discriminat[ion] against[ ] a
whistleblower’’? For example, should
our rules clarify that if an employer
rejects a prospective employee, or a past
employer attempts to cause such
rejection, because that individual had
engaged in activity protected under Rule
21F–2, this would be a form of
retaliation covered by Section
21F(h)(1)(A)? 173
172 See Digital Realty, 138 S. Ct. at 781 (‘‘Nothing
in today’s opinion prevents the agency from
enumerating additional means of SEC reporting—
including through testimony protected by clause
(ii)’’ of Section 21F(h)(1)(A).).
173 The Supreme Court has held that a former
employer’s retaliatory negative reference was
actionable under Title VII. See, e.g., Robinson v.
Shell Oil Co., 519 U.S. 337, 346 (1997). Other
federal anti-retaliation statutes have been held to
cover such conduct, which is often referred to as
‘‘blacklisting.’’ See Black’s Law Dictionary (10th ed.
2014) (defining ‘‘blacklist’’ as ‘‘[t]o put the name of
(a person) on a list of those who are disfavored and
are therefore to be avoided or punished,’’ and giving
as an example, ‘‘the firm blacklisted the former
employee’’). The Department of Labor’s regulations
implementing Section 806 of the Sarbanes-Oxley
Act of 2002 expressly prohibit ‘‘blacklisting’’ of an
employee, 29 CFR 1980.102(a), and define an
‘‘employee’’ as ‘‘an individual presently or formerly
working for a covered person, an individual
applying to work for a covered person, or an
individual whose employment could be affected by
a covered person.’’ Id. § 1980.101(g). In relevant
part, Section 806 of the Sarbanes-Oxley Act is
similar to Section 21F(h), providing that no covered
entity or person may discharge, demote, suspend,
threaten, harass, or in any other manner
discriminate against an employee in the terms and
conditions of employment, and, under Section
21F(h)(1)(A), that no employer may discharge,
demote, suspend, threaten, harass, directly or
indirectly, or in any other manner discriminate
against, a whistleblower in the terms and
conditions of employment.
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34721
F. Proposed Amendment to Rule 21F–8
To Add New Paragraph (d) To Provide
the Commission With Additional
Flexibility Regarding the Forms Used in
Connection With the Whistleblower
Program (and Corresponding
Amendments to Rule 21F–10, Rule 21F–
11, and Rule 21F–12) 174
Currently an applicant seeking to
submit information to the Commission
in order to qualify as a whistleblower
(for purposes of the award and
confidentiality components of the
whistleblower program) must submit
this information by using one of two
methods: (1) By providing the
information through an online portal on
the Commission’s website, or (2) by
submitting the paper Form TCR that was
adopted by the Commission as part of
the original whistleblower rulemaking
in 2011.175 Periodically the Commission
has determined that it would be
beneficial to modify the online portal.
However, this has resulted in
discrepancies forming over time
between the information collected
through the online portal and that
elicited by Form TCR.
To provide the Commission with the
ability to make timely corresponding
adjustments to the Form TCR when the
Commission determines to modify the
online portal, the Commission proposes
to modify Exchange Act Rule 21F–8 176
by adding a new paragraph (d)(1)
providing that the Commission will
periodically designate on the
Commission’s web page a Form TCR
Both statutes broadly prohibit ‘‘any . . . manner’’
of discrimination in the terms or conditions of
employment. See also Wanamaker v. Columbian
Rope Co., 108 F.3d 462, 466 (2d Cir. 1997) (noting
that former employees can state a claim for
retaliation under the Age Discrimination in
Employment Act for ‘‘blacklist[ing]’’); Boscarello v.
Audio Video Sys., Inc., 784 F. Supp. 2d 577, 582
(E.D. Va. 2011) (former contractor stated a
retaliation claim under the Fair Labor Standards
Act against former employer by alleging
blacklisting).
174 The Commission anticipates that proposed
Rule 21F–8(d)(1), if adopted, would apply only in
connection with submissions of information that
are made by an individual after the effective date
of the proposed rules. Further, the Commission
preliminarily anticipates that proposed Rule 21F–
8(d)(2), if adopted, would apply only to coveredaction and related-action award applications that
are connected to a Notice of Covered Action (see
Exchange Act Rule 21F–10(a), 17 CFR 240.21F–
10(a)) posted on or after effective date of the final
rules.
175 See Exchange Act Rule 21F–9(a), 17 CFR 240–
21F–9(a). Under the proposed amendments to
Exchange Act Rule 21F–2, 17 CFR 240.21F–2, these
procedures will remain necessary in order for a
whistleblower to be eligible for an award and to
obtain the confidentiality protections afforded by
Exchange Act Section 21F(h)(2), 15 U.S.C. 78u–
6(h)(2), even though an individual’s status as a
‘‘whistleblower’’ would no longer turn on
compliance with these procedures.
176 17 CFR 240.21F–8.
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(Tip, Complaint, or Referral) that
individuals seeking to be eligible for an
award through the process identified in
§ 240.21F–9(a)(2) shall use.
In addition to the paper Form TCR,
the Commission also adopted a paper
Form WB–APP when it adopted the
existing rules for the whistleblower
program. Individuals seeking awards
must make their award request using
Form WB–APP. Like Form TCR, Form
WB–APP can only be modified by
amending the Code of Federal
Regulations. However, we believe that it
may be beneficial to provide the
Commission with greater administrative
flexibility to modify the form. Providing
the Commission with the ability to
modify the form’s informational
requirements in a timely fashion should
also help promote the program’s overall
efficiency. Accordingly, the
Commission proposes to modify
Exchange Act Rule 21F–8 by adding a
new paragraph (d)(2) providing the
Commission will also periodically
designate on the Commission’s web
page a Form WB–APP for use by
individuals seeking to apply for an
award in connection with a Commission
covered judicial or administrative action
(15 U.S.C. 21F(a)(1)), or a related action
(§ 240.21F–3(b)(1) of the chapter).
In proposing this additional
flexibility, we note that both Form TCR
and Form WB–APP elicit information
used by the Commission to administer
its whistleblower award program and
are not public disclosure documents.
Moreover, we anticipate that the forms
designated on the Commission’s website
for use in the whistleblower program
would be substantially similar to those
currently referenced in the Code of
Federal Regulations.
In accordance with the changes
discussed above, the following
corresponding amendments would be
made. First, the Form TCR 177 that the
Commission adopted when it
promulgated its whistleblower rules in
2011 would be repealed and the
parenthetical Code of Federal
Regulation citations to that form in
Exchange Act Rule 21F–9(c) 178 and
Rule 21F–12(a)(2) 179 would be
removed. Second, the existing Form
WB–APP currently referenced in the
Code of Federal Regulations would be
repealed and Rule 21F–10,180 Rule 21F–
11,181 and Rule 21F–12 182 would be
amended by removing the parenthetical
177 17
CFR 249.1800.
CFR 21F–9(c).
179 17 CFR 21F–12(a)(2).
180 17 CFR 21F–10.
181 17 CFR 21F–11.
182 17 CFR 21F–12.
178 17
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references found throughout those rules
to the Code of Federal Regulation
citation to the current Form WB–APP.
Request for Comment
26. Are there any additional
considerations or limitations that the
Commission should consider in
connection with the proposed rule
change? For example, should we
provide that any revisions to paper
Form TCR or Form WB–APP shall not
take effect for a 30-day period after
posting on the Commission website?
G. Proposed Amendment to Rule 21F–8
To Add New Paragraph (e) To Clarify
and Enhance the Commission’s
Authority To Address Claimants Who
Submit False Information to the
Commission or Who Abuse the Award
Application Process 183
In our experience implementing the
whistleblower award program to date, a
small number of claimants have
imposed an undue burden on the award
determination process by submitting
dozens and in some cases over a
hundred award applications that lack
any colorable connection between the
tip that they provided and the
Commission enforcement actions for
which they are seeking awards.
Processing these frivolous award
applications uses staff resources that
could otherwise be devoted to
potentially meritorious award
applications. Beyond the diversion of
staff resources, we have found that, by
utilizing the procedural opportunities to
object to an award, these repeat
applicants can significantly delay the
processing of meritorious award
applications and the eventual payment
of awards.
To prevent these repeat submitters
from continuing to abuse the award
application process to the detriment of
potentially meritorious applicants, we
believe that it would be appropriate to
adopt a rule that would permit the
Commission to permanently bar any
applicant from seeking an award after
the Commission determines that the
applicant has abused the process by
submitting three frivolous award
applications.184 Specifically, under our
183 The Commission anticipates these proposed
rule changes would apply only to whistleblower
submissions that are made after the effective date
of the proposed rules.
184 We are relying on our broad rulemaking
authority to propose the amendments in this
section. As noted earlier, Section 21F(j) of the
Exchange Act, 15 U.S.C. 78u–6(j) grants us ‘‘the
authority to issue such rules and regulations as may
be necessary or appropriate to implement’’ the
whistleblower award program. Similarly, Section
23(a)(1) of the Exchange Act, 15 U.S.C. 78w(a)(1),
expressly provides the Commission the ‘‘power to
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proposal, if an applicant submits three
or more award applications for
Commission actions that the
Commission finds to be frivolous or
lacking a colorable connection between
the tip (or tips) and the Commission
action, the Commission may
permanently bar the applicant from
submitting any additional award
applications (either for Commission
actions or related actions) and the
Commission would not consider any
other award applications that the
claimant has submitted or may seek to
submit in the future.185
The proposed rule would expressly
provide, however, that the Office of the
Whistleblower shall as an initial matter
(i.e., before any preliminary
determination or preliminary summary
disposition would be issued) advise any
claimant of the Office’s assessment that
the claimant’s award application for a
Commission action is frivolous or
lacking a colorable connection between
the tip and the action for which the
individual has sought an award. If the
applicant withdraws the application at
that time, it would not be considered by
the Commission in determining whether
to exercise its authority to impose a bar
for three or more frivolous applications
or applications lacking a colorable
connection between the tip and the
Commission action for which the award
was sought.
In addition, the proposed rule would
codify the Commission’s current
practice with respect to applicants who
violate Rule 21F–8(c)(7).186 That rule
provides that an applicant shall be
ineligible for an award if, in the
whistleblower’s submission, his or her
other dealings with the Commission, or
his or her dealings with another
authority in connection with a related
action, he or she knowingly and
willfully make any false, fictitious, or
fraudulent statement or representation,
or use any false writing or document
knowing that it contains any false,
fictitious, or fraudulent statement or
entry with intent to mislead or
otherwise hinder the Commission or
make such rules and regulations as may be
necessary or appropriate to implement the
provisions’’ of the Exchange Act, and has long been
understood to provide the Commission with broad
authority to issue rules and regulations carrying the
force of law.
185 Under the proposed rule, the Commission
would not consider any applications made for
related actions in assessing whether an applicant
has submitted three or more award applications that
are frivolous or lack any colorable connection
between the tip and the enforcement action. The
Commission would assess only applications
submitted for Commission actions.
186 17 CFR 240.21F–8(c)(7).
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another authority.187 The Commission
has issued two final orders that have
permanently barred the applicants from
submitting any further whistleblower
award applications based on violations
of Rule 21F–8(c)(7). The proposed rule
would clarify and codify the
Commission’s authority to bar
applicants by providing that if the
Commission finds that a claimant has
violated paragraph (c)(7) of Rule 21F–8,
the Commission may permanently bar
the applicant from making any future
award applications, and shall decline to
process any other award applications
that the claimant has already submitted.
In our view, it is appropriate to assess
whether an applicant who engages in
`
egregious behavior vis-a-vis the
Commission in violation of Rule 21F–
8(c)(7) should be permanently ineligible
from obtaining an award. Such
egregious conduct can result in the
unnecessary and wasteful diversion of
staff resources and in extreme cases it
may expose investors and the public to
potential harm (particularly where the
misconduct concerns ongoing
Commission law-enforcement
actions).188 Moreover, we believe that
this proposed rule could discourage
individuals from engaging in the
egregious conduct prohibited by Rule
21F–8(c)(7), particularly when they are
submitting their award applications,
because they should recognize that it
may not only lead to a denial of their
current award claim but may also
permanently disqualify them from
obtaining a whistleblower award.
Under the proposed rule, the
Commission would consider a
permanent bar in the context of
processing an award application. We
expect that the preliminary
determination or preliminary
disposition addressing the award
application would include a
recommendation that the applicant be
permanently barred; this should serve to
place the applicant on notice that a bar
is being considered and afford the
applicant an opportunity to advance any
arguments in connection with a
187 See Exchange Act section 21F(i), 15 U.S.C.
78u–6(i).
188 Importantly, the proposed rule would apply to
false, fictitious, or fraudulent representations,
statements, or documents beyond those made in
connection with an award determination. For
example, if the Commission finds that an individual
knowingly or willfully made a false representation
in testimony to the Commission in one matter, the
Commission could bar that individual in
connection with a whistleblower award submitted
by that individual for an entirely separate matter.
In this way, we believe that the proposed rule
would provide an important additional incentive
for individuals to behave truthfully and honestly
with the Commission in all aspects of their dealings
with the agency.
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potential bar before the Commission
issues a final order.189
Request for Comment
27. Is it appropriate for OWB to advise
a claimant of the Office’s assessment
that the claimant’s award application for
a Commission action is frivolous, and to
offer the claimant the opportunity to
withdrawal his or her award
application(s), such that the
application(s) would not be considered
by the Commission in determining
whether to impose a bar?
28. Is it appropriate for the
Commission to adopt a rule that would
permanently bar any applicant after he
or she has been found by either the
Commission to have submitted at least
three frivolous award applications?
Should the number of frivolous award
applications be fewer or greater before a
bar would be imposed?
29. Are there any additional
procedures, considerations, or
limitations that the Commission should
consider in connection with the
proposed rule change?
H. Proposed Amendments to Rule
21F–9 To Provide Additional Flexibility
and Clarity Regarding Form TCR (and
Corresponding Technical Amendments
to Rule 21F–10, Rule 21F–11, and Rule
21F–12) 190
As noted above, Exchange Act Rule
21F–9(a) 191 currently provides that to
qualify as a whistleblower an individual
may submit information about a
possible securities law violation by one
of two methods: ‘‘(1) Online, through
the Commission’s website located at
www.sec.gov,’’ or ‘‘(2) [b]y mailing or
faxing a Form TCR (Tip, Complaint or
Referral) (17 CFR 249.1800) to the SEC
Office of the Whistleblower, 100 F
Street NE, Washington, DC 20549–5631,
Fax (703) 813–9322.’’ We propose to
amend this rule to conform to the
proposed amendments to Exchange Act
Rule 21F–2 and to clarify that online
submissions must be made through the
Commission’s online TCR portal.
Similarly, we propose to revise the rule
text to provide the Commission
additional discretion in designating
where paper Form TCRs may be sent
189 We do not intend to foreclose the potential
that the Commission could impose such a bar in the
context of a formal adjudicatory proceeding to
which the individual was a respondent if the
Enforcement Division made such a request and the
parties litigated it before the Commission.
190 The Commission anticipates these proposed
rule changes, if adopted, would apply only in
connection with submissions of information that
are made by an individual to qualify as a
whistleblower after the effective date of the
proposed rules.
191 17 CFR 240.21F–9(a).
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34723
and how whistleblowers may submit
information to the Commission to
qualify for an award or confidentiality
protections.
The revised language in Rule 21F–9(a)
would provide that to submit
information in a manner that satisfies
§ 240.21F–2(b) and (c) of the chapter, an
individual must submit his or her
information to the Commission by either
of these methods: (1) Online, through
the Commission’s website located at
www.sec.gov, using the Commission’s
electronic TCR portal (Tip, Complaint or
Referral); (2) by mailing or faxing a
Form TCR to the SEC Office of the
Whistleblower at the mailing address or
fax number identified on the SEC’s web
page for making such submissions; or
(3) by any other such method that the
Commission may expressly designate on
its website as a mechanism that satisfies
§ 240.21F–2(b) and (c).192 We believe
that the clarifications and flexibility
afforded by the proposed revisions
should help to make the whistleblower
program more user-friendly for potential
whistleblowers.193 New paragraph (b)(3)
would, among other things, afford the
Commission discretion to identify
alternative mechanisms for submitting
information in instances where, for
example, the Commission’s on-line
portal may be unavailable due to a
maintenance or replacement.194
We are also proposing to add new
paragraph (e) to Exchange Act Rule
21F–9 to clarify that the first time an
individual provides information to the
Commission that the individual will
rely upon as a basis for claiming an
award, the individual must provide that
192 For purposes of the Exchange Act Rule 21F–
12(a)(2), which provides that a ‘‘whistleblower’s
Form TCR’’ may be included within the
administrative record upon which the Commission
relies in considering a whistleblower award
application, the reference to Form TCR in this rule
refers to both the online submission made through
the Commission’s electronic TCR portal and the
paper Form TCR.
193 The changes that we are proposing to
Exchange Act Rule 21F–2, 17 CFR 240.21F–2—
specifically the unified definition of
‘‘whistleblower’’ that would apply in the award,
employment anti-retaliation, and confidentiality
contexts—as well as the amendments that we are
proposing to Exchange Act Rule 9(a), 17 CFR
240.21F–9(a), would render inapplicable on a
going-forward basis the formal interpretation that
the Commission issued in 2015 regarding the
meaning of Exchange Act Rule 21F–9. See 80 FR
47829, 47830/1, 2015 WL 4710732 (Aug. 10, 2015)
(‘‘Rule 21F–9(a) . . . specif[ies] the reporting
procedures that must be followed by an individual
who seeks to qualify as a whistleblower under Rule
21F–2(a). . . .’’).
194 We are making a conforming amendment to
Exchange Act Rule 21F–9(b), 17 CFR 240–21F–9(b),
to make clear that if a whistleblower provides
information pursuant to a method permited by
proposed section 9(b)(3), the whistleblower must
also complete the declaration required by Exchange
Act Rule 21F–9(b).
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information in accordance with the
procedures specified in Rules 21F–9(a)
and (b). If an individual fails to do so,
the individual will—subject to the
limited exception discussed below—be
barred from subsequently resubmitting
the same information to the Commission
in accordance with Rules 21F–9(a) and
(b) and seeking to obtain an award based
on that information, even if the
individual has previously qualified as a
whistleblower under the proposed
amendment to Rule 21F–2(a) by
submitting the information in some
other written form.195 To date, this has
been the approach that the Commission
has followed in making award
determinations.196 We believe that the
proposed rule language would provide
additional clarity to potential
whistleblowers to further alert them to
the importance of following the
procedures specified in Rules 21F–9(a)
and (b).197 In proposing this
195 To illustrate the intersection of proposed
amended Rule 21F–2(a) and proposed Rule 21F–
9(e): An individual who provides the Commission
with information about a possible violation of the
federal securities laws in writing will qualify as a
whistleblower and obtain the retaliation protections
provided under Section 21F(h)(1) of the Exchange
Act, 15 U.S.C. 78u–6(h)(1). However, to be eligible
for an award as to that information, the individual
must make the initial submission of that
information in accordance with the procedures set
forth in Rules 21F–9(a) and (b); i.e., the individual
must submit the information on Form TCR or
through the Commission’s online TCR portal and
must execute the required declaration. The
individual may remain award-eligible for any new
information that is submitted in accordance with
the Rule 21F–9 procedures, but not for the
information that was previously submitted without
following those procedures.
196 In a few instances, the Commission has
allowed individuals to perfect a defective
submission provided that the individual did so
promptly and before any significant investigative
steps had occurred with respect to the submission.
Any opportunity to perfect a defective submission
would, under the proposed rule, be governed by the
limited exception provided therein (which is
generally consistent with the opportunities the
Commission has to date provided in allowing
individuals to perfect their submissions).
197 If the proposed amendments in this release are
adopted, Exchange Act 21F–9(a) would be revised
to provide that to submit information in a manner
that satisfies § 240.21F–2(b) and (c) of the chapter
an individual must submit his or her information
to the Commission by any of these methods: (1)
Online, through the Commission’s website located
at www.sec.gov, using the Commission’s electronic
TCR portal (Tip, Complaint or Referral); (2) Mailing
or faxing a Form TCR to the SEC Office of the
Whistleblower at the mailing address or fax number
designated on the SEC’s web page for making such
submissions; or (3) By any other such method that
the Commission may expressly designate on its
website as a mechanism that satisfies § 240.21F–
2(b) and (c). Based on the proposed modifications
to Exchange Act Rule 21F–9(b), it would provide
that, further, to be eligible for an award, the
individual must declare under penalty of perjury at
the time he or she submits the information pursuant
to paragraph (a)(1), (2), or (3) of the section that the
information is true and correct to the best of his or
her knowledge and belief.
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amendment, we observe that
compliance with the procedures in
Rules 21F–9(a) and (b) advances many
programmatic purposes. These include
allowing the Commission to promptly
determine whether an individual who
submits information is subject to
heightened whistleblower
confidentiality protections; helping the
staff efficiently process the information
and other documentation provided by
the individual and assess its potential
credibility; and assisting the
Commission in eventually evaluating
the individual’s potential entitlement to
an award.
Proposed paragraph (e) would also
incorporate a limited exception that
would permit the Commission, in its
sole discretion, to make an award to a
whistleblower who failed to comply
with the procedural requirements of
Rules 21F–9(a) and (b) when the
individual first provided information to
the Commission. The limited exception
permitted by paragraph (e) would
provide that notwithstanding the
foregoing, the Commission, in its sole
discretion, may waive an individual’s
non-compliance with paragraphs (a) and
(b) of Rule 21F–9 if the Commission
determines that the administrative
record clearly and convincingly
demonstrates that the individual would
otherwise qualify for an award and the
individual demonstrates that he or she
complied with the requirements of
paragraphs (a) and (b) within 30 days of
the first communication with the staff
about the information that the
individual provided.198 There may be
some situations where an individual
will have provided information to the
Commission about a potential securities
law violation but may have failed to
perfect his or her submission in
accordance with the procedures
required to be a whistleblower eligible
for an award. For example, an
individual may learn about a potential
securities law violation that is about to
occur and may telephonically inform
198 By requiring that the Commission must find
that the administrative record ‘‘clearly and
convincingly’’ demonstrates that the individual
would (but for the untimely compliance with the
requirements of Exchange Act Rules 21F–9(a) and
(b)) qualify for an award, we mean to make this
discretionary mechanism available only in those
cases where there can be no serious doubt about the
individual’s contribution to the successful action
and the individual’s compliance with the award
criteria and eligibility conditions. Otherwise, in
determining whether to employ its discretion, the
Commission would have to potentially expend
considerable staff time and effort carefully
developing an administrative record and analyzing
whether the applicant would have been a
meritorious whistleblower, and only then turn to
decide whether to exercise its discretion to waive
what is otherwise a threshold procedural
requirement.
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the staff in an effort to permit the
Commission to take action before the
violation occurs. Similarly, the Office of
the Whistleblower periodically receives
letters from individuals seeking to
report securities law violations and the
Office will generally provide deficiency
notices to these individuals to the extent
that it appears that these individuals
want to become whistleblowers eligible
for an award.199 We believe that, to the
extent that the information that any
such individual might provide could be
the basis for the Commission bringing a
successful enforcement action, the
Commission should have within its
discretion the ability to make an award
provided that the individual complies
with Rules 21F–9(a) and (b) within 30
days of receiving a deficiency letter (or
having any other communication with
the staff concerning the information that
the individual provided).200
Request for Comment
30. Does proposed Rule 21F–9(a)
provide additional clarity and flexibility
that may help make the submission of
information by potential whistleblowers
more user-friendly? Are there any
additional factors that the Commission
should assess in connection with the
proposed rule amendments?
31. Please comment on the limited
exception provided for in proposed Rule
9(e) appropriate. Should the exception
be adopted? If so, should it be narrowed
or broadened? Should the 30-day time
period be extended or reduced?
199 Individuals do not have an entitlement to a
deficiency letter and their failure to receive one will
not be deemed a basis to excuse their failure to
comply with the terms of Exchange Act Rule
21F–2. It is each individual’s own responsibility to
comply with the requirements of the Commission’s
rules with respect to submitting information to
qualify for an award.
200 We believe that using a 30-day time period is
sufficient here. We note that in connection with
judicial proceedings 30-day filing deadlines are not
uncommon—indeed, Congress itself provided only
a 30-day window for unsuccessful whistleblowers
to challenge a Commission final order denying their
award application, see Exchange Act section 21F(f),
15 U.S.C. 78u–6(f)—and that our proposed Rule
21F–18, discussed infra, affords a 30-day time
period for applicants to respond to preliminary
summary dispositions that would be issued under
that proposed rule.
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I. Proposed Amendment to Rule 21F–12
Regarding the Materials That May
Form the Basis of the Commission’s
Award Determination 201
Rule 21F–12 202 lists the materials that
the Commission and the Claims Review
Staff (‘‘CRS’’) may rely upon to make a
whistleblower award determination. We
are proposing to make two clarifying
amendments to that rule.
First, Rule 21F–12(a)(3) 203 currently
permits the Commission and the CRS to
rely upon the whistleblower’s Form
WB–APP, including attachments, and
‘‘any other filings or submissions from
the whistleblower in support of the
award application.’’ Based on this
provision’s silence as to the timeliness
of such ‘‘other filings or submissions,’’
some whistleblower award claimants
have submitted hundreds of pages of
supplemental information on an
ongoing basis even after expiration of
the respective time periods for
responding to a Notice of Covered
Action or a Preliminary Determination,
resulting in significant administrative
burdens on the Office of the
Whistleblower and potential delays to
the whistleblower claims process. We
believe that expressly excluding
untimely supplemental submissions
from consideration by the Commission
and the CRS would incentivize
applicants to make thorough
submissions in the first instance when
responding to the Notice of Covered
Action and the CRS’s Preliminary
Determination (or a Preliminary
Summary Disposition issued by the
Office of the Whistleblower under
Proposed Rule 21F–18, discussed infra),
which should reduce these
administrative burdens and the
potential for delays to the claims
process.
Accordingly, we propose amending
Rule 21F–12(a)(3) to clarify that the
Commission and the CRS (and the
Office of the Whistleblower when
processing a claim pursuant to proposed
Rule 21F–18) may rely upon materials
timely submitted by the whistleblower
in response either to the Notice of
Covered Action, to a request from the
Office of the Whistleblower or the
Commission, or to the Preliminary
Determination. The deadline for filing a
claim for a whistleblower award is
ninety (90) days after the relevant
201 The Commission anticipates this proposed
rule change, if adopted, would apply only to
covered-action and related-action award
applications that are connected to a Notice of
Covered Action (see Exchange Act Rule 21F–10(a),
17 CFR 240.21F–10(a)) posted on or after effective
date of the final rules.
202 17 CFR 240.21F–12.
203 17 CFR 240.21F–12(a)(3).
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Notice of Covered Action under Rule
21F–10(a) & (b) 204 and Rule 21F–11(a)
& (b).205 Consistent with Rule 21F–
8(b),206 the Commission may specify a
deadline when it requests additional
information from the whistleblower in
support of an award application. The
time frame for responding to the
Preliminary Determination is expressly
established by Rule 21F–10(e) 207 and
Rule 21F–11(e).208 Under our proposal,
materials submitted outside those
respective time frames would not be
considered absent extraordinary
circumstances excusing the delay.209
Second, we propose amending Rule
21F–12(a)(6),210 which currently
provides in pertinent part that the
Commission and the Claims Review
Staff in making an award determination
may consider any ‘‘documents or
materials including sworn declarations
from third-parties that are received or
obtained by the Office of the
Whistleblower to assist the Commission
resolve the claimant’s award
application, including information
related to the claimant’s eligibility.’’ We
propose to modify this provision to
clarify that it applies only to materials
submitted by third parties, because
some claimants have misinterpreted it
as also encompassing materials
submitted by the claimants themselves.
Moreover, in light of the modification
that we are proposing to Rule 21F–
12(a)(3) to require that a claimant make
a ‘‘timely’’ submission in response to a
Preliminary Determination, we believe
that it is important to clarify that Rule
21F–12(a)(6) does not apply to
information provided by
whistleblowers.
Request for Comment
32. Does the proposed amendment as
to timeliness provide an appropriate
safeguard against abusive supplemental
filings by whistleblower award
claimants?
33. Do the proposed amendments
provide sufficient clarity? Is there
alternative language that might provide
greater clarity about the materials that
the Commission and the CRS may rely
upon in making an award
determination?
CFR 240.21F–10(a) & (b).
CFR 240.21F–11(a) & (b).
206 17 CFR 240.21F–8(b).
207 17 CFR 240.21F–10(e).
208 17 CFR 240.21F–11(e).
209 See Exchange Act Rule 21F–8(a), 17 CFR
240.21F–8(a).
210 17 CFR 240.21F–12(a)(6).
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205 17
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34725
J. Proposed Amendment to Rule 21F–13
Regarding the Administrative Record on
Appeal 211
Rule 21F–13 212 describes the
availability of judicial review and the
record on appeal of a whistleblower
award determination by the
Commission. Rule 21F–13(b) provides
that the record on appeal will consist of
the Preliminary Determination (or a
Preliminary Summary Disposition
issued under proposed Rule 21F–18,
discussed infra), the Final Order of the
Commission, ‘‘and any other items from
those set forth in Rule 21F–12(a) of this
chapter that either the claimant or the
Commission identifies for inclusion in
the record.’’ 213 That provision thus
ensures that the record on appeal will
include the materials described in Rule
21F–12(a) that were the basis for the
Commission’s award determination.
Some claimants have interpreted Rule
21F–13(b) as permitting them to
designate materials for inclusion in the
record on appeal that technically meet
the descriptions in Rule 21F–12(a) but
that were never actually before the
Commission in issuing the Final Order.
However, that interpretation creates
significant tension with the basic
principle of administrative law that, on
appeal, ‘‘the court’s review is limited to
the administrative record before the
agency at the time of its decision.’’ 214
That interpretation also would
inappropriately expand the record on
appeal beyond the limits in Rule 16 of
the Federal Rules of Appellate
Procedure.215
As amended, Rule 21F–13(b) would
eliminate the designation of items for
inclusion in the record on appeal and
instead would define the record on
appeal in a manner that conforms more
closely to Rule 16 of the Federal Rules
of Appellate Procedure. Materials
designated or submitted by a
whistleblower for the first time after the
Commission issues its Final Order
211 The Commission anticipates this proposed
rule change, if adopted, would apply only to
covered-action and related action award
applications that are connected to a Notice of
Covered Action (see Exchange Act Rule 21F–10(a),
17 CFR 240.21F–10(a)) posted on or after effective
date of the final rules.
212 17 CFR 240.21F–13.
213 17 CFR 240.21F–13(b).
214 EarthReports, Inc. v. FERC, 828 F.3d 949, 959
(D.C. Cir. 2016).
215 Rule 16(a) states,
The record on review or enforcement of an
agency order consists of:
(1) The order involved;
(2) any findings or report on which it is based;
and
(3) the pleadings, evidence, and other parts of the
proceedings before the agency.
Fed. R. App. P. 16(a)(1)–(3) (emphases added).
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would not be deemed part of the
administrative record.
Under amended Rule 21F–13(b), the
record on appeal therefore would
include the Final Order of the
Commission, any materials that were
considered by the Commission in
issuing the Final Order, and any
materials that were part of the claims
process leading from the Notice of
Covered Action to the Final Order. In
the interest of clarity, Rule 21F–13(b)
would specify that this includes, but is
not limited to, the materials that are part
of the claims process described in Rules
21F–10 and 21F–11 and proposed Rule
21F–18: The Notice of Covered Action,
whistleblower award applications filed
by the claimant, the Preliminary
Determination (or Preliminary Summary
Disposition), materials that were
considered by the Claims Review Staff
in issuing the Preliminary
Determination (or by the Office of the
Whistleblower in issuing a Preliminary
Summary Disposition), and materials
that were timely submitted by the
claimant in response to the Preliminary
Determination (or the Preliminary
Summary Disposition). Additional
materials not specifically listed in the
parenthetical in proposed Rule 21F–
13(b) might become part of the claims
process and therefore part of the record
if, for example, the Office of the
Whistleblower obtains materials from a
third party and provides them to the
Commission for its consideration in
resolving a whistleblower award
application. See Rule 21F–12(a)(6).
In addition, we are proposing to
amend the second sentence of Rule
21F–13(b) to clarify that the record on
appeal would not include any predecisional or internal deliberative
process materials that are prepared
exclusively to assist either the
Commission or the CRS. That provision
currently references only the
Commission. This change would clarify
the Commission’s current practice in
order to give greater clarity to claimants
pursuing appeals.
We also propose adding a third
sentence to Rule 21F–13(b) providing
that, when more than one claimant
applies for an award under a single
Notice of Covered Action, the
Commission may exclude from the
record on appeal any materials that
exclusively concern any claimant other
than the claimant who brought the
appeal, as necessary to comply with the
confidentiality protections in Section
21F(h)(2)(A) of the Exchange Act.216
This sentence would codify the
Commission’s current practice in order
216 15
U.S.C. 78u–6(h)(2)(A).
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to give greater clarity to claimants
pursuing appeals.
Request for Comment
34. We seek comments about whether
the proposed language sufficiently
conforms to Rule 16 of the Federal Rules
of Appellate Procedure and whether
alternative language would provide
greater conformity or clarity.
K. Proposed Rule 21F–18 Establishing a
Summary Disposition Process 217
Over the course of the years that the
Commission has implemented the
whistleblower award program, it has
become apparent to us that a significant
number of award applications may be
denied on relatively straightforward
grounds because they do not implicate
novel or important legal or policy
questions. These grounds for denial
include, among other things, the fact
that the individual did not comply with
the form-and-manner requirements as
specified in Rule 21F–9 for submitting
information to be eligible for an award,
or that the information was not used by
the staff responsible for investigating,
preparing and litigating the covered
action and thus the individual’s
information did not ‘‘lead to’’ the
success of the covered action.
In an effort to provide a more timely
resolution of relatively straightforward
denials, we are proposing a summary
disposition process. This process would
be in lieu of the claims adjudication
processes that are specified in Rule
21F–10 and Rule 21F–11.218 The
principal difference between the
proposed summary disposition process
and the existing processes specified in
Rule 21F–10 and 21F–11 is that for a
claim designated for summary
disposition the CRS would not be
involved in reviewing the record,
issuing a Preliminary Determination,
considering any written response filed
by the claimant, or issuing the Proposed
Final Determination; these functions
would be assumed by the Office of the
Whistleblower in an effort to streamline
the Commission’s consideration of
denials that are relatively
straightforward.
The proposed summary disposition
process incorporates two other
modifications that should help expedite
the processing of denials. First, the 30day period for replying to a Preliminary
217 The Commission anticipates that proposed
Rule 21F–18, if adopted, would apply to any
whistleblower award application for which the
Commission has not yet issued a Preliminary
Determination as of the effective date of the
proposed rules, as well as to any future award
applications that might be filed.
218 17 CFR 240.21F–10; 17 CFR 240.21F–11.
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Summary Disposition would be shorter
than the 60-day period for replying to a
Preliminary Determination provided for
by Rule 21F–10(e)(2) 219 and 21F–
11(e)(2).220 We believe that this shorter
period should be sufficient for a
claimant to reply and that it is
appropriate given that the matters
subject to summary disposition should
be relatively straightforward. Second,
under the proposed summary
disposition process, a claimant would
not have the opportunity to receive the
full administrative record upon which a
Preliminary Denial would have been
based. Instead, the Office of the
Whistleblower would (to the extent
appropriate given the nature of the
denial) provide the claimant with a staff
declaration that contains the pertinent
facts upon which the Preliminary
Summary Disposition is based. Given
the relatively straightforward nature of
the matters that would generally be
eligible for summary disposition, we
believe that this modification from the
record-review process specified in Rules
21F–10 and 21F–11 should still afford
any claimant a sufficient opportunity to
provide a meaningful reply to a
Preliminary Summary Denial. This
should eliminate the delay that can arise
when a claimant does not expeditiously
request the record, thereby helping to
further expedite the summary
adjudication process.
The proposed summary disposition
process would be available for any nonmeritorious award application that falls
within any of the following five
categories: (1) Untimely award
application; 221 (2) noncompliance with
the requirements of Rule 21F–9,222
which concerns the manner for
submitting a tip to be eligible for an
219 17 CFR 240.21F–10(e)(2) (providing that if an
individual decides to contest the Preliminary
Determination, he or she must submit his or her
written response and supporting materials within
sixty (60) calendar days of the date of the
Preliminary Determination, or if a request to review
materials is made pursuant to paragraph (e)(1) of
the section, then within sixty (60) calendar days of
the Office of the Whistleblower making those
materials available for your review.).
220 17 CFR 240.21F–11(e)(2). We believe that 30day response period is sufficient and have
considered the fact that judicial proceedings often
rely on this same time period for filing responsive
materials. See, e.g., Fed. R. of App. P. 31(a)(1)
(establishing a default 30-day time period for an
appellee or respondent to file a response brief to the
appellant or petitioner’s opening brief). See also
Rule 450(a) of the SEC’s Rules of Practice
(providing that in adjudicatory proceedings
pending before the Commission ‘‘[o]pposition briefs
shall be filed within 30 days after the date opening
briefs are due’’).
221 The time periods for submitting an award
application are specified in Rule 21F–10(b) and
Rule 21F–11(b). See 17 CFR 240.21F–10(b) &
240.21F–11(b).
222 17 CFR 240.21F–9.
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award; (3) claimant’s information was
never provided to or used by the staff
handling the covered action or the
underlying investigation (or
examination), and those staff members
otherwise had no contact with the
claimant; (4) noncompliance with Rule
21F–8(b),223 which requires an
applicant to submit supplemental
information that the Commission may
require 224 and to enter into a
confidentiality agreement; and (5)
failure to specify in the award
application the submission that the
claimant made pursuant to Rule 21F–
9(a) 225 upon which the claim to an
award is based. In addition, the
proposed rule would provide that other
defective or non-meritorious award
applications could be subject to the
summary disposition process under
appropriate circumstances.
Under the proposed summary
disposition process, the Office of the
Whistleblower would issue a
Preliminary Summary Disposition
denying an application. This
Preliminary Summary Disposition
would be in lieu of the Preliminary
Determination that the Claims Review
Staff would issue under Rule 21F–10 or
Rule 21F–11. A claimant would then
have a 30-day period to reply with a
written response explaining the grounds
for contesting the denial. Failure to file
a timely written response would
constitute a failure to exhaust the
administrative process and the
Preliminary Summary Disposition
would automatically become the final
order with respect to that applicant’s
award claim. If an applicant does file a
timely response, the Office of the
Whistleblower would consider the full
record, including the applicant’s
response (and any materials the
applicant timely submitted therewith),
and prepare a Proposed Final Summary
Disposition to be provided to the
Commission.226 Similar to the
223 17
CFR 240.21F–8(b).
authority to require additional
information of an applicant is delegated to the
Office of the Whistleblower. See 17 CFR 240.21F–
10(d).
225 17 CFR 240.21F–9(a).
226 Although the CRS has to date approved all
proposed final orders involving a challenge to a
preliminary determination, we do not believe the
absence of the CRS’s role at the comparable stage
of the proposed summary disposition process
should have a meaningful impact given the
relatively straight-forward nature of the claims that
would be processed under the proposed rule.
Further, as a matter of agency internal procedure,
all proposed final orders are reviewed by the Office
of the General Counsel and we anticipate that this
review would occur in connection with all
Proposed Summary Dispositions issued under this
proposed rule, further reducing any potential
negative impact from the elimination of the CRS’s
role.
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procedure under Rule 21F–10 and 21F–
11, the Commission would have thirty
(30) days to consider the Proposed Final
Summary Disposition; if no
Commissioner requests that the full
Commission consider the Proposed
Final Summary Disposition within the
30-day period, it would become the
final order of the Commission. If a
Commissioner does request full
Commission consideration, the
Commission would consider the matter
and issue a final order. The Office of the
Whistleblower would then notify the
claimant of the final order.
If the Commission has received more
than one award application for a
particular matter, the Office of the
Whistleblower could use the summary
disposition process for any of those
award applications that qualify, even if
other of the applications are subjected to
the regular consideration processes
specified in Rules 21F–10 and 21F–11.
Even in the multiple whistleblower
context, we believe that there could be
efficiencies in summarily considering
and disposing of applications that
constitute reasonably straightforward
denials. For example, this could free up
staff resources to concentrate on the
meritorious claims or the more difficult
determinations. Relatedly, to the extent
that a claim is denied under the
summary disposition process while
other claims may remain pending under
the Rule 21F–10 or Rule 21F–11
process, this should allow the
summarily denied claimant an earlier
ability to exhaust his opportunities for
judicial review.227 This, in turn, may
potentially permit the Commission to
more promptly pay any meritorious
whistleblower on any award that may
eventually result from the final order
issued under the Rule 21F–10 or Rule
21F–11 process.228
Finally, the proposed rule would
clarify that Rule 21F–12,229 which
governs the items that may be
considered when the Commission
entertains an award application under
Rule 21F–10 or Rule 21F–11, applies in
the context of summary dispositions.
Specifically, the proposed rule would
227 We note that, the Commission has consistently
interpreted Rules 10 and 11 to require that all
claims processed under those rules should be
addressed in one omnibus final order. The
summary disposition process that we are proposing
would, we believe, permit a more expeditious
adjudication of any relatively straightforward
denials that might otherwise have been folded into
a final order under Rule 10 or 11.
228 Pursuant to Rule 21F–14(c)(2), 17 CFR
240.21F–14(c)(2), the Commission cannot pay an
award to any meritorious whistleblower in a
particular matter until the completion of the
appeals process for all whistleblower award claims
has been exhausted.
229 17 CFR 240.21F–12.
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state that ‘‘[i]n considering an award
determination pursuant to this rule, the
Office of the Whistleblower and the
Commission may rely upon the items
specified in [Rule 21F–12(a)]. Further,
[Rule 21F–12(b)] applies to summary
dispositions.’’
Request for Comment
35. We seek comments about the
proposed summary disposition process,
including whether the categories of
award applications that would be
eligible for summary disposition are
appropriate, whether the proposal
would afford claimants sufficient
process, and whether there are any
specific modifications that we should
consider making to the proposed
process.
L. Technical Amendment to Rule 21F–
4(c)(2) 230
We propose to amend Rule 21F–
4(c)(2) 231 concerning the definition of
information that led to a successful
enforcement action because it contains
an erroneous cross-reference. The
reference is intended to be to Rule 21F–
4(b)(5) regarding the definition of
original source. The rule currently refers
to paragraph (b)(4) of the section.
III. Proposed Interpretive Guidance
Regarding the Meaning and
Application of ‘‘independent analysis’’
as Defined in Exchange Act Rule 21F–
4(b)(3) 232
Two core requirements of the
whistleblower award program are: (1)
That the whistleblower must have
provided ‘‘original information’’ to the
Commission; and (2) that such
information must have ‘‘led to’’ the
successful enforcement of an action.
Congress defined ‘‘original information’’
in relevant part as information that is
derived from either a whistleblower’s
‘‘independent knowledge’’ or the
whistleblower’s independent
‘‘analysis.’’ This guidance addresses the
potential availability of a whistleblower
award in cases where information
provided by a whistleblower is not
based on the whistleblower’s
230 The Commission anticipates this proposed
rule change, if adopted, would apply to all new
whistleblower award applications filed after the
effective date of the amended final rules, as well as
all whistleblower award applications that are
pending and have not yet been the subject of a final
order of the Commission by the effective date.
231 17 CFR 240.21F–4(c)(2).
232 17 CFR 240.21F–4(b)(3). Although we are
proposing this interpretive guidance for public
comment, the Commission may determine to rely
on the principles articulated therein for any
whistleblower claims that are currently pending
because we believe that this guidance clarifies the
existing rules that define and apply the term
‘‘independent analysis.’’
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‘‘independent knowledge’’ but, instead,
is premised on information derived
from the whistleblower’s ‘‘independent
analysis’’ of publicly available
information. Such cases implicate both
the scope of the independent analysis
prong of the ‘‘original information’’
requirement and what is necessary for
independent analysis to ‘‘lead to’’ the
successful enforcement of an action.
In formulating our views on how a
whistleblower may satisfy the
requirement of ‘‘original information’’
through the alternative of ‘‘independent
analysis,’’ we have considered
Congress’s and the Commission’s
determinations to substantially restrict
any role for publicly available
information in potential whistleblower
awards. When the Commission in 2011
adopted the rules implementing the
whistleblower program, it explained
that paying awards for publicly
available information was not consistent
with Congress’s purpose in establishing
the program. Specifically, the
Commission stated that ‘‘Congress
primarily intended our program ‘to
motivate those with inside knowledge to
come forward and assist the
Government to identify and prosecute
persons who have violated the securities
laws[.]’ ’’ 233 The Commission further
acknowledged that Congress sought to
make awards available in cases where
‘‘highly-probative, expert analysis of
data . . . suggest[s] an important new
avenue of inquiry, or otherwise
materially advance[s] an existing
investigation.’’ 234 But critically, the
Commission made clear that, in its
view, Congress did not intend to base
awards ‘‘on information that is available
to the general public.’’ 235
Independent Analysis Standard.
Consistent with these understandings of
congressional intent and consistent with
the Commission’s views when it
adopted the definition of ‘‘original
information’’ in the original
whistleblower rulemaking, we are
proposing the following standard: In
order to qualify as ‘‘independent
analysis,’’ a whistleblower’s submission
must provide evaluation, assessment, or
insight beyond what would be
reasonably apparent to the Commission
from publicly available information. In
assessing whether this requirement is
met, the Commission would determine
based on its own review of the relevant
facts during the award adjudication
process whether the violations could
233 76
FR 34300, 34311/3.
at 34312/3.
235 Id. at 34311/3. We note that although publicly
available information may not serve as the basis for
an award, the provision of such information to the
Commission can be an important public service.
234 Id.
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have been inferred from the facts
available in public sources. While we
recognize that this standard does not
constitute a bright line, we believe that
it should provide a solid foundation for
the Commission to apply when
assessing awards involving potential
independent analysis.
The Independent Analysis Must
‘‘Lead to’’ the Success of the
Enforcement Action. Even when this
standard is met, however, a
whistleblower’s independent analysis
must still have ‘‘led to’’ a successful
covered enforcement action. This
standard requires an assessment of
whether the whistleblower’s analysis—
as distinct from the publicly available
information on which the analysis was
based—either (1) was a principal
motivating factor in the staff’s decision
to open its investigation, or (2) made a
substantial and important contribution
to the success of an existing
investigation.
In the sections that follow, we explain
the relevant background and reasoning
for the standards that we have set forth
above.
A. Background: ‘‘Original Information’’
and Publicly Available Information
In formulating this guidance, we have
considered the qui tam provisions of the
False Claims Act,236 the federal
government’s principal bounty statute
and an important forerunner of the
Commission’s whistleblower award
authority.237 The False Claims Act
requires that qui tam relators must
provide their own, independent
information—and not publicly available
information—in order to avoid the socalled ‘‘public disclosure bar.’’ 238
Specifically, in its present form (and
excluding one exception that is not
relevant here 239), the public disclosure
bar requires a court to dismiss a qui tam
action ‘‘if substantially the same
allegations or transactions as alleged in
U.S.C. 3730.
Proposed Rules for Implementing the
Whistleblower Provisions of Section 21F of the
Securities Exchange Act of 1934, Release No. 34–
63237, 75 FR 70488, 70491 n.14 (Nov. 3, 2010)
(noting that cases interpreting the qui tam
provisions of the False Claims Act can provide
helpful guidance in the interpretation of Section
21F, though not necessarily controlling or
authoritative in all circumstances).
238 See Graham County Soil and Water
Conservation Dist. v. United States ex rel. Wilson,
559 U.S. 280, 294 (2010) (explaining that, through
the public disclosure bar, Congress sought ‘‘the
golden mean between adequate incentives for
whistle-blowing insiders with genuinely valuable
information and discouragement of opportunistic
plaintiffs who have no significant information to
contribute of their own’’) (quoting, United States ex
rel. Springfield Terminal Railway v. Quinn, 14 F.3d
645, 649 (D.C. Cir. 1994)).
239 31 U.S.C. 3730(4)(A).
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237 See
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the action or claim were publicly
disclosed’’ in certain designated
sources.240
In Section 21F, Congress similarly
limited awards to ‘‘original
information’’—defining the term to
require a whistleblower’s own,
independent information rather than
publicly available information.241 While
not taking precisely the same approach
as in the False Claims Act, Congress
nonetheless required that ‘‘original
information’’ for purposes of the
Commission’s award program must not
be exclusively derived from the news
media or certain other public sources.242
Further, Congress affirmatively required
that ‘‘original information’’ be derived
from a whistleblower’s ‘‘independent
knowledge or analysis.’’ 243 The Senate
report issued in connection with Dodd240 Not all public sources of information implicate
the public disclosure bar. The sources specified in
the statute are a Federal criminal, civil, or
administrative hearing in which the Government or
its agent is a party; a congressional, Government
Accountability Office, or other Federal report,
hearing, audit, or investigation; or the news media.
There is a limited exception for situations where
the qui tam relator was an original source of the
information. 31 U.S.C. 3730(e)(4)(A).
241 Although the term ‘‘original information’’ does
not appear in the False Claims Act, courts have
used the term to differentiate a qui tam relator’s
own, independent information upon which an
award may be based from information that is
available in the designated public sources. See, e.g.,
United States ex rel. Colquitt v. Abbott Labs, 858
F.3d 365, 374–75 (5th Cir. 2017); United States v.
Walker, 438 F. A’ppx 885, 888 (11th Cir. 2011);
United States ex rel. JDJ and Associates LLP v.
Natixis, 2017 U.S. Dist. Lexis 164106, *33 (S.D.N.Y.
2017). In United States ex rel. Marcus v. Hess, 317
U.S. 537 (1943), a seminal False Claims Act case
that prompted Congress to enact a forerunner of the
public disclosure bar, the Court permitted a qui tam
suit to proceed where the same defendants had
been criminally indicted for the same conduct
alleged in the qui tam action. In dissent, Justice
Jackson termed it a ‘‘misuse of the statute’’ to
permit an action where the averments in the
complaint substantially copied the indictment and
it was not shown that the petitioner ‘‘had any
original information, that he added anything by
investigations of his own, . . . .’’ 317 U.S. at 558
(Jackson, J., dissenting). ‘‘Original information’’ as
a term to describe information upon which an
award may be based has been a part of various
federal bounty statutes for more than 100 years. See,
e.g., United States v. Simons, 7 F. 709 (E.D. Mich.
1881) (discussing statute that permitted awards for
‘‘original information concerning any fraud upon
the customs revenue’’).
242 15 U.S.C. 78u–6(a)(3)(C). These other sources
are allegations made in a judicial or administrative
hearing, or in a governmental report, hearing, audit,
or investigation (unless the whistleblower is a
source of the information). Further, we note that
both the False Claims Act and the Internal Revenue
Service whistleblower statute permit discretionary
awards of up to 10% in the event that the
government proceeds with a case based principally
on public disclosures. See 31 U.S.C. 3730(d)(1); 26
U.S.C. 7623(b)(2)(A). Congress did not include any
similar discretionary award authority in Section
21F.
243 15 U.S.C. 78u–6(a)(3)(A).
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Frank, which enacted Section 21F,244
explained Congress’s expectation that in
order to obtain an award a
whistleblower would be required to
provide the ‘‘critical components’’ of
information that supported an
enforcement action beyond any
information about the matter that was
publicly available.245
In promulgating rules to implement
the whistleblower program, the
Commission further restricted any role
for publicly available information in a
potential whistleblower award. While
Congress had defined ‘‘original
information’’ as that which is derived
from a whistleblower’s ‘‘independent
knowledge’’ or ‘‘independent analysis,’’
Congress did not define either of these
terms. The Commission’s definitional
rules, however, effectively preclude
awards merely for the submission of
publicly available information.
First, the Commission excluded
publicly available information as a
source of a whistleblower’s
‘‘independent knowledge,’’ which the
Commission defined as ‘‘factual
information in [the whistleblower’s
possession] that is not derived from
publicly available sources.’’ 246 At the
adopting stage for the whistleblower
rules, the Commission considered
comments that were critical of this
blanket exclusion and that
recommended some allowance for
particular kinds of public
information.247 The Commission
rejected such an approach and chose to
adopt the broad exclusion of any
publicly available information that had
been proposed.248 Moreover, the
Commission interpreted ‘‘publicly
available sources’’ expansively to
include not only sources that are widely
244 Public Law 111–203, section 922(a), 124 Stat.
1376, 1841 (July 21, 2010).
245 See S. Rep. No. 111–176 at 111 (2010). The
Senate Report stated: ‘‘ ‘Original information’ is
defined as information that is derived from the
independent analysis or knowledge of the
whistleblower, and is not derived from an
allegation in court or government reports, and is not
exclusively from news media. In circumstances
when bits and pieces of the whistleblower’s
information were known to the media prior to the
emergence of the whistleblower, and that for the
purposes of the SEC enforcement the critical
components of the information was supplied by the
whistleblower, the intent of the Committee is to
require the SEC to reward such person(s) in
accordance with the degree of assistance that was
provided.’’
246 17 CFR 240.21F–4(b)(2) (emphasis added).
247 For example, one commenter suggested that
the Commission should exclude only information
from sources such as news media and governmental
reports that are specifically set forth in the statute.
See Securities Whistleblower Incentives and
Protections, Release No. 34–64545, 76 FR 34300,
34311/3 (June 13, 2011) (citing comment letter from
Taxpayers Against Fraud).
248 Id.
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disseminated (such as corporate press
releases and filings, media reports, and
information on the internet), but also
sources that, though not widely
disseminated, are generally available to
the public (such as court filings and
documents obtained through Freedom
of Information Act requests).249
Second, in defining the term
‘‘independent analysis,’’ the
Commission permitted a whistleblower
to employ publicly available
information, but required that the
whistleblower produce insights that are
non-public, providing that independent
analysis means an individual’s own
analysis, whether done alone or in
combination with others and analysis
means an individual’s examination and
evaluation of information that may be
publicly available, but which reveals
information that is not generally known
or available to the public.250
Significantly, the Commission
considered—and rejected—a suggestion
that the proposed definition of
‘‘independent analysis’’ be revised to
permit an award to a whistleblower
whose tip brings publicly available
information to the staff’s attention:
We believe that ‘‘independent analysis’’
requires that the whistleblower do more than
merely point the staff to disparate publicly
available information that the whistleblower
has assembled, whether or not the staff was
previously ‘‘aware of’’ the information.
‘‘Independent analysis’’ requires that the
whistleblower bring to the public
information some additional evaluation,
assessment, or insight.251
In setting forth the standard for
‘‘independent analysis’’ in this
guidance, we are particularly mindful
that the appropriate standard should be
sufficiently demanding that it would not
undermine the clear exclusion of public
information from the definition of
‘‘independent knowledge.’’ Any other
approach would, in our view,
undermine the overall framework that
was established by the Commission in
2011 when it adopted the definitions of
‘‘independent knowledge’’ and
‘‘independent analysis.’’
B. ‘‘Independent Analysis’’
As noted, the Commission defined
‘‘analysis’’ as the whistleblower’s
‘‘examination and evaluation of
information that may be publicly
available, but which reveals information
that is not generally known or available
to the public.’’ 252 Thus, if a
whistleblower submits publicly
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250 17
251 76
252 17
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FR 34300, 34305, 34312/3.
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available information in a TCR and
alleges a fraud or other securities
violations on the basis of that
information, the Commission must
determine whether the whistleblower’s
‘‘examination and evaluation’’ of the
publicly available information
‘‘reveal[ed]’’ the possible violations.
To ‘‘reveal’’ means to make something
known that was previously secret or
hidden, or to open something up to
view.253 Accordingly, to be considered
‘‘analysis,’’ the whistleblower’s
submission must include some insight—
beyond the existence of the publicly
available information—that is
revelatory; that is, the whistleblower’s
evaluation of the publicly available
information should do the work of
making known and opening up to view
for the Commission the possible
securities violations.
As a principal illustration of how to
apply our rule on ‘‘independent
analysis,’’ we look to the model that
Congress had before it at the time it
enacted the whistleblower program; the
work of Harry Markopolos in his efforts
to expose Bernard Madoff’s Ponzi
scheme.254 Among other things,
Markopolos brought to bear his
expertise as a certified fraud examiner
and his knowledge of the options
markets to demonstrate that Madoff’s
purported investment strategy could not
have produced his claimed investment
returns.255 For example, in a 2000
submission, beginning from the premise
that Madoff purported to manage
between $3 billion and $7 billion in
assets pursuant to his ‘‘split-strike
conversion’’ strategy, Markopolos
explained that the strategy as described
253 See Merriam-Webster Dictionary, available at
https://www.merriam-webster.com/dictionary/
reveal; Oxford English Dictionary, available at
https://en.oxforddictionaries.com/definition/reveal;
Cambridge Dictionary, available at https://
dictionary.cambridge.org/us/dictionary/english/
reveal; Black’s Law Dictionary (10th ed. 2014)
(citing ‘‘to reveal’’ as one definition of ‘‘disclose’’);
see also 15 U.S.C. 78u–6(h)(2)(A) (prohibiting the
Commission or staff from disclosing information
‘‘which could reasonably be expected to reveal the
identity of a whistleblower. . . .’’) (emphasis
added).
254 See S. Rep. No. 111–176 at 110 (2010) (citing
to Markopolos’s testimony).
255 Markopolos also submitted a large amount of
information that likely would have satisfied the
‘‘independent knowledge’’ prong of ‘‘original
information’’ under Rule 21F–4(b)(2), 17 CFR
240.21F–4(b)(2). For example, he described his own
firm’s inability to duplicate Madoff’s returns using
the same strategy and provided information about
Madoff’s claims and purported operations that he
obtained from speaking with third parties who
invested with Madoff. See Investigation of Failure
of the SEC to Uncover Bernard Madoff’s Ponzi
Scheme, Report No. OIG–509 (Aug. 31, 2009) (‘‘OIG
Report’’), Exh. 137, available at https://
www.sec.gov/news/studies/2009/oig-509/oig-509_
exhibits.htm.
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in public materials ‘‘would require lots
of options trading and lots of options in
open interest’’ 256 for hedging purposes.
Based upon his calculations of the total
value of call option open interest on the
Chicago Board Option Exchange and of
OEX put option open interest,
Markopolos revealed that ‘‘‘hedging
cannot be taking place as described.
. . . [I]f only $3 billion are allocated to
this strategy then there still aren’t
enough options in open interest for this
type of hedging to occur, since Madoff
would be at least 1⁄3 of the open interest
and we know that is not the case.’ ’’ 257
Similarly, in a 2005 submission,
Markopolos offered a specific
mathematical illustration of how he
believed the income and protection
parts of Madoff’s strategy would be
expected to function under real-world
market conditions, arguing that the
income that might be expected from
stock dividends and the sale of equity
call options offset by the cost of
purchasing put options, made Madoff’s
claimed returns ‘‘way too good to be
true.’’ 258 In the same submission,
Markopolos also calculated that Madoff
would have had to account for more
than 100% of the total OEX put option
open interest in order to hedge his stock
holdings as depicted in certain
marketing literature.259
Markopolos’s submissions included
information that would qualify as
‘‘independent analysis’’ as defined in
our whistleblower rules (and explained
further in this guidance) if submitted
today. Markopolos’s information was
‘‘highly-probative,’’ 260 going beyond the
publicly available information itself to
‘‘reveal’’ that Madoff’s claimed returns
were unachievable under real market
conditions. We anticipate that we may
find a requisite level of ‘‘analysis’’ in
analogous cases where an individual
with a high level of specialized training
or expertise reviews publicly available
information and illuminates for the
Commission possible violations that are
obscured because of the technical nature
of the source material.261
Report, Exh. 134.
Report at 62, quoting Markopolos 2000
submission, Exh. 134.
258 OIG Report, Exh. 268.
259 OIG Report, Exh. 268.
260 76 FR 34300, 34312/3.
261 However, we caution that we expect this
standard may be particularly demanding for
attorneys and accountants who seek whistleblower
awards based on their review of publicly available
information. As the Enforcement staff is
substantially comprised of experienced attorneys
and accountants, an outside attorney or accountant
would generally be expected to contribute insights
or revelations that would not be reasonably evident
to an accountant or attorney on the Enforcement
staff who reviewed the same publicly available
information.
Importantly, this is not to suggest that
‘‘independent analysis’’ is limited to
persons with technical expertise or
other specialized training. In each case,
the touchstone is whether the
whistleblower’s submission is
revelatory in utilizing publicly available
information in a way that goes beyond
the information itself and affords the
Commission with important insights or
information about possible violations.
While ‘‘independent analysis’’ is
evident in Markopolos’s tips, other
submissions that utilize publicly
available information may not be so
clear. However, we believe that case law
interpreting the False Claims Act’s
public disclosure bar generally suggests
a helpful framework for distinguishing
tips in which the whistleblower’s
‘‘independent analysis’’ of publicly
available information reveals important
information about possible violations
beyond the public sources themselves.
The public disclosure bar precludes
recovery when ‘‘substantially the same
allegations or transactions’’ as alleged
by the qui tam relator were previously
disclosed publicly in one of the
designated sources. The D.C. Circuit and
other federal courts of appeals have held
that fraudulent transactions are publicly
disclosed—and a qui tam suit thus
barred—when essential facts that are
sufficient to give rise to an inference of
fraud are in the public domain.262 This
rule bars qui tam suits when publicly
disclosed information provides ‘‘the
government . . . [with] enough
information ‘to investigate the case and
to make a decision whether to
prosecute’ or . . . ‘could at least have
alerted law-enforcement authorities to
the likelihood of wrongdoing.’ ’’ 263
Conversely, where a qui tam relator
‘‘supplie[s] the missing link between the
public information and the alleged
fraud,’’ and thereby ‘‘ ‘bridge[s] the gap
by [his] own efforts and experience,’ the
public disclosure bar does not
apply.’’ 264 In this way, qui tam awards
are reserved for relators who
256 OIG
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257 OIG
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262 See, e.g., United States ex rel. Oliver v. Philip
Morris USA Inc., 826 F.3d 466, 471–73 (D.C. Cir.
2016), reh. en banc denied, 2016 U.S. App. Lexis
17161 (D.C. Cir. 2016); Amphastar Pharmaceuticals
Inc. v. Aventis Pharma SA, 856 F.3d 696, 703 (9th
Cir. 2017); Cause of Action v. Chicago Transit
Authority, 815 F.3d 267, 278 (7th Cir. 2016), cert.
denied, 137 S. Ct. 205 (2016).
263 Phillip Morris USA, 826 F.3d at 472; see also
United States ex rel. Solis v. Millennium Pharms.,
Inc., 885 F.3d 623, 626 (9th Cir. 2018) (‘‘A prior
disclosure and an allegation may be substantially
similar when the prior public disclosure put the
government ‘on notice to investigate the fraud
before the relator filed his complaint.’’’).
264 United States ex rel. Shea v. Cellco
Partnership, 863 F.3d 923, 935 (DC Cir. 2017).
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‘‘ ‘contributed significant independent
information’ about a possible fraud.’’ 265
Relying in part on the False Claims
Act framework to assist us in
formulating a proposed standard for
interpreting Exchange Act Rule 21F–
4(b)(3), we believe the following is
appropriate: A whistleblower’s
examination and evaluation of publicly
available information does not
constitute ‘‘analysis’’ if the facts
disclosed in the public materials on
which the whistleblower relies and in
other publicly available information are
sufficient to raise an inference of the
possible violations alleged in the
whistleblower’s tip. This is because,
where the violations that the
whistleblower alleges can be inferred by
the Commission from the face of public
materials, those violations are not
‘‘reveal[ed]’’ to the Commission by the
whistleblower’s tip or any purported
analysis that the whistleblower has
submitted. Rather, in order for a
whistleblower to be credited with
providing ‘‘independent analysis,’’ the
whistleblower’s examination and
evaluation should contribute
‘‘significant independent information’’
that ‘‘bridges the gap’’ between the
publicly available information and the
possible securities violations.
As noted, ‘‘significant independent
information’’ that ‘‘bridges the gap’’ in
revealing violations may be found in the
application of technical expertise, but
this is not required.266 However, we
have received tips in which a
whistleblower merely offers
observations drawn from publicly
available information. In these cases, the
whistleblower typically directs the staff
to publicly available information and
states that the information itself suggests
a fraud or other violations. Examples
would be where the whistleblower
points to common hallmarks of fraud on
the face of the public materials (e.g.,
impossibly high, guaranteed investment
returns or extravagant claims in press
releases) or to public discourse (e.g.,
discussions on a public message board)
in which investors or others are alleging
a fraudulent scheme. Further, it would
not matter whether the individual relied
on only one source (e.g., a single
website) to collect the publicly available
information that demonstrates the
265 Id. at 933 (quoting United States ex rel.
Springfield Terminal Railway v. Quinn, 14 F.3d
645, 653 (D.C. Cir. 1994)).
266 For example, non-experts may configure
publicly available information in a non-obvious
way that reveals patterns indicating possible
violations that would not be otherwise inferable
from the public information or may engage in
highly probative calculations or some other
meaningful exercise with the information that may
demonstrate the possibility of securities violations.
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hallmarks of the fraud, or whether the
individual relied on a multitude of
different publicly available sources to
collect the information. These tips
generally would not qualify as
‘‘independent analysis’’ under our
interpretation because the
whistleblower’s essential contribution is
merely that he or she directed the staff
to publicly available information that
gives rise to an inference of violations;
the whistleblower’s tip has not ‘‘bridged
the gap’’ between public information
that does not itself provide a basis for
inferring a possible violation and a
conclusion that a violation may have
occurred. Further, we believe that this
same result would generally obtain
whether the whistleblower directs the
staff to a single piece of publicly
available information or the
whistleblower aggregates information
from multiple different sources.267 If the
violations can be inferred by the
Commission from the available and/or
assembled publicly available
information, without more, then the
whistleblower has not contributed
significant independent information
that reveals the violations.268
Thus, in each case the Commission
should consider whether publicly
available information (both that
supplied by the whistleblower and other
public sources) was sufficient to give
rise to an inference of the violations
alleged by the whistleblower, or
whether the whistleblower’s
examination and evaluation of public
source material revealed new,
significant, and independent
information that ‘‘bridged the gap’’ for
the staff in demonstrating the possibility
of violations. Moreover, under our rules
the whistleblower will be notified of
any preliminary determination that his
or her tip did not constitute
‘‘independent analysis,’’ and will have
an opportunity to contest that
determination in a written submission
to the Commission.269
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267 As
noted above, we explained in the adopting
release for our whistleblower rules that a
whistleblower would need to do more than point
us to disparate public information in order to
provide ‘‘independent analysis’’ within the
meaning of our rule. 76 FR 34300, 34305,
34312/3.
268 The Commission, in its adjudicatory capacity,
routinely draws reasonable inferences from facts in
the record. See, e.g., SEC Rule of Practice 250, 17
CFR 201.250 (drawing reasonable inferences from
factual allegations in deciding dispositive motions).
‘‘Drawing inferences from direct and circumstantial
evidence is a routine and necessary task of any
factfinder. ‘The very essence of [the factfinder’s]
function is to select from among conflicting
inferences and conclusions that which it considers
most reasonable.’ ’’ Siewe v. Gonzalez, 480 F.3d
160, 166 (2d Cir. 2007) (quoting Tennant v. Peoria
and Pekin Union Railway, 321 U.S. 29 (1944)).
269 See 17 CFR 240.21F–10(e).
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C. Leads to Successful Enforcement
Assuming that a whistleblower’s
submission meets the threshold
requirement that it constitute
‘‘independent analysis,’’ for the
whistleblower to be eligible for an
award the ‘‘information that . . . is
derived from the . . . [whistleblower’s]
analysis’’ must also lead to a successful
enforcement action. This determination
turns ‘‘on an evaluation of whether the
analysis is of such high quality that it
either causes the staff to open an
investigation, or significantly
contributes to a successful enforcement
action, as set forth in Rule 21F–4(c).’’ 270
Further, if the staff looks to other
information as well in determining to
open an investigation, the Commission
will only find that the independent
analysis ‘‘led to’’ the success of the
enforcement action if the Commission
determines that the whistleblower’s
analysis was a ‘‘principal motivating
factor’’ in the staff’s decision to open the
investigation.271
Thus, even an otherwise compelling
analysis may not satisfy the ‘‘leads to’’
requirement depending on the nature of
other information already in the staff’s
possession. For example, if the staff has
already obtained testimony from
insiders describing the facts of a
violation, a subsequent whistleblower
submission that demonstrates the
possibility of the violation through
independent analysis of publicly
available information would not likely
qualify for an award because, against the
backdrop of the facts already known to
the staff, the whistleblower’s analysis
would not significantly contribute to the
staff’s investigation.
Request for Comment
30. We seek comment on the
interpretation of ‘‘independent
analysis’’ in light of the background set
forth above. Are there additional
considerations that the Commission
should factor into the interpretation?
For example, should the interpretation
address more explicitly cases in which
an individual selects, compiles, and
presents publicly available information
in a new way for the staff? If so, how?
31. Should any aspect of the
interpretation be codified in rule text?
For example, should the Commission
adopt rule text that would make clear
that for a whistleblower to be credited
with providing ‘‘original information’’
270 76 FR 34300, 34312/3. This would require that
the whistleblower’s analysis made a substantial and
important contribution to the action. See
Whistleblower Award Proceeding 2016–9, Release
No. 34–77833 (May 13, 2016).
271 75 FR 70488, 70497/2.
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through ‘‘independent analysis,’’ the
whistleblower’s examination and
evaluation should contribute
‘‘significant independent information’’
that ‘‘bridges the gap’’ between the
publicly available information and the
possible securities violations?
IV. Request for Comment Regarding a
Potential Discretionary Award
Mechanism for Commission Actions
That Do Not Qualify as Covered
Actions, Involve Only a De Minimis
Collection of Monetary Sanctions, or
Are Based on Publicly Available
Information
Beyond the specific rule proposals
and interpretations expressly advanced
above, we invite public comment on
whether the Commission could at a
future point propose a rule that would
permit the Commission on a
discretionary basis to pay awards to
whistleblowers in Commission
enforcement actions that do not result in
an order for monetary sanctions that
exceeds $1,000,000 272 or enforcement
actions where the whistleblower’s tip
consisted of publicly available
information.273 Similarly, do we have
the statutory authority to propose and
adopt a rule that would permit the
Commission on a discretionary basis to
make award payments that are not tied
to the monetary payments collected
where a meritorious whistleblower has
received an award determination in a
covered action, but the ordered
monetary sanctions cannot be collected
or the amount collected would result in
a de minimis payment? Alternatively,
would a legislative change be required
for the Commission to establish the type
of discretionary award mechanisms
described in this section? Moreover,
whether by rule or legislative change,
would such discretion to make awards
in these instances be in the public
interest? Please explain the grounds for
your views.
V. General Request for Public Comment
We request and encourage any
interested person to submit comments
272 For example, could we propose and adopt a
rule that would authorize the Commission on a
discretionary basis to utilize the IPF to pay awards
to whistleblowers who make significant
contributions in Commission Enforcement actions
that do not qualify as covered actions for which we
can currently pay awards?
273 These would be situations where, under the
existing statute and our current rules, the
information provided by the whistleblower would
not qualify as information that was derived from the
whistleblower’s ‘‘independent knowledge’’ or
independent analysis,’’ see Exchange Act Rule 21F–
4(b)(2) & (3), 17 CFR 240.21F–4(b)(2) & (3), and thus
would not be ‘‘original information’’ upon which
the Commission could base an award, see Exchange
Act Rule 21F–4(b)(1)(i), 17 CFR 240.21F–4(b)(1)(i).
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on any aspect of the proposed rule
amendments, interpretations, or other
items specified above. With respect to
any comments on the economic analysis
contained below, we note that such
comments would be of greatest
assistance to our rulemaking initiative if
accompanied by supporting data and
analysis of the issues addressed therein
and by alternatives to our proposals
where appropriate.
Finally, other than the items
specifically identified in this release,
persons wishing to comment are
expressly advised that the Commission
is not proposing any other changes to
the whistleblower program rules (i.e.,
Exchange Act Rules 21F–1 through 21F–
17), nor is the Commission otherwise
reopening any of those rules for
comment.
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VI. Paperwork Reduction Act
A. Background
The proposed amendments would
affect certain ‘‘collection of
information’’ requirements within the
meaning of the Paperwork Reduction
Act of 1995 (‘‘PRA’’).274 The
Commission is submitting the proposal
to the Office of Management and Budget
(‘‘OMB’’) for review in accordance with
the PRA.275 The titles for the affected
collections of information are:
‘‘Electronic Data Base Collection
System—TCR’’ (OMB Control No. 3235–
0672); and ‘‘Form TCR’’ and
‘‘Form WB–APP’’ (OMB Control No.
3235–0686).
Currently an applicant seeking to
submit information to the Commission
in order to qualify as a whistleblower
must submit this information by using
one of two methods: (1) By providing
the information through an online portal
on the Commission’s website that is
designed for receiving electronic
submissions, or (2) by submitting the
paper Form TCR that was initially
adopted by the Commission as part of
the original whistleblower rulemaking
in 2011.276 In addition to the paper
Form TCR, the Commission also
adopted a paper Form WB–APP when it
adopted the existing rules for the
whistleblower program. Individuals
seeking awards must make their award
request using Form WB–APP. The hours
and costs associated with preparing and
submitting information through the
online portal and affected forms
constitute reporting and cost burdens
imposed by each collection of
information. An agency may not
274 44
U.S.C. 3501 et seq.
U.S.C. 3507(d) and 5 CFR 1320.11.
276 See Exchange Act Rule 21F–9, 17 CFR 240–
21F–9(a).
275 44
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conduct or sponsor, and a person is not
required to respond to, a collection of
information requirement unless it
displays a currently valid OMB control
number.
retitled accordingly (see Table 2 of
section VI(C)).
B. Summary of the Proposed
Amendments
We do not anticipate that the
proposed amendments would increase
the burden or cost to individuals
preparing and submitting the required
information through the online portal
and affected forms. Although we intend
to make certain modifications to Form
TCR so that the information elicited by
the form is consistent with the
information collected through the
online portal, we do not believe that
these conforming modifications will
increase appreciably the burden for
individuals completing the form.
We estimate that the combined
burden associated with both paper Form
TCR and the online complaint form is
9,050 hours annually. We anticipate that
the burdens imposed by the online
complaint form will vary depending on
the complexity of the alleged violations
that are the subject of the tip and the
amount of information possessed by the
individual submitting the tip. We
estimate that it takes a complainant, on
average, 30 minutes to complete the
online complaint form. Based on an
estimate of 16,000 annual responses, we
estimate that the annual PRA burden for
the online complaint form is 8,000
hours. Although the completion time
will depend on the complexity of the
alleged violation and the amount of
information the whistleblower possesses
in support of the allegations, we
estimate that it takes a whistleblower,
on average, one and one-half hours to
complete and submit Form TCR. We
estimate that it may take individuals
more time to complete Form TCR than
the online complaint form because a
person will have to hand write in the
required information and spend time
mailing and faxing the form to the
Commission. Based on the receipt of an
average of approximately 700 annual
Form TCR submissions for the past
three fiscal years, the Commission
estimates that the annual reporting
burden of Form TCR is 1,050 hours.
We estimate that it takes a
whistleblower, on average, one hour to
complete Form WB–APP, though the
completion time depends largely on the
complexity of the alleged violation and
the amount of information the
whistleblower possesses in support of
his or her application for an award.
Based on the receipt of an average of
approximately 110 annual properly filed
Form WB–APP submissions for the past
As described in more detail above, to
provide the Commission with the ability
to make timely corresponding
adjustments to the paper Form TCR
when it determines to modify the online
portal, the Commission proposes to
modify Exchange Act Rule 21F–8 277 by
adding a new paragraph (d)(1) providing
that the Commission will periodically
designate a Form TCR (Tip, Complaint,
or Referral) that individuals seeking be
eligible for an award through the
process identified in § 240.21F–9(a)(2)
shall use. In addition, to provide the
Commission with greater administrative
flexibility to modify Form WB–APP, the
Commission proposes to modify
Exchange Act Rule 21F–8 by adding a
new paragraph (d)(2) providing that the
Commission will also periodically
designate a Form WB–APP for use by
individuals seeking to apply for an
award under either § 240.21F–10 or
§ 240.21F–11.
In connection with these proposed
amendments, we propose to reorganize
the OMB control numbers and
associated burden estimates for the
collections of information contained in
the Commission’s online portal, Form
TCR and Form WB–APP. Although the
online portal and Form TCR collect
substantially the same type of
information—information alleging
potential securities law violations—they
currently have separate OMB control
numbers. In addition, although Form
TCR and Form WB–APP collect
different types of information, the latter
of which collects information from
individuals applying for whistleblower
awards, these collections of information
are currently gathered pursuant to the
same OMB control number.
Pursuant to the proposed
reorganization, both the online portal
and Form TCR would fall under the
same OMB control number (No. 3235–
0672). The title for this collection of
information and the associated burden
estimate would be adjusted accordingly
to reflect the submission of relevant
information through both the online
portal and the paper Form TCR (see
Table 2 of section VI(C)). Form WB–APP
would this have its own OMB control
number (No. 3235–0686) and the
collection of information would be
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CFR 240.21F–8.
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C. Burden and Cost Estimates Related to
the Proposed Amendments
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six fiscal years,278 the Commission
estimates that the annual reporting
burden of Form WB–APP is 110 hours.
We do not believe that the proposed
amendments would increase the
professional costs associated with
preparing and submitting the affected
forms. Under the whistleblower rules,
an anonymous whistleblower who is
seeking an award is required, and a
whistleblower whose identity is known
may elect, to retain counsel to represent
the whistleblower in the whistleblower
program. We expect that in most
instances the whistleblower’s counsel
will complete, or assist in the
completion, of some or all of the
required forms on behalf of the
whistleblower. However, we expect that
in the vast majority of cases in which a
whistleblower is represented by
counsel, the whistleblower will enter
into a contingency fee arrangement with
counsel, providing that counsel be paid
for the representation through a fixed
percentage of any recovery by the
whistleblower under the program. Thus,
we expect most whistleblowers will not
incur any direct out of pocket expenses
for attorneys’ fees for the completion of
the affected forms.
We expect that a very small number
of whistleblowers (no more than 5%)
enter into hourly fee arrangements with
counsel.279 In those cases, a
whistleblower will incur direct
expenses for attorneys’ fees for the
completion of the required forms. To
estimate those expenses,280 we make the
following assumptions:
(i) The Commission will continue to
receive on average approximately 700
Forms TCR and 110 Forms WB–APP
annually;
(ii) Individuals will pay hourly fees to
counsel for the submission of
approximately 35 Forms TCR and 6
Forms WB–APP annually; 281
(iii) Counsel retained by
whistleblowers pursuant to an hourly
fee arrangement will charge on average
$400 per hour; 282 and
(iv) Counsel will bill on average: (i)
Three hours to complete a Form TCR,
and (ii) two hours to complete a Form
WB–APP.283
For purposes of the PRA, we estimate
that each year whistleblowers will incur
the following total amounts of attorneys’
fees in connection with completing
Forms TCR and WB–APP: (i) $42,000 284
for the reporting burden of Form TCR;
and (ii) $4,800 285 for the reporting
burden of Form WB–APP.
The tables below summarize the
burden and cost estimates associated
with the online portal and affected
forms both currently and after the
proposed reorganization of the relevant
control numbers:
TABLE 1 OF SECTION VI(C)—CURRENT BURDEN ESTIMATES
OMB control
No.
Title
‘‘Electronic Data Base Collection System—TCR’’ .......................................................................
‘‘Form TCR’’ and ‘‘Form WB–APP’’ .............................................................................................
3235–0672
3235–0686
Burden hours
8,000
1,160
Costs
$0
46,800
TABLE 2 OF SECTION VI(C)—REVISED BURDEN ESTIMATES UNDER THE PROPOSED REORGANIZATION
OMB control
No.
Title
‘‘Tips, Complaints and Referrals (TCR)’’ .....................................................................................
‘‘Form WB–APP’’ .........................................................................................................................
3235–0672
3235–0686
Burden hours
9,050
110
Costs
$42,000
4,800
As explained above, the statute
provides that the Commission must
maintain the confidentiality of the
identity of each whistleblower, subject
to certain exceptions. Section 21F(h)(2)
states that, except as expressly provided
the Commission and any officer or
employee of the Commission shall not
disclose any information, including
information provided by a
whistleblower to the Commission,
which could reasonably be expected to
reveal the identity of a whistleblower,
except in accordance with the
provisions of section 552a of title 5,
United States Code, unless and until
required to be disclosed to a defendant
or respondent in connection with a
public proceeding instituted by the
Commission or certain specific entities
listed in paragraph (C) of Section
21F(h)(2).
Further, as discussed above, we are
proposing Rule 21F–2(c) to require that
an individual who is seeking this
heightened confidentiality protection
must submit his or her information to
the Commission using the online portal
or by completing a hardcopy Form TCR.
If an individual fails to do so, then
278 This figure does not include Form WB–APP
submissions which were facially deficient,
subsequently withdrawn or submitted by
individuals who have been barred by the
Commission from participation in the
whistleblower program.
279 This estimate is based, in part, on the
Commission’s belief that most whistleblowers likely
will not retain counsel on an hourly basis to assist
them in preparing the forms.
280 Individuals submitting their information in
writing who are not seeking to be eligible for the
Commission’s whistleblower award program are not
required to retain an attorney, even if they choose
to submit their information anonymously, and thus
are not required to use either the Form TCR or the
Form WB–APP. As such, for purposes of calculating
the estimated costs of the forms, we have only
included the potential costs associated with
completing and submitting the Form TCR and Form
WB–APP.
281 These amounts are based on the assumption,
as noted above, that no more than 5% of all
whistleblowers will be represented by counsel
pursuant to an hourly fee arrangement.
282 The Commission uses this hourly billing rate
for purposes of estimating the professional costs of
other rules, and we believe it is an appropriate
billing rate to use in this context, recognizing that
some attorneys representing whistleblowers may
not be securities lawyers and may charge different
average hourly rates.
283 The Commission expects that counsel will
likely charge a whistleblower for additional time
required to gather from the whistleblower or other
sources relevant information needed to complete
Forms TCR and WB–APP. Accordingly, we estimate
that, on average, counsel will bill a whistleblower
three hours for the completion of Form TCR and
two hours for completion of Form WB–APP (even
though we estimate that a whistleblower acting
without counsel will be able to complete the Form
TCR in 1.5 hours and Form WB–APP in 1 hour).
284 35 × ($400 × 3) = $42,000.
285 6 × ($400 × 2) = $4,800.
D. Mandatory Collection of Information
A whistleblower is required to
complete either a hardcopy Form TCR
or submit his or her information
electronically through the online portal
and to complete Form WB–APP to
qualify for a whistleblower award.
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under our proposed rule he or she
would be ineligible for the heightened
confidentiality protections.
Section 21F(h)(2) also permits the
Commission to share information
received from whistleblowers with
certain domestic and foreign regulatory
and law enforcement agencies.
However, the statute requires the
domestic entities to maintain such
information as confidential, and
requires foreign entities to maintain
such information in accordance with
such assurances of confidentiality as the
Commission deems appropriate.
In addition, Section 21F(d)(2)
provides that a whistleblower may
submit information to the Commission
anonymously and still be eligible for an
award, so long as the whistleblower is
represented by counsel. However, the
statute provides that a whistleblower
must disclose his or her identity prior
to receiving payment of an award.
F. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B),
we request comment in order to:
• Evaluate whether the proposed
collections of information are necessary
for the proper performance of the
functions of the Commission, including
whether the information will have
practical utility;
• Evaluate the accuracy of our
assumptions and estimates of the
burden of the proposed collection of
information;
• Determine whether there are ways
to enhance the quality, utility, and
clarity of the information to be
collected;
• Evaluate whether there are ways to
minimize the burden of the collection of
information on those who respond,
including through the use of automated
collection techniques or other forms of
information technology; and
• Evaluate whether the proposed
amendments would have any effects on
any other collection of information not
previously identified in this section.
Any member of the public may direct
to us any comments concerning the
accuracy of these burden estimates and
any suggestions for reducing these
burdens. Persons submitting comments
on the collection of information
requirements should direct their
comments to the Office of Management
and Budget, Attention: Desk Officer for
the U.S. Securities and Exchange
Commission, Office of Information and
Regulatory Affairs, Washington, DC
20503, and send a copy to, Brent J.
Fields, Secretary, U.S. Securities and
Exchange Commission, 100 F Street NE,
Washington, DC 20549, with reference
to File No. S7–08–17. Requests for
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materials submitted to OMB by the
Commission with regard to the
collection of information should be in
writing, refer to File No. S7–08–17 and
be submitted to the U.S. Securities and
Exchange Commission, Office of FOIA
Services, 100 F Street NE, Washington,
DC 20549. OMB is required to make a
decision concerning the collection of
information between 30 and 60 days
after publication of this proposed rule.
Consequently, a comment to OMB is
best assured of having its full effect if
the OMB receives it within 30 days of
publication.
VII. Economic Analysis
The Commission is sensitive to the
economic consequences of its rules,
including the benefits, costs, and effects
on efficiency, competition, and capital
formation. Section 23(a)(2) 286 of the
Securities Exchange Act of 1934
requires the Commission, in
promulgating rules under the Exchange
Act, to consider the impact that any rule
may have on competition and prohibits
the Commission from adopting any rule
that would impose a burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act. Further,
Section 3(f) of the Exchange Act 287
requires the Commission, when
engaging in rulemaking where it is
required to consider or determine
whether an action is necessary or
appropriate in the public interest, to
consider, in addition to the protection of
investors, whether the action will
promote efficiency, competition, and
capital formation.
The economic analysis in this part
focuses on the proposed amendments to
Rule 21F–2, Rule 21F–4(d)(3), Rule
21F–6, Rule 21F–3(b)(4), Rule 21F–8,
newly proposed Exchange Act Rule
21F–18, and the proposed interpretive
guidance. As discussed above, the
proposed amendments to Rule 21F–2
are in response to the Supreme Court’s
recent decision in Digital Realty Trust,
Inc. v. Somers; 288 proposed Rule 21F–
4(d)(3) would allow awards based on
non-prosecution agreements or deferred
prosecution agreements entered into by
the DOJ or state attorneys general, and
settlement agreements entered into by
the Commission; proposed Rule 21F–
3(b)(4) would eliminate potential double
recovery under the current definition of
related action; proposed amendments to
Rule 21F–6 would allow additional
considerations for small and large
awards; proposed Rule 21F–8(e) would
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286 15
U.S.C. 78w(a)(2).
U.S.C. 78c(f).
288 138 S. Ct. 767 (2018).
287 15
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provide authority to bar applicants from
future award applications in certain
limited situations; proposed Rule 21F–
18 would provide a streamlined award
consideration process for certain limited
categories of non-meritorious
applications; and the proposed
interpretive guidance would help clarify
the meaning of ‘‘independent analysis’’
as that term is defined in Exchange Act
Rule 21F–4 and utilized in the
definition of ‘‘original information.’’
The other proposed amendments in this
release are either procedural, technical
in nature or codify existing practice, and
therefore we do not expect them to
significantly impact efficiency,
competition, and capital formation.
Many of the benefits and costs
discussed below are difficult to
quantify. For example, although the
analysis that follows details the specific
ways in which we expect the proposed
rules to affect whistleblower incentives,
we lack the data necessary to estimate
the magnitudes of these effects
separately or in the aggregate. Similarly,
we do not know the precise cost—in
terms of awards paid out of the IPF—of
defining a non-prosecution agreement or
deferred prosecution agreement entered
into by the DOJ or a state attorney
general or a settlement agreement
entered into by the Commission as an
‘‘administrative action’’ and any money
required to be paid thereunder as a
‘‘monetary sanction.’’ Moreover, we do
not know the funds that might be
conserved in the IPF by the avoidance
of double recoveries for the same action
and the avoidance of large awards that
are not reasonably necessary to achieve
the goals of the whistleblower program.
Therefore, while we have attempted to
quantify economic impacts where
possible, much of the discussion of
economic effects is qualitative in nature.
A. Economic Baseline
To examine the potential economic
effects of the amendments, we employ
as a baseline the comprehensive set of
rules that the Commission adopted in
May 2011 to implement the
whistleblower program. The baseline
also includes: The Supreme Court’s
recent decision in Digital Realty Trust,
Inc. v. Somers; a description of
whistleblower programs administered
by other regulatory authorities; and a
discussion of the IPF (including its
replenishment mechanism), summary
statistics that describe the distribution
of awards paid by the whistleblower
program under the 2011 rules, and
estimates of wages and salaries obtained
from a number of surveys.
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1. Whistleblower Programs
In this section, we discuss a nonexhaustive list of the various federal and
state whistleblower programs that are
currently administered by other
agencies or authorities and which might
be implicated by the proposed rules.289
The CFTC administers its own
whistleblower award program under
section 23 of the Commodity Exchange
Act.290 Both the SEC and CFTC
programs were established by the DoddFrank Act and are substantially
identical in their substantive terms.291
As discussed above, since the adoption
of our whistleblower program rules, two
states have adopted their own
whistleblower award programs in
connection with state securities-law
enforcement actions. In 2011, Utah
established a whistleblower-award
scheme to provide rewards of up to
thirty percent of the money collected in
state securities-law enforcement
actions.292 The following year, Indiana
enacted a whistleblower award scheme
to provide rewards up to ten percent of
the money collected in a state securitieslaw enforcement action.293 We are also
aware that DOJ might pursue lawenforcement actions that potentially
implicate both the Commission’s
whistleblower program and the
whistleblower award program that the
IRS administers.294 Further, Congress in
2015 established a new motor-vehiclesafety whistleblower award program
that allows employees or contractors of
a motor-vehicle manufacturer, parts
supplier, or dealership who report
serious violations of federal vehicle-
safety laws to obtain awards of 10
percent to 30 percent of any monetary
sanction over $1 million that the
Federal Government collects based on
that information.295
2. Supreme Court Decision in Digital
Realty Trust, Inc. v. Somers
The Supreme Court recently held in
Digital Realty Trust, Inc. v. Somers,296
that Section 21F(h)(1) of the Exchange
Act unambiguously requires that a
person report a possible securities law
violation to the Commission in order to
qualify for employment retaliation
protection, and that the Commission’s
rule interpreting the retaliation
protections in Section 21F more broadly
was therefore not entitled to
deference.297 The Court reasoned that
the definition of ‘‘whistleblower’’
codified in Section 21F(a)(6) requires
such a report to the Commission as a
prerequisite for employment retaliation
protection, and that this definition is
‘‘clear and conclusive.’’ 298 The Court
also determined that strict application
of the definition’s reporting requirement
in the employment anti-retaliation
context is consistent with Congress’s
core objective of ‘‘ ‘motivat[ing] people
who know of securities law violations to
tell the SEC.’ ’’ 299
3. IPF and Awards Issued by the SEC
Whistleblower Program
In Section 21F(g) of the Exchange Act,
Congress established the IPF to provide
funding for the payment of
whistleblower awards. The IPF has a
permanent indefinite appropriation that
is available without further
appropriation or fiscal year limitation
for the purpose of funding awards to
whistleblowers (and to fund the Office
of Inspector General’s Employee
Suggestion Program).300
As of the end of Fiscal Year 2017, the
balance of the IPF was approximately
$322 million.301 Whenever the reserve
in the IPF falls below $300 million,
Section 21F(g)(3) requires the
Commission to replenish the IPF.302 In
May 2018, the balance of the IPF for the
first time fell below the $300 million
threshold that triggers the statutory
replenishment mechanism; 303 this
occurred when the Commission paid
$83 million—its largest payout to date
on an enforcement action—to three
individuals.
From August 2012 through April
2018, the Commission’s whistleblower
program issued 50 whistleblower
awards to 55 individuals (including, as
explained above, individuals who acted
as joint whistleblowers).304 Table 1 of
Section VII(A)(3) reports the frequency
distribution of these awards by award
size. Forty-two of these awards were
less than $5 million, of which thirty-one
awards were less than $2 million. Of the
remaining eight awards, five were at
least $5 million but less than $30
million and three exceeded $30
million.305 According to the Office of
the Whistleblower, of the 55 individuals
who have received awards,
approximately 10 percent are highranking corporate executives at
companies of varying sizes and a large
majority of these executives received
awards that were under $5 million.
TABLE 1 OF SECTION VII(A)(3)—FREQUENCY DISTRIBUTION OF WHISTLEBLOWER AWARDS
[We use awards issued to whistleblowers by the SEC Whistleblower Program from August 2012 through April 2018. Number is the number of
awards that fall within an award size category. Percent is the number of awards in an award size category as a fraction of the total number
of awards.]
Award size category
Number
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Less than $2 million .................................................................................................................................................
At least $2 million but less than $5 million ..............................................................................................................
289 Although we discuss several federal
whistleblower programs that we believe are more
likely to be implicated by the proposed rules, there
are other federal whistleblower programs that are
not discussed but which could potentially be
implicated.
290 7 U.S.C. 26.
291 See Securities Whistleblower Incentives and
Protections Proposing Release, 75 FR at 70490.
292 Utah Code Annotated 61–1–101 et seq.
293 Indiana Code 23–19–7–1 et seq.
294 26 U.S.C. 7623.
295 49 U.S.C. 30172 (enacted by Section 24352 of
the Fixing America’s Surface Transportation Act of
2015 (FAST Act), Pub. L. 114–94).
296 138 S. Ct. 767 (2018).
297 Id. at 781–82.
298 Id.
299 Id. at 777 (quoting S. Rep. No. 111–176, at 38
(2010)).
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300 However, the Commission is required to
request and obtain an annual apportionment from
the Office of Management and Budget to use these
funds. See SEC Agency Financial Report for 2017
(Nov. 14, 2017), available at https://www.sec.gov/
files/sec-2017-agency-financial-report.pdf.
301 See Section II.D, above.
302 See 15 U.S.C. 78u–6(g)(3).
303 For a description of the IPF’s statutory
replenishment mechanisms, see Section 21F(g)(3) of
the Exchange Act, 15 U.S.C. 78u–6(g)(3).
304 These totals treat as single awards several
cases where whistleblowers’ original information
led to multiple covered actions that were processed
together in one award order recognizing the total
contributions of the whistleblower. Similarly,
consistent with the approach proposed above
governing cases where we grant an award for both
a Commission enforcement action and a related
action by another agency based on the same
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Percent
31
11
62
22
information provided by the whistleblower (see 17
CFR 240.21F–3(b)), we consider covered-action
awards together with their corresponding relatedaction awards as single whistleblower awards.
305 One of the three awards that exceeded $30
million was issued in September 2014 in a
Commission action and related actions. See Order
Determining Whistleblower Award Claim, Exchange
Act Release No. 34–73174 (Sept. 22, 2014),
available at https://www.sec.gov/rules/other/2014/
34-73174.pdf. The other two awards were issued in
March 2018 for $49 and $33 million, respectively,
to three individuals (two of whom were acting as
joint whistleblowers). See Order Determining
Whistleblower Award Claim, Exchange Act Release
No. 34–82897 (March 19, 2018), available at,
https://www.sec.gov/rules/other/2018/34-82897.pdf.
We note that these three awards alone reduced the
balance of the IPF by approximately $112 million.
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TABLE 1 OF SECTION VII(A)(3)—FREQUENCY DISTRIBUTION OF WHISTLEBLOWER AWARDS—Continued
[We use awards issued to whistleblowers by the SEC Whistleblower Program from August 2012 through April 2018. Number is the number of
awards that fall within an award size category. Percent is the number of awards in an award size category as a fraction of the total number
of awards.]
Award size category
At
At
At
At
At
least
least
least
least
least
Number
Percent
$5 million but less than $10 million ............................................................................................................
$10 million but less than $15 million ..........................................................................................................
$15 million but less than $20 million ..........................................................................................................
$20 million but less than $30 million ..........................................................................................................
$30 million ..................................................................................................................................................
2
1
1
1
3
4
2
2
2
6
Total ..................................................................................................................................................................
50
100
In addition to summarizing the
distribution of awards to
whistleblowers, we also summarize the
distribution of awards by enforcement
action. For each enforcement action, we
identify all whistleblowers who receive
an award for that enforcement action
and sum up their awards to arrive at the
aggregate award for that enforcement
action. Table 2 of section VII(A)(3)
indicates that between August 2012 and
April 2018, there were 45 enforcement
actions for which the Commission
issued whistleblower awards.306 Thirtyseven enforcement actions had awards
of less than $5 million, of which twenty-
eight awards were less than $2 million.
Of the remaining eight actions, six had
aggregate awards of at least $5 million
but less than $30 million and only two
had an aggregate award that exceeded
$30 million.
TABLE 2 OF SECTION VII(A)(3)—FREQUENCY DISTRIBUTION OF AWARDS BY ENFORCEMENT ACTION
[We use awards issued to whistleblowers by the SEC Whistleblower Program from August 2012 through April 2018. For each enforcement action, we identify all whistleblowers who receive an award for that enforcement action and sum up their awards to arrive at the aggregate
award for that enforcement action. We then plot the distribution of aggregate awards by enforcement action. Number is the number of aggregate awards that fall within an award size category. Percent is the number of aggregate awards in an award size category as a fraction of
the total number of awards.]
Award size category
Number
Percent
Less than $2 million .................................................................................................................................................
At least $2 million but less than $5 million ..............................................................................................................
At least $5 million but less than $10 million ............................................................................................................
At least $10 million but less than $15 million ..........................................................................................................
At least $15 million but less than $20 million ..........................................................................................................
At least $20 million but less than $30 million ..........................................................................................................
At least $30 million ..................................................................................................................................................
28
9
3
2
0
1
2
62
20
7
4
0
2
4
Total ..................................................................................................................................................................
45
100
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4. Estimates of Current Annual Wages
Prospective whistleblowers’ annual
wages are potentially relevant to various
aspects of the proposed rules. Table 3 of
Section VII(A)(3) presents, by industry,
the pre-tax annual wages per employee
(‘‘average wages’’) estimated by the
Bureau of Labor Statistics for 2016.307
Average wages vary from a low of
$22,445 in the leisure and hospitality
industry to a high of $98,458 in the
information industry.
These averages do not reflect the
substantial degree of within-industry
wage variation. For example, more
senior employees involved in financial
activities likely earn higher wages than
their more junior counterparts, and staff
that supply significant expertise may
earn more than those that do not. A
survey of 2,499 firms registered with the
Commission and included in the Russell
3000 Index as of May 2017 revealed
median total CEO compensation at
approximately $3.8 million.308 A study
of the 200 largest pay packages awarded
to CEOs at U.S. public companies in
fiscal year 2016 revealed that the
median pay for this group of CEOs was
$16.9 million, while the average pay
was $19.7 million.309 A 2017 report
documenting survey responses from 377
financial professionals included average
base salaries for senior-level financial
executives of between $133,859 and
$342,154, depending on title and
whether companies are public or
private.310 Notwithstanding the
foregoing, we think it is relevant to
observe that although the compensation
of CEOs and other senior ranking
officials provides insights into the wage
variation within a particular industry, in
our experience a company’s workforce
typically consists of far more lower-
306 As noted, we aggregate related actions with
their corresponding Commission actions for
purposes of this analysis.
307 Wage data used for calculating the annual
wages per employee are derived from the quarterly
tax reports submitted to state government workforce
agencies by employers, subject to state
unemployment insurance laws, and from Federal
agencies subject to the Unemployment
Compensation for Federal Employees program.
Further information is available at https://
www.bls.gov/cew/cewbultn16.htm.
308 See ‘‘CEO and Executive Compensation
Practices: 2017 Edition’’ (available at: https://
www.conference-board.org/publications/
publicationdetail.cfm?publicationid=7584).
309 See ‘‘Equilar 200: Ranking the Largest CEO
Pay Packages’’ (available at https://
www.equilar.com/reports/49-equilar-200-rankingthe-largest-ceo-pay-pakages-2017.html) for a
summary of the study and its findings. See ‘‘Equilar
200: The Largest CEO Pay Packages of 2016’’
(available at https://www.equilar.com/reports/49table-equilar-200-ranking-largest-ceo-pay-
packages.html) for the ranking of CEOs by their pay
packages. See ‘‘How the C.E.O. Rankings Were
Done’’ (https://www.nytimes.com/2017/05/26/
business/how-the-ceo-rankings-were-done.html) for
a discussion of the study’s methodology.
310 See ‘‘Financial Executive Compensation
Report 2017’’ Grant Thornton, 2017 (available at:
https://www.grantthornton.com/∼/media/contentpage-files/tax/pdfs/FEI-financial-exec-comp-survey2017/FEI-survey-results-2017.ashx).
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paying positions, relatively speaking.
For example, the average base salary for
securities professionals working in New
York City in 2015 (the last year for
which such data is available) was
$388,000 and the nominal value of the
average annual bonus for that year was
approximately $146,200.
TABLE 3 OF SECTION VII(A)(3)—2016 ANNUAL WAGES PER EMPLOYEE BY INDUSTRY
[This table presents the pre-tax annual wages per employee at privately owned establishments aggregated by industry as reported by the Bureau
of Labor Statistics]
Annual wages
per employee
($)
Industry
Natural resources and mining .............................................................................................................................................................
Construction .........................................................................................................................................................................................
Manufacturing ......................................................................................................................................................................................
Trade, transportation, and utilities .......................................................................................................................................................
Information ...........................................................................................................................................................................................
Financial activities ................................................................................................................................................................................
Professional and business services ....................................................................................................................................................
Education and health services ............................................................................................................................................................
Leisure and hospitality .........................................................................................................................................................................
Other services ......................................................................................................................................................................................
Unclassified ..........................................................................................................................................................................................
B. Analysis of Benefits, Costs, and
Economic Effects of the Proposed Rules
In this section, we discuss the
potential benefits, costs, and economic
effects of the proposed rules. For
proposed Rule 21F–6(c), we also discuss
alternatives to the approach
contemplated in the proposed rule as
well as reasons for rejecting those
alternatives.
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1. Proposed Amendments to Rule
21F–2
Most of the proposed amendments to
Rule 21F–2 are either in response to the
Supreme Court’s decision in Digital
Realty Trust, Inc. v. Somers 311 or do not
differ substantively from current rules
and practice. Two proposed
amendments, however, do represent
changes relative to the economic
baseline, and their potential benefits,
costs, and economic effects are
discussed here. Proposed Rule 21F–
2(a)(1) would extend employment
retaliation protection only to an
individual who provides the
Commission with information ‘‘in
writing.’’ Proposed Rule 21F–2(d)(1)(iii)
would, among other things, limit
employment retaliation protection to
lawful acts that ‘‘relate to the subject
matter’’ of the person’s submission to
the Commission under proposed Rule
21F–2(a).
a. Proposed Rule 21F–2(a)(1)
Proposed Rule 21F–2(a)(1) could
potentially impose a burden on those
individuals who want to report
potential violations to the Commission
and wish to qualify as a
‘‘whistleblower’’ solely for employment
311 138
S. Ct. 767 (2018).
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retaliation protection. Such individuals
might decide not to report to the
Commission if the reporting burden is
perceived to outweigh the benefits
associated with retaliation protection.
Our experience to date in the awards
context suggests that requiring that
information be provided in writing
presents, at most, a minimal burden to
individuals who want to report
violations to the Commission. To the
extent that this experience is
informative about the reporting burden
in the retaliation context, such a burden
would also be, at most, minimal.
Accordingly, the proposed rule would
likely not have an adverse impact on the
whistleblowing incentives of those
individuals who wish to qualify as a
‘‘whistleblower’’ solely for employment
retaliation protection.
We have considered several
alternatives to the approach
contemplated in proposed Rule 21F–
2(a). The first alternative is to require
information to be provided to the
Commission through the online portal at
https://www.sec.gov, or mailing or faxing
a Form TCR to the Office of the
Whistleblower. The second alternative
is to permit additional manners of
reporting for anti-retaliation purposes
(such as placing a telephone call).
We rejected the first alternative
because it would, in our view,
unnecessarily limit the means of
reporting to the Commission by
individuals who are merely seeking
employment retaliation protection.
Limiting whistleblower status to those
individuals who follow the first
alternative could result in the
unnecessary exclusion of individuals
from the benefits of Section 21F(h)(2)’s
employment retaliation protections
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$56,115
58,647
64,870
44,764
98,458
88,841
69,992
48,058
22,445
35,921
51,837
without providing any accompanying
benefit to the Commission,
whistleblowers, or the public generally.
Further, requiring individuals to report
‘‘in writing’’ could potentially impose
lower costs (including time spent) on
these individuals than the costs they
would have borne under the first
alternative.
We rejected the second alternative
because of potential costs that could
arise if the Commission’s staff became
ensnared by disputes in private antiretaliation lawsuits over what
information was provided to whom on
what dates. Requiring that any reporting
be done in writing obviates these
potential costs.
b. Proposed Rule 21F–2(d)(1)(iii)
Proposed Rule 21F–2(d)(1)(iii) helps
avoid the result that an individual could
qualify just once as a whistleblower and
then receive lifetime protection for any
non-Commission reports described in
clause (iii) of Section 21F(h)(1)(A). For
individuals who want to make nonCommission reports about potential
violations to their employers and desire
employment retaliation protection for
such lawful acts, the proposed rule
could increase the incentives of these
individuals to instead report directly to
the Commission. These individuals
would only qualify for employment
retaliation protection if they report to
the Commission under the proposed
rule. Reporting to the Commission ‘‘in
writing’’ as contemplated under
proposed Rule 21F–2(a) could
potentially impose a burden on these
individuals. In light of the analysis of
proposed Rule 21F–2(a)(1) supra, we
believe that such a reporting burden
would, at most, be minimal and would
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likely not limit the reporting incentives
afforded by proposed Rule 21F–
2(d)(1)(iii).
2. Proposed Rule 21F–3(b)(4)
Proposed Rule 21F–3(b)(4) would
provide that a law-enforcement action
will not qualify as a related action if the
Commission determines that there is a
separate whistleblower award scheme
that more appropriately applies to the
enforcement action. Further, proposed
Rule 21F–3(b)(4) would provide that the
Commission will not make an award to
the whistleblower for the related action
if the whistleblower has already been
granted an award by the authority
responsible for administering the more
applicable whistleblower award
program. Further, under proposed Rule
21F–3(b)(4), if the whistleblower was
denied an award by the other award
program, the whistleblower would not
be permitted to readjudicate any issues
before the Commission that the
authority responsible for administering
the other whistleblower award program
resolved as part of the award denial.
The proposed rule would prevent a
whistleblower from adjudicating his or
her contributions in separate forums
and potentially obtaining two separate
awards on the same enforcement action.
While the existing rules preclude this
result when an action is applicable to
both the Commission’s whistleblower
program and the CFTC’s whistleblower
program,312 the existing rules do not
expressly preclude this result when the
non-SEC whistleblower program is
administered by an authority other than
the CFTC. Thus, the proposed rule
would help the Commission avoid
paying awards that are not reasonably
necessary in light of the whistleblower
program’s goals in cases where an action
is applicable to the Commission’s
whistleblower program and the
whistleblower program of an authority
other than the CFTC.
The proposed rule would likely not
have an adverse impact on the
incentives of individuals who may
report violations that result in
enforcement actions potentially
implicating both the Commission’s
whistleblower program and the
whistleblower program of another
authority other than the CFTC. As
discussed earlier in Section II(C), to
date, the Commission has never paid an
award on a matter where a second
whistleblower program also potentially
applied to the same matter, nor has the
Commission ever indicated that it
would do so. Given that the proposed
rule codifies the Commission’s current
practice, we believe that these potential
whistleblowers would have already
taken such current practice into account
when deliberating on whether to report.
3. Proposed Rule 21F–4(d)(3)
Proposed Rule 21F–4(d)(3) would
provide that, for purposes of making a
whistleblower award, a non-prosecution
agreement or deferred prosecution
agreement entered into by the DOJ or a
state attorney general in a criminal case,
or a settlement agreement entered into
by the Commission outside of the
context of a judicial or administrative
proceeding to address violations of the
securities laws will be deemed to be an
‘‘administrative action’’ and any money
required to be paid thereunder will be
deemed a ‘‘monetary sanction.’’ The
proposed rule will result in more
awards being paid from the IPF because
awards would be paid for nonprosecution and deferred prosecution
agreements entered into by the U.S.
Department of Justice or a state attorney
general as well as settlement agreements
entered into by the Commission in
addition to judicial or administrative
proceedings covered by the existing
rules. While potentially increasing
payouts from the IPF, the proposed rule
should enhance the incentives for
whistleblowers to come forward in a
timely manner to the extent that it
signals to prospective whistleblowers
that a wider array of enforcement
resolutions may result in awards.
4. Proposed Rule 21F–6(c)
Proposed Rule 21F–6(c) would
provide a mechanism for the
Commission to adjust upwards any
awards that would potentially be below
$2 million to a single whistleblower.
However, this new authority would
come with important limitations.
Specifically, the Commission will not
adjust an award upward if any of the
negative award factors that are
identified in Exchange Act Rule 21F–
6(b) 313 were found to be present with
respect to the whistleblower’s award
claim, or if the award claim triggers
Exchange Act Rule 21F–16 (concerning
awards to whistleblowers who engage in
culpable conduct).314
The proposed rule could enhance the
whistleblowing incentives of those
individuals who anticipate receiving
awards below $2 million and do not
expect to be subject to any of the above
conditions that would preclude an
application of the award enhancement
mechanism. The prospect of a larger
award could encourage these
313 17
312 See
17 CFR 240.21F–3(b)(3).
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314 17
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CFR 240.21F–6(b).
CFR 240.21F–16.
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individuals to report violations to the
Commission. By withholding the
upward adjustment if a whistleblower
unreasonably delayed reporting to the
Commission after learning the relevant
facts, the proposed rule could increase
whistleblowing incentives by
encouraging individuals to report
violations promptly and thereby
facilitate the Commission’s ability to
protect investors.
The proposed rule could have a
deterrent effect on potential violators
because these individuals understand
that they would lose the opportunity for
an award enhancement if they engage in
securities law violations and
subsequently act as whistleblowers of
those violations. Similarly, the proposed
rule could have a deterrent effect on
potential whistleblowers who
contemplated interfering with an
internal compliance and reporting
system by denying award enhancements
to such potential whistleblowers.
From a cost perspective, the proposed
rule could potentially result in larger
awards being paid from the IPF because
an award that would yield a potential
payout to a single whistleblower below
$2 million may be adjusted upward. As
indicated in Table 1 of Section
VII(A)(3), the Commission has granted
31 whistleblower awards (i.e., 62% of
awards) that were below $2 million. To
the extent that the distribution of past
awards provides a reasonable estimate
of the distribution of likely future
awards, smaller awards are likely in the
future, some of which could be subject
to the proposed rule.
5. Proposed Rule 21F–6(d)
a. Consideration of Proposed Rule
Proposed Rule 21F–6(d) would
provide a mechanism for the
Commission to conduct an enhanced
review of awards where the total
monetary sanctions collected in the
Commission or related actions would
equal at least $100 million and where
the potential payout to a single
whistleblower in connection with those
actions would exceed $30 million.
Where these two conditions are met, the
proposed rule would afford the
Commission the discretion to determine
if it is appropriate to adjust the award
downward. The goal of any downward
adjustment is to ensure that the likely
total award payout to the whistleblower
does not exceed an amount that the
Commission determines is appropriate
to achieve the program’s objectives of
rewarding meritorious whistleblowers
and sufficiently incentivizing future
whistleblowers. However, consistent
with the statutory mandate, in no event
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would the total amount awarded to all
whistleblowers in the aggregate be less
than 10 percent of the monetary
sanctions collected from the action.
Further, an application of the proposed
rule would not result in a reduction of
an award below $30 million. We believe
that the proposed rule could foster a
more efficient use of the IPF by reducing
the likelihood of awards that are
excessive in light of the whistleblower
program’s goals and the interests of
investors and the broad public interest.
As indicated in Table 1 of Section
VII(A)(3), we have granted three
whistleblower awards that exceeded $30
million. These three awards alone
reduced the balance of the IPF by
approximately $112 million. To the
extent that the distribution of past
awards provides a reasonable estimate
of the distribution of likely future
awards, large awards are likely in the
future, some of which could be subject
to the proposed rule. Absent the
proposed rule, the Commission may
find itself faced with the possibility of
paying out significantly large awards
that are in excess of the amounts
appropriate to advance the goals of the
whistleblower program, the interests of
investors and the broad public interest.
These awards could also substantially
diminish the IPF, requiring the
Commission to direct more funds to
replenish the IPF rather than directing
those funds to the United States
Treasury where they could be used for
other important public purposes.315
As whistleblowers consider their
reporting decisions, they weigh, among
other things, the expected size of the
award and the expected costs associated
with their whistleblowing. We
acknowledge that proposed paragraph
6(d) could shift the upper end of the
distribution of expected awards.
However, we recognize that realized
awards to date are typically
substantially smaller in magnitude. In
addition, according to the Office of the
Whistleblower, of the 55 individuals
who have received awards,
approximately 10 percent are highranking corporate executives at
companies of varying sizes and a large
majority of these executives received
awards that were under $5 million. This
indicates to us that, as a practical
matter, even those whistleblowers with
the most to lose in terms of potential
income have been willing to come
forward for a recovery below the
proposed $30 million floor. Thus, the
data available does not indicate that
proposed paragraph 6(d) would
315 See Section VII(A)(3) for a discussion of the
IPF and its replenishment mechanism.
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discourage whistleblowers from coming
forward.
Additional factors further support the
view that potential whistleblowers will
not be discouraged from coming forward
as a result of proposed paragraph 6(d).
As discussed earlier, $30 million would
be a floor, not a ceiling on large awards.
Rather, $30 million is the point above
which we would begin to consider
whether the likely award is consistent
with the program’s objectives; we may
choose not to reduce the award.
Further, the operation of proposed
paragraph 6(d) would likely affect only
a small subset of potential
whistleblowers. As discussed in Section
VII(A)(3) above, to date we have issued
50 whistleblower awards to 55
individuals (including, as explained
above, individuals who acted as joint
whistleblowers) and only three awards
(i.e., 6% of awards) have exceeded $30
million.316 To the extent that the
distribution of past awards provides a
reasonable estimate of the distribution
of likely future awards, and potential
whistleblowers do not systematically
over- or underestimate the size of
recoveries,317 only a minority of
potential whistleblowers would be
potentially affected by the proposed
rule.318
Additionally, our review of the
academic literature relevant to
whistleblower incentives indicates that
whistleblowers are often willing to
report notwithstanding the absence of
financial incentives. Non-monetary
incentives that can motivate individuals
to report include: (i) A desire to see
wrongdoers punished, (ii) an interest in
‘‘doing the right thing’’ for the sake of
investors or others who might be
harmed by the wrongdoing, or (iii) a
316 One award that exceeded $30 million was
issued in September 2014 in a Commission action
and related actions. See Order Determining
Whistleblower Award Claim, Exchange Act Release
No. 34–73174 (Sept. 22, 2014), available at https://
www.sec.gov/rules/other/2014/34-73174.pdf. The
second and third awards that exceeded $30 million
were issued in March 2018 in a Commission action.
See Order Determining Whistleblower Award Claim,
Exchange Act Release No. 34–82897 (March 19,
2018), available at https://www.sec.gov/rules/other/
2018/34-82897.pdf.
317 The proposed rule could affect a larger subset
of potential whistleblowers if potential
whistleblowers systematically overestimate the size
of the recovery; conversely, the proposed rule could
affect a smaller subset of potential whistleblowers
if potential whistleblowers systematically
underestimate the size of the recovery.
318 We acknowledge that there are other pending
awards that could exceed the $30 million floor. We
do not discuss those matters here because they have
not been finalized, but we note that such awards
would still constitute a relatively small proportion
of the overall future potential awards that the
Commission is likely to make.
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34739
desire to protect one’s own selfinterests.319
Moreover, even at the $30 million
floor that we are proposing, it appears
to us that a $30 million award could
yield a lump sum that, if invested in an
annuity, could generate an annual
return that is attractive in light of the
wage and salary data presented in
Section VII(A)(4).320 A number of nonmutually exclusive factors can
contribute to making the lump sum
smaller than the whistleblower award.
First, to the extent that the
whistleblower wishes to remain
anonymous through the course of an
investigation and resulting enforcement
action, that whistleblower must have an
attorney represent him or her in
connection with a submission of
information and claim for an award.321
The payment of attorney fees out of the
whistleblower award would likely
reduce the lump sum that could be
invested in an annuity. Second, if the
whistleblower award is awarded to two
or more individuals who acted together
as a joint whistleblower, then the award
would likely be divided among the
individual whistleblowers. Such a
division of the award among the
individual whistleblowers would
reduce the lump sum that each
individual could invest in an annuity.
To illustrate the annual income that a
whistleblower could potentially receive
by investing the lump sum residual
award that remains after accounting for
the factors discussed above, we
annuitize a range of possible lump sums
to generate different streams of
payments. Such payments could
potentially replace the stream of wage
payments that a whistleblower would
lose by leaving his or her employer.
Alternatively, if the whistleblower
experiences no change in his or her
employment situation, the payments
could be interpreted as additional
income.
In Table 4 in Section VII(B)(5)(a), we
report the annual income that could be
generated over twenty years by
319 See Anthony Heyes & Sandeep Kapur, An
Economic Model of Whistleblower Policy, 25 J. L.
Econ. & Org. 164–166 (2009) (providing a short
review of academic literature on sociology and
psychology and listing non-monetary motives for
whistleblowing); see also Aaron S. Kesselheim et
al., Whistle-Blower’s Experience in Fraud Litigation
Against Pharmaceutical Companies, 362 New
England J. Med. 1834, 1835 (2010) (listing selfpreservation, justice, integrity, altruism or public
safety as primary motivations for qui tam lawsuits).
See Securities Whistleblower Incentives and
Protections, Exchange Act Release No. 64545, 76 FR
at 34360, note 453 (June 13, 2011).
320 We note that the annual incomes presented
below are pre-tax numbers, as are the wage and
salary data presented in Section VII(A)(4).
321 See 17 CFR 240.21F–7(b)(1).
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investing a lump sum upfront payment
in a twenty-year annuity.322 To capture
the potential effects associated with
taxes, attorneys’ fees, and award
division among individuals acting as a
joint whistleblower, we calculate
different annual incomes by varying the
upfront payment from $5 million to $50
million in $5 million increments, and
by varying the rate of return on the
annuity from 2% per annum to 10% per
annum in 2% increments. As an
example, investing an upfront amount
of $20 million in the annuity at 2% per
annum generates an annual income of
approximately $1.2 million.323 Table 4
indicates that increasing the upfront
payment while holding the rate of
return constant increases the annual
income; in addition, increasing the rate
of return while holding the upfront
payment constant also increases the
annual income. To illustrate the effects
of lengthening the duration of income
generation, we repeat the calculations
assuming a lump sum investment in a
forty-year annuity (Table 5 in Section
VII(B)(5)(a)), a sixty-year annuity (Table
6 in Section VII(B)(5)(a)), and a
perpetuity 324 (Table 7 in Section
VII(B)(5)(a)). In Tables 5, 6, and 7, we
continue to calculate different annual
incomes by varying the upfront payment
from $5 million to $50 million in $5
million increments, and by varying the
rate of return on the annuity from 2%
per annum to 10% per annum in 2%
increments.325
TABLE 4 IN SECTION VII(B)(5)(a)—ANNUAL INCOME GENERATED BY A TWENTY YEAR ANNUITY
[We assume that a lump sum upfront payment is invested in a twenty-year annuity to generate annual income over twenty years. We calculate
different annual incomes by varying the upfront payment from $5 million to $50 million in $5 million increments, and by varying the rate of return on the annuity from 2% per annum to 10% per annum in 2% increments]
Rate of return
Upfront payment
2%
$5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
50,000,000
...........................................................................
...........................................................................
...........................................................................
...........................................................................
...........................................................................
...........................................................................
...........................................................................
...........................................................................
...........................................................................
...........................................................................
4%
$303,530
607,060
910,590
1,214,120
1,517,650
1,821,180
2,124,710
2,428,240
2,731,770
3,035,300
6%
$363,588
727,176
1,090,765
1,454,353
1,817,941
2,181,529
2,545,117
2,908,706
3,272,294
3,635,882
$429,859
859,717
1,289,576
1,719,435
2,149,293
2,579,152
3,009,010
3,438,869
3,868,728
4,298,586
8%
$501,864
1,003,728
1,505,592
2,007,456
2,509,320
3,011,184
3,513,048
4,014,912
4,516,776
5,018,640
10%
$579,013
1,158,026
1,737,039
2,316,052
2,895,065
3,474,078
4,053,091
4,632,104
5,211,117
5,790,130
TABLE 5 IN SECTION VII(B)(5)(a)—ANNUAL INCOME GENERATED BY A FORTY YEAR ANNUITY
[We assume that a lump sum upfront payment is invested in a forty-year annuity to generate annual income over forty years. We calculate different annual incomes by varying the upfront payment from $5 million to $50 million in $5 million increments, and by varying the rate of return on the annuity from 2% per annum to 10% per annum in 2% increments]
Rate of return
Upfront payment
2%
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$5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
50,000,000
...........................................................................
...........................................................................
...........................................................................
...........................................................................
...........................................................................
...........................................................................
...........................................................................
...........................................................................
...........................................................................
...........................................................................
322 The other assumptions used in the
calculations are: A fixed income is paid at the end
of every month; monthly compounding of interest;
there is no residual income at the end of the
annuity; the annuity has 12 × 20 = 240 monthly
payments; income is pre-tax; annual income is 12
multiplied by the monthly income generated by the
annuity (e.g., for an upfront payment of $20 million
and a 2% rate of return per annum, the annuity
generates a monthly income of $101,176.67.
Multiplying $101,176.67 by 12 yields the
$1,214,120 figure reported in the table.) These
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4%
$181,695
363,391
545,086
726,782
908,477
1,090,172
1,271,868
1,453,563
1,635,258
1,816,954
$250,763
501,526
752,289
1,003,052
1,253,815
1,504,578
1,755,342
2,006,105
2,256,868
2,507,631
assumptions notwithstanding, we note that only a
portion of the fixed income generated by a
purchased commercial annuity is taxable under IRS
rules. See Internal Revenue Service Publication 939,
General Rule for Pensions and Annuities available
at https://www.irs.gov/pub/irs-pdf/p939.pdf.
323 Id.
324 A perpetuity is a stream of fixed, periodic
payments that go on indefinitely.
325 The other assumptions used in Table 6–8 are:
A fixed income is paid at the end of every month;
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6%
$330,128
660,256
990,385
1,320,513
1,650,641
1,980,769
2,310,897
2,641,025
2,971,154
3,301,282
8%
$417,187
834,374
1,251,561
1,668,748
2,085,935
2,503,122
2,920,309
3,337,496
3,754,683
4,171,870
10%
$509,488
1,018,975
1,528,463
2,037,950
2,547,438
3,056,925
3,566,413
4,075,900
4,585,388
5,094,875
monthly compounding of interest; there is no
residual income at the end of the annuity; the
annuity has monthly payments; income is pre-tax;
annual income is 12 multiplied by the monthly
income generated by the annuity. These
assumptions notwithstanding, we note that only a
portion of the fixed income generated by a
purchased commercial annuity is taxable under IRS
rules. See Internal Revenue Service Publication 939,
General Rule for Pensions and Annuities available
at https://www.irs.gov/pub/irs-pdf/p939.pdf.
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34741
TABLE 6 IN SECTION VII(B)(5)(a)—ANNUAL INCOME GENERATED BY A SIXTY YEAR ANNUITY
[We assume that a lump sum upfront payment is invested in a sixty-year annuity to generate annual income over sixty years. We calculate different annual incomes by varying the upfront payment from $5 million to $50 million in $5 million increments, and by varying the rate of return on the annuity from 2% per annum to 10% per annum in 2% increments]
Rate of return
Upfront payment
2%
5,000,000 .............................................................................
10,000,000 ...........................................................................
15,000,000 ...........................................................................
20,000,000 ...........................................................................
25,000,000 ...........................................................................
30,000,000 ...........................................................................
35,000,000 ...........................................................................
40,000,000 ...........................................................................
45,000,000 ...........................................................................
50,000,000 ...........................................................................
4%
$143,163
286,326
429,489
572,652
715,815
858,978
1,002,141
1,145,304
1,288,466
1,431,629
6%
$220,042
440,083
660,125
880,166
1,100,208
1,320,249
1,540,291
1,760,332
1,980,374
2,200,415
$308,505
617,011
925,516
1,234,022
1,542,527
1,851,033
2,159,538
2,468,044
2,776,549
3,085,055
8%
$403,373
806,746
1,210,119
1,613,492
2,016,865
2,420,238
2,823,611
3,226,984
3,630,357
4,033,730
10%
$501,274
1,002,548
1,503,821
2,005,095
2,506,369
3,007,643
3,508,917
4,010,191
4,511,464
5,012,738
TABLE 7 IN SECTION VII(B)(5)(a)—ANNUAL INCOME GENERATED FROM A PERPETUITY
[We assume that a lump sum upfront payment is invested in a perpetuity to generate annual income in perpetuity. We calculate different annual
incomes by varying the upfront payment from $5 million to $50 million in $5 million increments, and by varying the rate of return on the annuity from 2% per annum to 10% per annum in 2% increments]
Rate of return
Upfront payment
2%
5,000,000 .............................................................................
10,000,000 ...........................................................................
15,000,000 ...........................................................................
20,000,000 ...........................................................................
25,000,000 ...........................................................................
30,000,000 ...........................................................................
35,000,000 ...........................................................................
40,000,000 ...........................................................................
45,000,000 ...........................................................................
50,000,000 ...........................................................................
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The annuity figures in Tables 4
through 7 in Section VII(B)(5)(a) are
consistent with our belief that the
proposed $30 million floor should not
negatively impact the overall pecuniary
incentives faced by most potential
whistleblowers considering whether to
come forward to the Commission to
report potential misconduct.326
In addition, to the extent that the
costs associated with whistleblowing
include social stigma and a possible job
loss for the whistleblower, the
employment anti-retaliation protections
and confidentiality requirements
(including, critically, the ability of
whistleblowers to remain anonymous)
can serve to reduce the costs associated
with whistleblowing to some extent.327
326 It is possible that the proposed rule could
introduce uncertainty or ambiguity about the likely
size of the whistleblower award, which may affect
the incentives of individuals to report potential
violations. See e.g., Itzhak Gilboa & David
Schmeidler, Maxmin Expected Utility with NonUnique Prior, 18 J. Mathematical Econ. 141 (1989)
(proposing an axiomatic foundation of a decision
rule based on maximizing expected minimum
payoff of a strategy). See also infra note 330.
327 See 15 U.S.C. 78u–6(d) and (h); 17 CFR
240.21F–9(c).
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4%
$100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
$200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
Indeed, our experience to date has been
that many company insiders have
submitted their tips to the Commission
anonymously.
b. Estimating Incentives To Provide
Information
The Commission has sought to
provide a quantitative estimate of the
incentives to provide information via
the whistleblower program. We
acknowledge that a rigorous approach to
analyzing the potential impact of the
proposed changes on whistleblower
incentives, would be to compare the
number of whistleblower tips that
resulted in successful enforcement
actions before and after the
establishment of the Commission’s
whistleblower program. Such a
comparison could elucidate changes in
behavior due to the whistleblower
program, including potentially those
due to the provision of monetary
awards. However, data on
whistleblower tips that led to successful
enforcement actions prior to the
establishment of the Commission’s
whistleblower program is not available,
thus rendering such a comparison
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6%
$300,000
600,000
900,000
1,200,000
1,500,000
1,800,000
2,100,000
2,400,000
2,700,000
3,000,000
8%
$400,000
800,000
1,200,000
1,600,000
2,000,000
2,400,000
2,800,000
3,200,000
3,600,000
4,000,000
10%
$500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
infeasible. Even absent such data, the
Commission has engaged in a limited
comparison of a pre-2011 awards
program with the current whistleblower
program. Section 21A(e) of the
Exchange Act, added in 1988,
authorized the Commission to award a
bounty to a person who provides
information leading to the recovery of a
civil penalty from an insider trader,
from a person who tipped information
to an insider traders, or from a person
who directly or indirectly controlled an
insider trader. Section 21A(e) also
established a limit on bounties of 10%
of the amount recovered.
A March 2010 report by the SEC’s
Office of the Inspector General
documented bounty applications and
awards under the Commission’s bounty
program since its inception in 1989.328
Between 1989 and 2010, the program
had paid a total of $159,537 to five
claimants in seven insider trading cases,
at the statutory limit of 10% of
328 See U.S. Securities and Exchange
Commission, Office of the Inspector General,
Assessment of the SEC’s Bounty Program, March 29,
2010.
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recoveries.329 In contrast, since the
inception of the whistleblower program
in 2011 the Commission has ordered a
single whistleblower payout related to
an insider trading case, and that payout
was less than $500,000.
Any comparison of the bounty
program and the whistleblower program
is limited by substantial differences
between the bounty program and the
whistleblower program in scope and
process. Although the number of
payments in insider trading cases has
declined under the current program, the
larger scope and breadth of the
whistleblower program has resulted in a
substantial increase in the number and
magnitude of payments overall.
Differences in measures of
whistleblower incentives before and
after the establishment of the
whistleblower program likely will
reflect a combination of changes to
Commission processes that occurred
simultaneously or very close in time,
limiting our ability to identify the
impact of any single change on
whistleblower incentives. For example,
while the 2011 rules implemented an
increase in the maximum award
percentage to 30% from the previous
10% maximum, they also established a
10% minimum award percentage.330
Further, the 2011 rules also increased
the scope of potential claims to include
actions beyond insider trading and
established an Office of the
Whistleblower, actions that likely
served to increase the prominence of the
whistleblower program relative to the
bounty program that preceded it. The
implementing rules also set forth an
updated process for the submission and
evaluation of claims following
criticisms that the bounty program was
opaque and difficult for whistleblowers
to navigate. Further, the statutory
changes to the Exchange Act that
established the whistleblower program
also included explicit whistleblower
protections. As we acknowledge that
these factors limit the degree to which
we can assess the potential impact on
incentives of the proposed changes to
the whistleblower program based on the
transition from the bounty program to
the whistleblower program, the
Commission welcomes comment on
changes to other whistleblower
programs or alternative analytical
methods that would permit more
329 Id
at 5.
330 See S. Rep. No. 111–176 at 110–12 (2010) at
111 (noting the majority view that ‘‘the critical
component of the Whistleblower Program is the
minimum that any individual could look towards
in determining whether to take the enormous risk
of blowing the whistle in calling attention to
fraud’’).
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precise identification and quantification
of the proposal’s potential impacts.
c. Alternatives
The Commission has considered
several alternatives to proposed Rule
21F–6(d). We discuss each of those
alternatives below.
The first alternative is to set the floor
at $5 million, and the second alternative
is to set the floor at $50 million.
We believe that a $5 million floor
could potentially apply to awards that
are not the focus of the proposed
amendment. As indicated in Table 1 of
Section VII(A)(3), approximately 16% of
past whistleblower awards are at least
$5 million. To the extent that the
distribution of past awards is a
reasonable estimate of the distribution
of likely future awards, this floor could
result in the enhanced review of awards
that are aligned with the program’s
goals. Because the focus of the proposed
rule is on large awards that are not
reasonably necessary to achieve the
program’s goals and that could
disproportionately diminish the IPF, the
$5 million floor is not preferable to the
proposed approach.
A $50 million floor is not preferable
to the proposed approach. We have not
granted awards that are at least $50
million. Even if there were some cases
where the proposed rule might be
triggered, our discretion to make a
meaningful and appropriate downward
adjustment would be substantially
reduced. Thus, the $50 million floor
would likely not support the proposed
rule’s goal of ensuring that the likely
total award payout to the whistleblower
does not exceed an amount that the
Commission determines is appropriate
to further the goals of the whistleblower
program. Because of this concern, we
believe that the $50 million floor is not
preferable to the proposed approach.
6. Proposed Rule 21F–8(e)
Under proposed Rule 21F–8(e), if an
applicant submits three or more award
applications that the Commission finds
to be frivolous or lacking a colorable
connection between the tip and the
Commission action, the Commission
may permanently bar the applicant from
submitting any additional award
applications (either for Commission
actions or related actions) and the
Commission would not consider any
other award applications that the
claimant has submitted or may seek to
submit in the future.
The proposed rule would expressly
provide, however, that the Office of the
Whistleblower shall as a preliminary
matter advise any claimant of the
Office’s assessment that the claimant’s
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award application for a Commission
action is frivolous or lacking a colorable
connection between the tip and the
action for which the applicant has
sought an award. If the applicant
withdraws the application at that time,
it would not be considered by the
Commission in determining whether to
exercise its authority to impose a bar.
In addition, the proposed rule would
generally codify the Commission’s
current practice with respect to
applicants who violate Rule 21F–
8(c)(7).331 That rule provides that an
applicant shall be ineligible for an
award if, in his or her whistleblower
submission, his or her other dealings
with the Commission, or his or her
dealings with another authority in
connection with a related action, the
individual knowingly and willfully
makes any false, fictitious, or fraudulent
statement or representation, or uses any
false writing or document knowing that
it contains any false, fictitious, or
fraudulent statement or entry with
intent to mislead or otherwise hinder
the Commission or another authority.
The Commission has issued two final
orders that have permanently barred the
applicants from submitting any further
whistleblower award applications based
on violations of Rule 21F–8(c)(7). The
proposed rule would clarify and codify
the Commission’s authority to bar
applicants by providing that if the
Commission finds that a claimant has
violated paragraph (c)(7) of Rule 21F–8,
the Commission may permanently bar
the applicant from making any future
award applications, and shall decline to
process any other award applications
that the claimant has already submitted.
The proposed rule could increase the
speed and efficiency of the award
determination process.332 By
permanently barring applicants that
make three or more frivolous award
applications, as well as not processing
any future applications from these
barred applicants, the proposed rule
could help free up staff resources that
could then be devoted to processing
potentially meritorious award
applications. In the Commission’s
experience to date, two individuals have
submitted approximately 24% of all
award applications in connection with
Commission covered actions. All but
one of the applications submitted by
331 17
CFR 240.21F–8(c)(7).
acknowledge that this potential benefit
rests, in part, on the premise that the applicants
covered by the proposed rule would likely not
change their behavior with respect to the overall
award determination process. For example, an
applicant that has been found to submit multiple
frivolous award applications in the past would
likely continue to do so in the future.
332 We
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these two individuals have been found
by the Office of the Whistleblower to be
entirely frivolous. To the extent that the
agency’s historical experience is
informative about the likely behavior of
applicants that submit multiple
frivolous award applications in the
future, the proposed rule would have a
meaningful impact in terms of freeing
up staff resources that could then be
devoted to processing potentially
meritorious award applications. This
redeployment of staff resources in turn
could expedite the processing of
potentially meritorious award
applications. More broadly, staff
resources that are freed up as a result of
the proposed rule could be devoted to
other work related to the whistleblower
program including, but not limited to,
the posting of Notices of Covered
Actions, determining potential payouts,
and manning the whistleblower
hotline.333 Further, as discussed in
Section II(F), above, we have found that
the repeat applicants that would be
covered by proposed Rule 21F–8(e)(1)
can significantly delay the processing of
meritorious award applications and the
eventual payment of awards by utilizing
the procedural opportunities to object to
an award. By barring such applicants,
the proposed rule could reduce the
delay in processing meritorious award
applications and the eventual payment
of awards.
The abovementioned benefit would
also potentially arise from the proposed
rule’s deterrent effect to the extent that
the proposed rule discourages
individuals from submitting frivolous
award applications because they
recognize that the submission of
frivolous award applications may
ultimately permanently disqualify them
from obtaining a whistleblower award.
Overall, the proposed rule could
increase the speed and efficiency of the
award determination process by
expediting the processing of potentially
meritorious award applications, as well
as the payment of awards. To the extent
that faster award application processing
and award payment motivate
333 To help promote the SEC’s whistleblower
program and establish a line of communication
with the public, the Office of the Whistleblower
operates a hotline where whistleblowers, their
attorneys, or other members of the public with
questions about the program may call to speak to
the Office of the Whistleblower’s staff. During FY
2017, the Office of the Whistleblower returned
nearly 3,200 calls from members of the public,
exceeding the number of calls returned the prior
fiscal year. Since May 2011 when the hotline was
established, the Office of the Whistleblower has
returned over 18,600 calls from the public. See SEC
Whistleblower Program 2017 Annual Report to
Congress (Nov. 15, 2017), available at https://
www.sec.gov/files/sec-2017-annual-reportwhistleblower-program.pdf.
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whistleblowing, individuals are more
likely to come forward and report
potential violations as a result of the
proposed rule.
The proposed rule could help protect
investors and the public from potential
harm (particularly where the
misconduct concerns ongoing
Commission actions) that may flow from
the provision of false, fictitious, or
fraudulent statement or representation,
or false writing or document with intent
of misleading or otherwise hindering
the Commission or another authority.
This benefit would potentially arise
because the proposed rule would grant
the Commission discretion to
permanently bar applicants that violated
Rule 21F–8(c)(7) from submitting any
future award applications.334 This
benefit would also potentially arise from
the proposed rule’s deterrent effect to
the extent that the proposed rule
discourages individuals from engaging
in the conduct prohibited by Rule 21F–
8(c)(7), particularly when they are
submitting their award applications,
because they should recognize that it
may not only lead to a denial of their
current award claim but may also
permanently disqualify them from
obtaining a whistleblower award.
Individuals who are permanently
barred under the proposed rule might
subsequently have information about
possible securities law violations that
could be provided to the Commission.
To the extent that these barred
individuals’ decision to report is based
solely on the pecuniary motivation of
obtaining a whistleblowing award, these
individuals may decide not to report
even if they have information about
possible violations because they can no
longer obtain a whistleblower award as
a result of the proposed rule. We believe
that this potential cost of the proposed
rule could be mitigated by a number of
factors.
First, the number of individuals who
may be permanently barred by the
proposed rule for submitting three or
more frivolous applications and who
might subsequently have information
about possible securities law violations
that could be provided to the
Commission is likely to be a small
fraction of the population of award
applicants. Based on our experience to
date, we have found that individuals
that submitted three or more award
applications make up 6.6% of the
population of covered action award
applicants. This estimate constitutes an
upper bound of the actual fraction of
applicants that submitted three or more
334 See
supra text accompanying notes 184–189,
331.
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34743
frivolous applications and subsequently
had information about possible
securities law violations that could be
provided to the Commission.335 To the
extent that our estimate is informative of
the likely fraction of award applicants
who may be permanently barred by the
proposed rule, the potential cost
associated with the proposed rule
would be limited.
Second, as discussed above, the
Commission has issued two final orders
that have permanently barred the
applicants from submitting any further
whistleblower award applications based
on violations of Rule 21F–8(c)(7). The
proposed rule would clarify and codify
the Commission’s authority to bar
applicants by providing that if the
Commission finds that a claimant has
violated paragraph (c)(7) of Rule 21F–8,
the Commission may permanently bar
the applicant from making any future
award applications, and shall decline to
process any other award applications
that the claimant has already submitted.
Given that the proposed rule codifies
the Commission’s current practice, we
believe that individuals who have been
barred on the basis of Rule 21F–8(c)(7)
would have already taken such current
practice into account when deliberating
on whether to report, even in the
absence of the proposed rule.
Finally, as discussed in the adopting
release that accompanied the original
whistleblower rules, whistleblowing is
an individual decision that is generally
guided by a complex mix of pecuniary
elements and non-pecuniary
elements.336 Individuals that are
permanently barred from applying for
whistleblower awards may still come
forward and provide information about
possible violations if they are
sufficiently motivated by non-pecuniary
elements.337
We also acknowledge the possibility
that individuals who have made fewer
than three frivolous award
applications 338 might be discouraged
from reporting possible securities law
violations because their next award
application could be determined to be
frivolous, which would increase the
likelihood of a permanent bar from
making any future award applications.
335 To date, four applicants submitted three or
more applications that were determined to be
potentially meritorious and not frivolous.
336 See Securities Whistleblower Incentives and
Protections Adopting Release, 76 FR at 34355, note
433.
337 Id. An example of a non-pecuniary element is
a sense of ‘‘doing the right thing.’’
338 These individuals include those who are
considering reporting a possible violation for the
first time, those who have made one frivolous
claim, and those who have made two frivolous
claims.
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We believe that this potential cost of the
proposed rule could be mitigated by a
number of factors.
First, as discussed above, the
proposed rule would expressly provide
that the Office of the Whistleblower
shall as a preliminary matter advise any
claimant of the Office’s assessment that
the claimant’s award application for a
Commission action is frivolous or
lacking a colorable connection between
the tip and the action for which the
applicant has sought an award. If the
applicant withdraws the application at
that time, it would not be considered by
the Commission in determining whether
to exercise its authority to impose a bar.
We believe that this aspect of the
proposed rule should alleviate the
concerns among those individuals who
have made fewer than three frivolous
award applications that their next award
application could be determined to be
frivolous, which would increase the
likelihood of a permanent bar from
making any future award applications.
Second, the claims adjudication
processes that are specified in Rule
21F–10 and Rule 21F–11 afford a
whistleblower the opportunity to
demonstrate the meritorious nature of
her claim should her claim be
preliminarily denied on the grounds of
being frivolous. Thus, the claims
adjudication processes should help
ensure that potentially meritorious
claims will be considered as such by the
Commission. Third, as discussed above,
whistleblowing is an individual
decision that is generally guided by a
complex mix of pecuniary elements and
non-pecuniary elements.339 Individuals
who are concerned about being
permanently barred from applying for
whistleblower awards may still come
forward and provide information about
possible violations if they are
sufficiently motivated by non-pecuniary
elements.340
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7. Proposed Rule 21F–18
Proposed Rule 21F–18(a) provides
that the Office of the Whistleblower may
use a summary disposition process to
deny any award application that falls
within any of the following categories:
(1) Untimely award application; 341 (2)
noncompliance with the requirements
of Rule 21F–9,342 which concerns the
manner for submitting a tip to qualify as
339 See Securities Whistleblower Incentives and
Protections Adopting Release, 76 FR at 34355, note
433.
340 Id. An example of a non-pecuniary element is
a sense of ‘‘doing the right thing.’’
341 The time periods for submitting an award
application are specified in Rule 21F–10(b) and
Rule 21F–11(b). See 17 CFR 240.21F–10(b) & 11(b).
342 17 CFR 240.21F–9.
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a whistleblower and to be eligible for an
award; (3) claimant’s information was
never provided to or used by the staff
handling the covered action or the
underlying investigation (or
examination), and those staff members
otherwise had no contact with the
claimant; (4) noncompliance with Rule
21F–8(b),343 which requires an
applicant to submit supplemental
information that the Commission may
require 344 and to enter into a
confidentiality agreement; or (5) failure
to specify in the award application the
submission that the claimant made
pursuant to Rule 21F–9(a) 345 upon
which the claim to an award is based.
In addition, the proposed rule would
provide that other defective or nonmeritorious award applications could be
subject to the summary disposition
process under appropriate
circumstances. Proposed Rule 21F–18(b)
specifies the procedures that shall apply
to any award application designated for
summary disposition.
The proposed rule could reduce the
diversion of staff resources and time
that it might otherwise take to process
claims that may be rejected on
straightforward grounds. An award
application that is processed by the
proposed summary disposition process
would not require the Claims Review
Staff to review the record, issue a
Preliminary Determination, consider
any written response filed by the
claimant, or issue the Proposed Final
Determination; these functions would
be assumed by the Office of the
Whistleblower. The summary
disposition process incorporates two
other modifications. First, the 30-day
period for replying to a Preliminary
Summary Disposition is shorter than the
time period for replying to a Preliminary
Determination provided for in Rules
21F–10(e)(2) 346 and 21F–11(e)(2).347
This shorter period should be sufficient
for a claimant to reply and that it is
appropriate given that the matters
subject to summary disposition should
be relatively straightforward. Second, a
claimant would not have the
opportunity to receive the full
administrative record upon which the
Preliminary Denial was based. Instead,
the Office of the Whistleblower would
(to the extent appropriate given the
nature of the denial) provide the
claimant with a staff declaration that
CFR 240.21F–8(b).
authority to require additional
information of an applicant is delegated to the
Office of the Whistleblower. See 17 CFR 240.21F–
10(d).
345 17 CFR 240.21F–9(a).
346 17 CFR 240.21F–10(e)(2).
347 17 CFR 240.21F–11(e)(2).
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344 The
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contains the pertinent facts upon which
the Preliminary Summary Disposition is
based. This modification from the
record-review process specified in Rules
21F–10 and 21F–11 should still afford
any claimant a sufficient opportunity to
provide a meaningful reply to a
Preliminary Summary Disposition. This
should eliminate the delay that can arise
when a claimant does not expeditiously
request the record (which in turn delays
the start of the 60-day period for a
claimant to submit a response to a
preliminary determination); elimination
of these delays should help further
expedite the summary adjudication
process that we are proposing.
As with Proposed Rule 21F–8(e), staff
resources that are freed up as a result of
the proposed rule could be devoted to
processing potentially meritorious
award applications. This, in turn, could
expedite the processing of potentially
meritorious award applications. To the
extent that faster processing of
potentially meritorious award
applications motivates whistleblowing,
individuals may be more likely to come
forward and report potential violations
as a result of the proposed rule. Further,
as noted in the discussion of proposed
Rule 21F–8(e) above, staff resources that
are freed up as a result of the proposed
rule could be devoted to other work
related to the whistleblower program.
We acknowledge the potential that
certain aspects of the proposed rule
might make it more difficult for
whistleblowers to respond to the denial
of award applications. The proposed
rule might reduce the whistleblowing
incentives of those individuals who
consider the ease of responding to
award application denials when
deciding whether to come forward and
report potential violations.
However, certain factors limit this
potential for increased difficulties for
whistleblowers. First, given that the
matters subject to summary disposition
should be relatively straightforward, we
believe that the 30-day period for
replying to a Preliminary Summary
Disposition and the provision of a staff
declaration (where applicable) should
afford any claimant a sufficient
opportunity to provide a meaningful
reply to a Preliminary Summary
Disposition. Second, as discussed
above, the proposed rule may only be
used to deny award applications that
fall under certain restricted categories.
Third, as discussed in the adopting
release that accompanied the original
whistleblower rules, whistleblowing is
an individual decision that is generally
guided by a complex mix of pecuniary
elements and non-pecuniary
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elements.348 Individuals who may be
concerned with the ease of responding
to award application denials may still
come forward and provide information
about possible violations if they are
sufficiently motivated by non-pecuniary
elements.
8. Proposed Interpretive Guidance
Regarding the Meaning and Application
of ‘‘independent analysis’’ as Defined in
Exchange Act Rule 21F–4(b)(3) 349
The proposed interpretive guidance
helps to clarify the meaning of
‘‘independent analysis’’ as that term is
defined in Exchange Act Rule 21F–4
and utilized in the definition of
‘‘original information.’’ As discussed
earlier, a whistleblower’s examination
and evaluation of publicly available
information does not constitute
‘‘analysis’’ if the facts disclosed in the
public materials on which the
whistleblower relies and in other
publicly available information are
sufficient to raise an inference of the
possible violations alleged in the
whistleblower’s tip. In order for a
whistleblower to be credited with
‘‘analysis,’’ the whistleblower’s
examination and evaluation should
contribute ‘‘significant independent
information’’ that ‘‘bridges the gap’’
between the publicly available
information and the possible securities
violations. Assuming that a
whistleblower’s submission meets the
threshold requirement that it constitutes
‘‘independent analysis,’’ for the
whistleblower to be eligible for an
award the ‘‘information that . . . is
derived from the . . . [whistleblower’s]
analysis’’ must also be of such high
quality that it leads to a successful
enforcement action.
The interpretive guidance could
potentially reduce the whistleblowing
incentives of those individuals who
wish to satisfy the ‘‘independent
analysis’’ prong of the ‘‘original
information’’ requirement by examining
publicly available information and
providing observations that do not go
beyond the information itself and
reasonable inferences to be drawn
therefrom. In light of the interpretive
guidance, these individuals may decide
not to provide such public information
knowing that such information would
not be credited as ‘‘independent
analysis’’ and therefore not eligible for
a whistleblower award. To the extent
that the provision of public information
improves Commission enforcement or
348 See Securities Whistleblower Incentives and
Protections Adopting Release, 76 FR at 34355, note
433.
349 17 CFR 240.21F–4(b)(3).
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otherwise provides a benefit, any
potential reduction in such provision
would be a cost associated with the
interpretive guidance. Nevertheless,
individuals who are aware that public
information would not be credited with
‘‘independent analysis’’ may still come
forward and provide public information
to the Commission if they are
sufficiently motivated by non-pecuniary
elements.
The interpretive guidance could
increase the whistleblowing incentives
of those individuals who possess
‘‘significant independent information’’
that ‘‘bridges the gap’’ between the
publicly available information (and
reasonable inferences therefrom) and
the conclusion that possible securities
violations are indicated, but may decide
against reporting to the Commission
because they do not fully understand
the meaning of ‘‘independent analysis’’
in the absence of the interpretive
guidance. To the extent that these
individuals come forward and report
such significant independent
information to the Commission in light
of the interpretive guidance, the
quantity and quality of reported
information might increase, which in
turn might improve the Commission’s
ability to enforce Federal securities
laws, detect violations and deter
potential future violations. Further, the
clarification afforded by the interpretive
guidance might also reduce the number
of award applications that are made
solely on the basis of the provision of
public information and do not meet the
‘‘independent analysis’’ threshold. To
the extent that the number of such
claims declines as a result of the
interpretive guidance, staff resources
could be freed up and devoted to
processing potentially meritorious
award applications and other work
related to the whistleblower program as
discussed earlier.350
C. Effects of the Proposed Rules on
Efficiency, Competition, and Capital
Formation
As discussed earlier, the Commission
is sensitive to the economic
consequences of its rules, including the
benefits, costs, and effects on efficiency,
competition, and capital formation. The
Commission believes that the proposed
amendments will make incremental
changes to its whistleblower program.
Thus, the Commission does not
anticipate the effects on efficiency,
competition, and capital formation to be
significant.
The proposed rules could have a
positive indirect impact on investment
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supra Sections VII(B)(6) and VII(B)(7).
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34745
efficiency and capital formation by
increasing the incentives of potential
whistleblowers to provide information
on possible violations.351 Providing
such information could increase the
effectiveness of the Commission’s
enforcement activities More effective
enforcement could lead to earlier
detection of violations and increased
deterrence of potential future violations,
which should assist in a more efficient
allocation of investment funds. Serious
securities frauds, for example, can cause
inefficiencies in the economy by
diverting investment funds from more
legitimate, productive uses.352
Additionally, to the extent that the
proposed rules increase deterrence of
potential future violations, investors’
trust in the securities markets would
also increase. This increased investor
trust will promote lower capital costs as
more investment funds enter the market,
and as investors generally demand a
lower risk premium due to a reduced
likelihood of securities fraud.353 This,
too, should promote the efficient
allocation of capital formation.
At the same time, some proposed
rules could reduce whistleblowing
incentives in certain cases, although any
such reduction in whistleblowing
incentives—to the extent that it
occurs—is justified in light of the
positive indirect impact on investment
efficiency and capital formation
discussed earlier. Proposed Rule 21F–
6(d) could reduce the whistleblowing
incentives of those potential
whistleblowers who anticipate receiving
awards in excess of $30 million and
make their reporting decision by trading
off the expected size of the award
against the expected costs associated
with whistleblowing.354 Proposed Rule
21F–8(e) might reduce the
whistleblowing incentives of (i) those
individuals who are permanently barred
under the proposed rule from
submitting award applications and (ii)
351 See supra Section VII(B) for a discussion of
how proposed Rules 21F–2(d)(1)(iii), 21F–4(d)(3),
21F–6(c), 21F–8(e), 21F–18, and the interpretive
guidance could increase whistleblowing incentives.
352 See Securities Whistleblower Incentives and
Protections Adopting Release, 76 FR at 34362.
353 See id. note 466, which explains the link
between investor trust in the fairness of the market
and capital cost (‘‘If investors fear theft, fraud,
manipulation, insider trading, or conflicted
investment advice, their trust in the markets will be
low, both in the primary market for issuance or in
the secondary market for trading. This would
increase the cost of raising capital, which would
impair capital formation—in the sense that it will
be less than it would or should be if rules against
such abuses were in effect and properly enforced
and obeyed.’’). See also Ko, K. Jeremy, ‘‘Economics
Note: Investor Confidence’’, October 2017, available
at https://www.sec.gov/files/investor_confidence_
noteOct2017.pdf.
354 See supra SectionVII(B)(4).
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those individuals who have made fewer
than three frivolous award applications.
Proposed Rule 21F–18 might reduce the
whistleblowing incentives of those
individuals who consider the ease of
responding to award application denials
when deciding whether to come forward
and report potential violations. The
interpretive guidance might reduce the
whistleblowing incentives of those
individuals who wish to rely on the
provision of solely public information to
satisfy the ‘‘independent analysis’’
prong of the ‘‘original information’’
requirement for a whistleblower award.
These potential reductions in
whistleblowing incentives may be
limited for reasons discussed earlier.355
Further, we reiterate our belief that any
such reduction in whistleblowing
incentives—to the extent that is
occurs—is justified in light of the
positive impact on investment
efficiency and capital formation
discussed earlier.
The proposed rules that provide the
Commission with additional
considerations for awards may have
opposite, albeit indirect, impacts on
investment efficiency and capital
formation by potentially altering the
level of monetary incentives that
whistleblower would expect at different
recovery levels. On one hand, proposed
Rule 21F–6(d) could reduce the
whistleblowing incentives of those
individuals who anticipate receiving
awards in excess of $30 million by
reducing their anticipated award to an
amount of $30 million or greater; on the
other hand proposed Rule 21F–6(c)
could enhance the whistleblowing
incentives of those individuals who
anticipate receiving awards below $2
million by increasing their anticipated
award to an amount of up to $2 million.
The proposed rules could also
improve other forms of efficiency.
Proposed Rule 21F–3(b)(4) and
proposed Rule 21F–6(d) could foster a
more efficient use of the IPF by avoiding
awards that are not reasonably
necessary in light of the whistleblower
program’s goals and the interests of
investors and the broad public interest.
Further, certain proposed rules could
promote efficiency in the processing of
award applications. By permanently
barring applicants that make frivolous
or fraudulent award applications,
proposed Rule 21F–8(e) could help free
up staff resources that could be used to
expedite the processing of potentially
meritorious award applications as well
as the payment of awards. Staff
resources that are freed up as a result of
proposed Rule 21F–18 could also
expedite the processing of potentially
meritorious award applications. As
discussed in Sections VII(B)(6) and
VII(B)(7) above, to the extent that faster
award application processing and award
payment motivate whistleblowing,
individuals are more likely to come
forward and report potential violations
as a result of proposed Rule 21F–8(e)
and proposed Rule 21F–18. To the
extent that the proposed rules promote
the timely reporting of possible
violations by increasing whistleblowing
incentives and prevent the provision of
false, fictitious, or fraudulent statement
or representation, or a false writing or
document with intent of misleading or
otherwise hindering the Commission or
another authority,356 the efficiency in
detecting violations would be enhanced
in the sense that violations could be
detected sooner, reducing losses
associated with the misuse of resources.
Greater efficiency in detecting violations
could also speed up the public
disclosure of such violations to
securities markets. Price efficiency
could be improved if earlier public
disclosure of violations speeds up the
incorporation of such news into security
prices.
Similar to the effects on capital
formation, the effects of the proposed
rules on competition would be indirect,
and would flow from their effects on
whistleblowing incentives. To the
extent that the proposed rules increase
the likelihood of detecting misconduct
by increasing whistleblowing
incentives, the proposed rules could
reduce the unfair competitive
advantages that some companies can
achieve by engaging in undetected
violations.357 Conversely, to the extent
that the proposed rules decrease the
likelihood of detecting misconduct by
reducing whistleblowing incentives, the
proposed rules could increase the unfair
competitive advantages that some
companies can achieve by engaging in
undetected violations.
Request for Comment
The Commission seeks commenters’
views on all aspects of its economic
analysis of the proposed amendments.
In particular, the Commission asks
commenters to consider the following
questions:
1. Are there costs and benefits
associated with the proposed
amendments that the Commission has
not identified? If so, please identify
them and if possible, offer ways of
estimating these costs and benefits.
356 See
supra Section VII(B)(6).
357 See 76 FR at 34362.
355 See
supra Sections VII(B)(4), VII(B)(6),
VII(B)(7), and VII(B)(8).
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2. Do, and if so at what point, awards
become unreasonably large in light of
the goals of the whistleblower program?
Please explain and provide details.
3. Are there effects on efficiency,
competition, and capital formation
stemming from the proposed
amendments that the Commission has
not identified? If so, please identify
them and explain how the identified
effects result from one or more
amendments.
4. How will lowering award amounts
based on dollar figures impact the
incentives of whistleblowers to provide
the Commission with information on
misconduct? Will potential
whistleblowers view the $30 million
floor as a cap? Why or why not?
5. Are there data sources or data sets
that can help the Commission refine its
estimates of the lost wages earned by
whistleblowers from their previous
jobs? Besides lost wages, are there other
ways to determine the effectiveness of
whistleblower awards?
6. Are there alternatives to the
proposed rules that the Commission has
not identified? If so, please identify and
describe them.
IX. Small Business Regulatory
Enforcement Fairness Act
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996 (‘‘SBREFA’’),358 the Commission
solicits data to determine whether the
proposed rule amendments constitute a
‘‘major’’ rule. Under SBREFA, a rule is
considered ‘‘major’’ where, if adopted, it
results or is likely to result in:
• An annual effect on the economy of
$100 million or more (either in the form
of an increase or a decrease);
• A major increase in costs or prices
for consumers or individual industries;
or
• Significant adverse effects on
competition, investment, or innovation.
Commenters should provide
empirical data on (a) the potential
annual effect on the economy; (b) any
increase in costs or prices for consumers
or individual industries; and (c) any
potential effect on competition,
investment or innovation.
X. Regulatory Flexibility Act
Certification
Section 603(a) of the Regulatory
Flexibility Act 359 requires the
Commission to undertake an initial
regulatory flexibility analysis of the
proposed rules unless the Commission
certifies that the proposed rules, if
358 Public Law 104–121, tit. II, 110 Stat 857
(1996).
359 5 U.S.C. 603(a).
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adopted, would not have a significant
economic impact on a substantial
number of small entities.360
Small entity is defined in 5 U.S.C.
601(6) to mean ‘‘small business,’’ ‘‘small
organization,’’ and ‘‘small governmental
jurisdiction’’ as defined in 5 U.S.C.
601(3)–(5). The definition of ‘‘small
entity’’ does not include individuals.
The proposed rules apply only to an
individual, or individuals acting jointly,
who provide information to the
Commission relating to the violation of
the securities laws. Companies and
other entities are not eligible to
participate in the whistleblower
program as whistleblowers.
Consequently, the persons that would
be subject to the proposed rule are not
‘‘small entities’’ for purposes of the
Regulatory Flexibility Act.
For the reasons stated above, the
Commission certifies, pursuant to 5
U.S.C. 605(b) of the Regulatory
Flexibility Act, that the proposed rules
would not have a significant economic
impact on a substantial number of small
entities.
Solicitation of Comments: We
encourage the submission of comments
with respect to any aspect of this
Regulatory Flexibility Act Certification.
To the extent that commenters believe
that the proposed rules might have a
covered impact, we ask they describe
the nature of any impact and provide
empirical data supporting the extent of
the impact. We will place any such
comments in the same public file as
comments on the proposed amendments
themselves.
XI. Statutory Basis
The Commission proposes the rule
amendments, as well as the removal of
references to various forms, contained
in this document under the authority set
forth in Sections 3(b), 21F, and 23(a) of
the Exchange Act.
List of Subjects in 17 CFR Parts 240 and
249
Securities, Whistleblowing.
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Text of the Proposed Amendments
For the reasons set out in the
preamble, title 17, chapter II of the Code
of Federal Regulations is proposed to be
amended as follows:
PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
1. The authority citation for part 240
continues to read in part as follows:
■
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
360 5
U.S.C. 605(b).
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77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f,
78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m,
78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q,
78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm,
80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–
4, 80b–11, 7201 et seq.; and 8302; 7 U.S.C.
2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; and Pub. L. 111–203, 939A, 124 Stat.
1887 (2010); and secs. 503 and 602, Pub. L.
112–106, 126 Stat. 326 (2012), unless
otherwise noted.
*
*
*
*
*
Section 240.21F is also issued under Pub.
L. 111–203, § 922(a), 124 Stat. 1841 (2010).
*
*
*
*
*
2. Section 240.21F–2 is revised to read
as follows:
■
§ 240.21F–2 Whistleblower status, award
eligibility, and confidentiality and retaliation
protections.
(a) Whistleblower status. (1) You are a
whistleblower for purposes of Section
21F of the Exchange Act (15 U.S.C. 78u–
6) as of the time that, alone or jointly
with others, you provide the
Commission with information in writing
that relates to a possible violation of the
federal securities laws (including any
law, rule, or regulation subject to the
jurisdiction of the Commission) that has
occurred, is ongoing, or is about to
occur.
(2) A whistleblower must be an
individual. A company or other entity is
not eligible to be a whistleblower.
(b) Award eligibility. To be eligible for
an award under Section 21F(b) of the
Exchange Act (15 U.S.C. 78u–6(b))
based on any information you provide
that relates to a possible violation of the
federal securities laws, you must
comply with the procedures and the
conditions described in §§ 240.21F–4,
240.21F–8, and 240.21F–9. You should
carefully review those rules before you
submit any information that you may
later wish to rely upon to claim an
award.
(c) Confidentiality protections. To
qualify for the confidentiality
protections afforded by Section
21F(h)(2) of the Exchange Act (15 U.S.C.
78u–6(h)(2)) based on any information
you provide that relates to a possible
violation of the federal securities laws,
you must comply with the procedures
and the conditions described in
§ 240.21F–9(a).
(d) Retaliation protections. (1) To
qualify for the retaliation protections
afforded by Section 21F(h)(1) of the
Exchange Act (15 U.S.C. 78u–6(h)(1)),
you must satisfy all of the following
criteria:
(i) You must qualify as a
whistleblower under paragraph (a) of
this section before experiencing the
retaliation for which you seek redress;
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34747
(ii) You must reasonably believe that
the information you provide to the
Commission under paragraph (a) of this
section relates to a possible violation of
the federal securities laws; and
(iii) You must perform a lawful act
that meets the following two criteria:
(A) First, the lawful act must be
performed in connection with any of the
activities described in Section
21F(h)(1)(A)(i) through (iii) of the
Exchange Act (15 U.S.C. 78u–
6(h)(1)(A)(i) through (iii)); and
(B) Second, the lawful act must relate
to the subject matter of your submission
to the Commission under paragraph (a)
of this section.
(2) To receive retaliation protection
for a lawful act described in paragraph
(d)(1)(iii) of this section, you do not
need to qualify as a whistleblower
under paragraph (a) of this section
before performing the lawful act, but
you must qualify as a whistleblower
under paragraph (a) of this section
before experiencing retaliation for the
lawful act.
(3) To qualify for retaliation
protection, you do not need to satisfy
the procedures and conditions for award
eligibility in §§ 240.21F–4, 240.21F–8,
and 240.21F–9.
(4) Section 21F(h)(1) of the Exchange
Act (15 U.S.C. 78u–6(h)(1)), including
any rules promulgated thereunder, shall
be enforceable in an action or
proceeding brought by the Commission.
■ 3. Section 240.21F–3 is amended by:
■ a. Revising paragraph (b)(1); and
■ b. Adding paragraph (b)(4).
The revision and addition read as
follows:
§ 240.21F–3
*
Payment of awards.
*
*
*
*
(b) * * *
(1)(i) A related action is a judicial or
administrative action that is brought by
one of the entities listed in paragraphs
(b)(1)(i)(A) through (D) of this section,
that is based upon information that
either the whistleblower provided
directly to the entity or the Commission
itself passed along to the other entity
pursuant to the Commission’s
procedures for sharing information, and
which is the same original information
that the whistleblower voluntarily
provided to the Commission and that
led the Commission to obtain monetary
sanctions totaling more than $1,000,000.
(A) The Attorney General of the
United States;
(B) An appropriate regulatory
authority;
(C) A self-regulatory organization; or
(D) A state attorney general in a
criminal case.
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(ii) The terms appropriate regulatory
authority and self-regulatory
organization are defined in § 240.21F–4.
*
*
*
*
*
(4)(i) Notwithstanding paragraph
(b)(1) of this section, if a judicial or
administrative action is subject to a
separate monetary award program
established by the Federal Government,
a state government, or a self-regulatory
organization, the Commission will deem
the action a related action only if the
Commission finds (based on the unique
facts and circumstances of the action)
that its whistleblower program has the
more direct or relevant connection to
the action.
(ii) In determining whether a potential
related action has a more direct or
relevant connection to the
Commission’s whistleblower program
than another award program, the
Commission will consider the nature,
scope, and impact of the misconduct
charged in the potential related action,
and its relationship to the federal
securities laws. This inquiry may
include consideration of, among other
things:
(A) The relative extent to which the
misconduct charged in the potential
related action implicates the public
policy interests underlying the federal
securities laws (such as investor
protection) versus other lawenforcement or regulatory interests
(such as tax collection or fraud against
the Federal Government);
(B) The degree to which the monetary
sanctions imposed in the potential
related action are attributable to conduct
that also underlies the federal securities
law violations that were the subject of
the Commission’s enforcement action;
and
(C) Whether the potential related
action involves state-law claims and the
extent to which the state may have a
whistleblower award scheme that
potentially applies to that type of lawenforcement action.
(iii) If the Commission does determine
to deem the action a related action, the
Commission will not make an award to
you for the related action if you have
already been granted an award by the
authority responsible for administering
the other whistleblower award program.
Further, if you were denied an award by
the other award program, you will not
be permitted to readjudicate any issues
before the Commission that the
authority responsible for administering
the other whistleblower award program
resolved against you as part of the
award denial. Additionally, if the
Commission makes an award before an
award determination is finalized by the
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authority responsible for administering
the other award scheme, the
Commission shall condition its award
on the meritorious whistleblower
making a prompt, irrevocable waiver of
any claim to an award from the other
award scheme.
■ 4. Section 240.21F–4 is amended by:
■ a. Revising paragraph (c)(2);
■ b. In paragraph (d)(2), removing the
period from the end of the paragraph
and adding in its place ‘‘; and’’;
■ c. Adding paragraph (d)(3); and
■ d. Revising paragraph (e).
The revisions and addition read as
follows:
§ 240.21F–4
Other definitions.
*
*
*
*
*
(c) * * *
(2) You gave the Commission original
information about conduct that was
already under examination or
investigation by the Commission, the
Congress, any other authority of the
federal government, a state Attorney
General or securities regulatory
authority, any self-regulatory
organization, or the PCAOB (except in
cases where you were an original source
of this information as defined in
paragraph (b)(5) of this section), and
your submission significantly
contributed to the success of the action.
*
*
*
*
*
(d) * * *
(3) For purposes of making an award
under §§ 240.21F–10 and 240.21F–11,
the following will be deemed to be an
administrative action and any money
required to be paid thereunder will be
deemed a monetary sanction under
paragraph (e) of this section:
(i) A non-prosecution agreement or
deferred prosecution agreement entered
into by the U.S. Department of Justice or
a state attorney general in a criminal
case; or
(ii) A settlement agreement entered
into by the Commission outside of the
context of a judicial or administrative
proceeding to address violations of the
securities laws.
(e) Monetary sanctions means:
(1) A required payment that results
from a Commission action or related
action and which is either:
(i) Expressly designated as
disgorgement, a penalty, or interest
thereon; or
(ii) Otherwise required as relief for the
violations that are the subject of the
covered action or related action; or
(2) Any money deposited into a
disgorgement fund or other fund
pursuant to section 308(b) of the
Sarbanes-Oxley Act of 2002 (15 U.S.C.
7246(b)), as a result of such action or
any settlement of such action.
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5. Section 240.21F–6 is amended by
adding paragraphs (c), (d) and (e) to read
as follows:
■
§ 240.21F–6 Criteria for determining
amount of award.
*
*
*
*
*
(c) Additional considerations in
connection with certain smaller awards.
When considering any meritorious
whistleblower award application where
the Commission—after applying the
award factors specified in paragraphs (a)
and (b) of this section—determines that
the resulting payout to that
whistleblower for the original
information that he or she provided that
led to one or more successful covered or
related action(s), collectively, would be
below $2 million (or any such greater
amount that the Commission may
periodically establish through
publication of an order in the Federal
Register), the Commission may adjust
the award upward as provided for in
this paragraph (c).
(1) The Commission may make an
upward adjustment that it determines is
appropriate to ensure that the total
payout to the whistleblower more
appropriately achieves the program’s
objectives of rewarding meritorious
whistleblowers and sufficiently
incentivizing future whistleblowers who
might otherwise be concerned about the
low dollar amount of a potential award;
(2) The Commission shall not adjust
an award upward under this paragraph
(c) if any of the negative award factors
specified in paragraph (b) of this section
were found present with respect to the
whistleblower’s award claim, or if the
award claim triggers § 240.21F–16
(concerning awards to whistleblowers
who engage in culpable conduct);
(3) In no event shall the Commission
make an upward adjustment under this
section to raise a potential payout (as
assessed by the Commission at the time
it makes the award determination)
above $2 million (or by such other
amount as the Commission may
designate by order); and
(4) The total amount awarded to all
whistleblowers in the aggregate may not
be greater than 30 percent of the total
monetary sanctions collected, or likely
to be collected, in any action (as
assessed by the Commission at the time
it makes the award determination).
(d) Additional considerations in
connection with certain large awards
where the monetary sanctions collected
would equal or exceed $100 million.
When considering any meritorious
whistleblower award application where
the whistleblower’s original information
led to one or more successful covered or
related action(s), collectively, that
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resulted in the collection of $100
million or more in monetary sanctions
or will likely result in such collections
(as assessed by the Commission at the
time it considers the award
application(s)), the Commission shall
determine the award amount as
specified in paragraphs (d)(1) through
(4) of this section. (For purposes of this
rule, the Commission may adjust the
$100 million threshold upward through
publication of an order in the Federal
Register.)
(1) When applying the award factors
in paragraphs (a) and (b) of this section,
the Commission shall make any upward
or downward adjustments by
considering the impact of the
adjustments on both the award
percentage and the approximate
corresponding dollar amount of the
award. If the resulting payout would be
below $30 million (or such greater
alternative amount that the Commission
may periodically establish through
publication of an order in the Federal
Register), then the downward
adjustment provided for in paragraph
(d)(2) of this section shall not be
applicable.
(2) After completing the award
analysis required by paragraph (d)(1) of
this section and determining the total
dollar amount of the potential award for
any action(s) based upon the
whistleblower’s original information,
the Commission shall consider whether
that amount exceeds what is reasonably
necessary to reward the whistleblower
and to incentivize similarly situated
whistleblowers. If the Commission finds
that the total payout for any action(s)
based upon the whistleblower’s original
information would exceed an amount
that is reasonably necessary, it may
adjust the total payout for the action(s)
downward to an amount that it finds is
sufficient to achieve those goals. As is
the case with every aspect of any award
determination under this section, the
Commission shall not consider the
balance of the Investor Protection Fund
(‘‘IPF’’) when determining whether to
make an adjustment to an award under
this paragraph (c).
(3) Any downward adjustment to a
whistleblower’s award for any actions
based upon the whistleblower’s original
information under paragraph (d)(2) of
this section shall under no
circumstances yield a potential total
payout on all the actions, collectively,
(as assessed by the Commission at the
time that it makes the award
determination) of less than either $30
million or such greater alternative
amount that the Commission may
periodically establish through
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publication of an order in the Federal
Register.
(4) Further, any adjustments under
paragraph (d)(2) of this section shall in
no event result in the total amount
awarded to all meritorious
whistleblowers, collectively, for each
covered or related action constituting
less than 10 percent of the monetary
sanctions collected in that action.
(e) Future adjustments. Finally, in any
order that adjusts any of the dollar
amounts specified under paragraph (c)
or (d) of this section, the Commission
shall consider (among other factors that
it deems relevant) whether the
adjustment is necessary or appropriate
to encourage whistleblowers to come
forward and the potential impact any
adjustment might have on the IPF.
■ 6. Section 240.21F–7 is amended by
revising the introductory text of
paragraph (a) to read as follows:
§ 240.21F–7 Confidentiality of
submissions.
(a) Pursuant to Section 21F(h)(2) of
the Exchange Act (15 U.S.C. 78u–
6(h)(2)) and § 240.21F–2(c), the
Commission will not disclose
information that could reasonably be
expected to reveal the identity of a
whistleblower provided that the
whistleblower has submitted
information utilizing the processes
specified in § 240.21F–9(a), except that
the Commission may disclose such
information in the following
circumstances:
*
*
*
*
*
■ 7. Section 240.21F–8 is amended by:
■ a. Revising the section heading.
■ b. Adding paragraphs (d) and (e).
The revision and addition read as
follows:
§ 240.21F–8
Eligibility and forms.
*
*
*
*
*
(d)(1) The Commission will
periodically designate on the
Commission’s web page a Form TCR
(Tip, Complaint, or Referral) that
individuals seeking to be eligible for an
award through the process identified in
§ 240.21F–9(a)(2) shall use.
(2) The Commission will also
periodically designate on the
Commission’s web page a Form WB–
APP for use by individuals seeking to
apply for an award in connection with
a Commission-covered judicial or
administrative action (15 U.S.C.
21F(a)(1)), or a related action
(§ 240.21F–3(b)(1)).
(e) Submissions or applications that
are frivolous or fraudulent, or that
would otherwise hinder the effective
and efficient operation of the
Whistleblower Program may result in
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34749
the Commission issuing a permanent
bar as part of a final order in the course
of considering a whistleblower award
application from you. If such a bar is
issued, the Office of the Whistleblower
will not accept or act on any other
applications from you, in the following
circumstances:
(1) If you make three or more award
applications for Commission actions
that the Commission finds to be
frivolous or lacking a colorable
connection between the tip (or tips) and
the Commission actions for which you
are seeking awards; or
(2) If the Commission finds that you
have violated paragraph (c)(7) of this
section. Before any Preliminary
Determination or Preliminary Summary
Disposition is issued, the Office of the
Whistleblower shall advise you of any
assessment by that Office that your
award application is frivolous or lacking
a colorable connection between the tip
and the action for which you have
sought an award. If you withdrawal
your application at that time, it will not
be considered by the Commission in
determining whether to exercise its
authority under paragraph (e)(1) of this
section. The Commission will consider
whether to issue a permanent bar in
connection with an award application
that would trigger such a bar; the
Preliminary Determination or
Preliminary Disposition must state that
a bar is being recommended and the
applicant would thereafter have an
opportunity to submit a response in
accordance with the award processing
procedures specified in §§ 240.21F–
10(e)(2) and 240.21F–18(b)(3).
■ 8. Section 240.21F–9 is amended by:
■ a. Revising paragraphs (a) and (b);
■ b. In paragraphs (c) and (d), removing
the parenthetical phrase ‘‘(referenced in
§ 249.1800 of this chapter)’’ wherever it
appears; and
■ c. Adding paragraph (e).
The revisions and addition read as
follows:
§ 240.21F–9 Procedures for submitting
original information.
(a) To submit information in a manner
that satisfies § 240.21F–2(b) and (c) you
must submit your information to the
Commission by any of these methods:
(1) Online, through the Commission’s
website located at www.sec.gov, using
the Commission’s electronic TCR portal
(Tip, Complaint or Referral);
(2) Mailing or faxing a Form TCR to
the SEC Office of the Whistleblower at
the mailing address or fax number
designated on the SEC’s web page for
making such submissions; or
(3) By any other such method that the
Commission may expressly designate on
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its website as a mechanism that satisfies
§ 240.21F–2(b) and (c).
(b) Further, to be eligible for an
award, you must declare under penalty
of perjury at the time you submit your
information pursuant to paragraph
(a)(1), (2), or (3) of this section that your
information is true and correct to the
best of your knowledge and belief.
*
*
*
*
*
(e) You must follow the procedures
specified in paragraphs (a) and (b) of
this section the first time you provide
the Commission with information that
you rely upon as a basis for claiming an
award. If you fail to do so, then you will
be deemed ineligible for an award in
connection with that information (even
if you later resubmit that information in
accordance with paragraphs (a) and (b)
of this section). Notwithstanding the
foregoing, the Commission, in its sole
discretion, may waive your
noncompliance with paragraphs (a) and
(b) of this section if the Commission
determines that the administrative
record clearly and convincingly
demonstrates that you would otherwise
qualify for an award and you
demonstrate that you complied with the
requirements of paragraphs (a) and (b) of
this section within 30 days of the first
communication with the staff about the
information that you provided.
■ 9. Section 240.21F–10 is amended by
revising paragraphs (b), (c), and (d) to
read as follows:
§ 240.21F–10 Procedures for making a
claim for a whistleblower award in SEC
actions that result in monetary sanctions in
excess of $1,000,000.
daltland on DSKBBV9HB2PROD with PROPOSALS2
*
*
*
*
*
(b) To file a claim for a whistleblower
award, you must file Form WB–APP,
Application for Award for Original
Information Provided Pursuant to
Section 21F of the Securities Exchange
Act of 1934. You must sign this form as
the claimant and submit it to the Office
of the Whistleblower by mail or fax (or
any other manner that the Office
permits). All claim forms, including any
attachments, must be received by the
Office of the Whistleblower within
ninety (90) calendar days of the date of
the Notice of Covered Action in order to
be considered for an award.
(c) If you provided your original
information to the Commission
anonymously, you must disclose your
identity on the Form WB–APP, and your
identity must be verified in a form and
manner that is acceptable to the Office
of the Whistleblower prior to the
payment of any award.
(d) Once the time for filing any
appeals of the Commission’s judicial or
administrative action has expired, or
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where an appeal has been filed, after all
appeals in the action have been
concluded, the staff designated by the
Director of the Division of Enforcement
(‘‘Claims Review Staff’’) will evaluate all
timely whistleblower award claims
submitted on Form WB–APP in
accordance with the criteria set forth in
these rules. In connection with this
process, the Office of the Whistleblower
may require that you provide additional
information relating to your eligibility
for an award or satisfaction of any of the
conditions for an award, as set forth in
§ 240.21F–8(b). Following that
evaluation, 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 percentage amount.
*
*
*
*
*
■ 10. Section 240.21F–11 is amended by
revising paragraphs (b) and (d) to read
as follows:
§ 240.21F–11 Procedures for determining
awards based upon a related action.
*
*
*
*
*
(b) You must also use Form WB–APP
to submit a claim for an award in a
potential related action. You must sign
this form as the claimant and submit it
to the Office of the Whistleblower by
mail or fax (or any other manner that the
Office permits) as follows:
(1) If a final order imposing monetary
sanctions has been entered in a
potential related action at the time you
submit your claim for an award in
connection with a Commission action,
you must submit your claim for an
award in that related action on the same
Form WB–APP that you use for the
Commission action. For purposes of this
paragraph (b)(1) and paragraph (b)(2) of
this section, a final order imposing
monetary sanctions is entered on the
date of a court or administrative order
imposing the monetary sanctions;
however, with respect to any agreement
covered by § 240.21F–4(d) (such as a
deferred prosecution agreement or a
nonprosecution agreement entered by
the Department of Justice), the
Commission will deem the date of the
entry of the final order to be the date of
the earliest public availability of the
instrument reflecting the arrangement if
evidenced by a press release or similar
dated publication notice; otherwise, the
date of the last signature necessary for
the agreement.
(2) If a final order imposing monetary
sanctions in a potential related action
has not been entered at the time you
submit your claim for an award in
connection with a Commission action,
PO 00000
Frm 00050
Fmt 4701
Sfmt 4702
you must submit your claim on Form
WB–APP within ninety (90) days of the
issuance of a final order imposing
sanctions in the potential related action.
*
*
*
*
*
(d) Once the time for filing any
appeals of the final judgment or order in
a potential related action has expired, or
if an appeal has been filed, after all
appeals in the action have been
concluded, the Claims Review Staff will
evaluate all timely whistleblower award
claims submitted on Form WB–APP in
connection with the related action. The
evaluation will be undertaken pursuant
to the criteria set forth in these rules. In
connection with this process, the Office
of the Whistleblower may require that
you provide additional information
relating to your eligibility for an award
or satisfaction of any of the conditions
for an award, as set forth in § 240.21F–
8(b). Following this evaluation, 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 percentage amount.
*
*
*
*
*
■ 11. Section 240.21F–12 is amended
by:
■ a. Revising the introductory text of
paragraph (a);
■ b. In paragraph (a)(2), removing the
parenthetical phrase ‘‘(referenced in
§ 249.1800 of this chapter)’’; and
■ c. Revising paragraphs (a)(3) and (6).
The revisions read as follows:
§ 240.21F–12 Materials that may form the
basis of an award determination and that
may comprise the record on appeal.
(a) The following items constitute the
materials that the Commission, the
Claims Review Staff, and the Office of
the Whistleblower may rely upon to
make an award determination pursuant
to §§ 240.21F–21F–10, 240.21F–11, and
240.21F–18:
*
*
*
*
*
(3) The whistleblower’s Form WB–
APP, including attachments, any
supplemental materials submitted by
the whistleblower before the deadline to
file a claim for a whistleblower award
for the relevant Notice of Covered
Action, and any other materials timely
submitted by the whistleblower in
response either:
(i) To a request from the Office of the
Whistleblower or the Commission; or
(ii) To the Preliminary Determination
or Preliminary Summary Disposition;
*
*
*
*
*
(6) Any other documents or materials
from third parties (including sworn
declarations) that are received or
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obtained by the Office of the
Whistleblower to resolve the claimant’s
award application, including
information related to the claimant’s
eligibility. (Neither the Commission, the
Claims Review Staff, nor the Office of
the Whistleblower may rely upon
information that the third party has not
authorized the Commission to share
with the claimant.)
*
*
*
*
*
■ 12. Section 240.21F–13 is amended by
revising paragraph (b) to read as follows:
§ 240.21F–13
Appeals.
*
*
*
*
*
(b) The record on appeal shall consist
of the Final Order, any materials that
were considered by the Commission in
issuing the Final Order, and any
materials that were part of the claims
process leading from the Notice of
Covered Action to the Final Order
(including, but not limited to, the Notice
of Covered Action, whistleblower award
applications filed by the claimant, the
Preliminary Determination or
Preliminary Summary Disposition,
materials that were considered by the
Claims Review Staff in issuing the
Preliminary Determination or that were
provided to the claimant by the Office
of the Whistleblower in connection with
a Preliminary Summary Disposition,
and materials that were timely
submitted by the claimant in response
to the Preliminary Determination or
Preliminary Summary Disposition). The
record on appeal shall not include any
pre-decisional or internal deliberative
process materials that are prepared
exclusively to assist the Commission
and the Claims Review Staff in deciding
the claim (including the staff’s Draft
Final Determination in the event that
the Commissioners reviewed the claim
and issued the Final Order). When more
than one claimant has sought an award
based on a single Notice of Covered
Action, the Commission may exclude
from the record on appeal any materials
that do not relate directly to the
claimant who is seeking judicial review.
■ 13. Add § 240.21F–18 to read as
follows:
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§ 240.21F–18
Summary disposition.
(a) Notwithstanding the procedures
specified in §§ 240.21F–10(d) through
(g) and in 240.21F–11(d) through (g), the
Office of the Whistleblower may
determine that an award application
that meets any of the following
conditions for denial shall be resolved
through the summary disposition
process described further in paragraph
(b) of this section:
(1) You submitted an untimely award
application;
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18:30 Jul 19, 2018
Jkt 244001
(2) You did not comply with the
requirements of § 240.21F–9 when
submitting the tip upon which your
award claim is based;
(3) The information that you
submitted was never provided to or
used by the staff handling the covered
action or the underlying investigation
(or examination), and those staff
members otherwise had no contact with
you;
(4) You did not comply with
§ 240.21F–8(b);
(5) You failed to specify in the award
application the submission pursuant to
§ 240.21F–9(a) upon which your claim
to an award is based; and
(6) Your application does not raise
any novel or important legal or policy
questions and the Office of the General
Counsel concurs that the matter is
appropriate for summary disposition.
(b) The following procedures shall
apply to any award application
designated for summary disposition:
(1) The Office of the Whistleblower
shall issue a Preliminary Summary
Disposition that notifies you that your
award application has been designated
for resolution through the summary
disposition process. The Preliminary
Summary Disposition shall also state
that the Office has preliminarily
determined to recommend that the
Commission deny the award application
and identify the basis for the denial.
(2) Prior to issuing the Preliminary
Summary Disposition, the Office of the
Whistleblower shall prepare a staff
declaration that sets forth any pertinent
facts regarding the Office’s
recommendation to deny your
application. At the same time that it
provides you with the Preliminary
Summary Disposition, the Office of the
Whistleblower shall, in its sole
discretion, either:
(i) Provide you with the staff
declaration; or
(ii) Notify you that a staff declaration
has been prepared and advise you that
you may obtain the declaration only if
within fifteen (15) calendar days you
sign and complete a confidentiality
agreement in a form and manner
acceptable to the Office of the
Whistleblower pursuant to § 240.21F–
8(b)(4). If you fail to return the signed
confidentiality agreement within fifteen
(15) calendar days, you will be deemed
to have waived your ability to receive
the staff declaration.
(3)(i) You may reply to the
Preliminary Summary Disposition by
submitting a response to the Office of
the Whistleblower within thirty (30)
calendar days of the later of:
(A) The date of the Preliminary
Summary Disposition; or
PO 00000
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Fmt 4701
Sfmt 4702
34751
(B) The date that the Office of the
Whistleblower sends the staff
declaration to you following your timely
return of a signed confidentiality
agreement.
(ii) The response should identify the
grounds for your objection to the denial
(or in the case of paragraph (a)(5) of this
section, correct the defect). The
response must be in the form and
manner that the Office of the
Whistleblower shall require. You may
include documentation or other
evidentiary support for the grounds
advanced in your response.
(4) If you fail to submit a timely
response pursuant to paragraph (b)(3) of
this section, the Preliminary Summary
Disposition will become the Final Order
of the Commission. Your failure to
submit a timely written response will
constitute a failure to exhaust
administrative remedies.
(5) If you submit a timely response
pursuant to paragraph (b)(3) of this
section, the Office of the Whistleblower
will consider the issues and grounds
advanced in your response, along with
any supporting documentation that you
provided, and will prepare a Proposed
Final Summary Disposition. The Office
of the Whistleblower may supplement
the administrative record as
appropriate. (This paragraph (b)(5) does
not prevent the Office of the
Whistleblower from determining that,
based on your written response, the
award claim is no longer appropriate for
summary disposition and that it should
be resolved through the claims
adjudication procedures specified in
either § 240.21F–10 or § 240.21F–11).
(6) The Office of the Whistleblower
will then notify the Commission of the
Proposed Final Summary Disposition.
Within thirty (30) calendar days
thereafter, any Commissioner may
request that the Proposed Final
Summary Disposition be reviewed by
the Commission. If no Commissioner
requests such a review within the 30day period, then the Proposed Final
Summary Disposition will become the
Final Order of the Commission. In the
event a Commissioner requests a review,
the Commission will consider the award
application and issue a Final Order.
(7) The Office of the Whistleblower
will provide you with the Final Order
of the Commission.
(c) In considering an award
determination pursuant to this rule, the
Office of the Whistleblower and the
Commission may rely upon the items
specified in § 240.21F–12(a). Further,
§ 240.21F–12(b) shall apply to summary
dispositions.
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Federal Register / Vol. 83, No. 140 / Friday, July 20, 2018 / Proposed Rules
PART 249—FORMS, SECURITIES
EXCHANGE ACT OF 1934
14. The general authority citation for
part 249 continues to read as follows
and sectional authorities for §§ 249.1800
and 249.1801 are removed:
■
Sec. 953(b), Pub. L. 111–203, 124 Stat. 1904;
Sec. 102(a)(3), Pub. L. 112–106, 126 Stat. 309
(2012); Sec. 107, Pub. L. 112–106, 126 Stat.
313 (2012), and Sec. 72001, Pub. L. 114–94,
129 Stat. 1312 (2015), unless otherwise
noted.
*
*
*
*
*
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PO 00000
■
15. Remove and reserve subpart S.
By the Commission.
Dated: June 28, 2018.
Brent Fields,
Secretary.
[FR Doc. 2018–14411 Filed 7–19–18; 8:45 am]
Authority: 15 U.S.C. 78a et seq. and 7201
et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C. 1350;
VerDate Sep<11>2014
Subpart S—[Removed and Reserved]
BILLING CODE 8011–01–P
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]]>Agencies
[Federal Register Volume 83, Number 140 (Friday, July 20, 2018)]
[Proposed Rules]
[Pages 34702-34752]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-14411]
[[Page 34701]]
Vol. 83
Friday,
No. 140
July 20, 2018
Part II
Securities and Exchange Commission
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17 CFR Parts 240 and 249
Whistleblower Program Rules; Proposed Rule
Federal Register / Vol. 83 , No. 140 / Friday, July 20, 2018 /
Proposed Rules
[[Page 34702]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249
[Release No. 34-83557; File No. S7-16-18]
RIN 3235-AM11
Whistleblower Program Rules
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing for public comment several amendments to the Commission's
rules implementing its whistleblower program. Section 21F of the
Securities Exchange Act of 1934 (``Exchange Act'') provides, among
other things, that the Commission shall pay an award--under regulations
prescribed by the Commission and subject to certain limitations--to
eligible whistleblowers who voluntarily provide the Commission with
original information about a violation of the federal securities laws
that leads to the successful enforcement of a covered judicial or
administrative action, or a related action. On May 25, 2011, the
Commission adopted a comprehensive set of rules to implement the
whistleblower program. The proposed rules would make certain changes
and clarifications to the existing rules, as well as several technical
amendments. The Commission is also including interpretive guidance
concerning the terms ``unreasonable delay'' and ``independent
analysis.''
DATES: Comments should be received on or before September 18, 2018.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/proposed.shtml); or
Send an email to [email protected]. Please include
File Number S7-16-18 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-16-18. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method of submission. The Commission will post all comments on the
Commission's internet website (https://www.sec/gov/rules/proposed.shtml). Comments are also available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change. Persons submitting comments are cautioned that we do not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make available
publicly.
Studies, memoranda or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Emily Pasquinelli, Office of the
Whistleblower, Division of Enforcement, at (202) 551-5973; Brian A.
Ochs, Office of the General Counsel, at (202) 551-5067, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing to amend 17 CFR
240.21F-3 (``Rule 21F-3''), 240.21F-4 (``Rule 21F-4''), 240.21F-6
(``Rule 21F-6''), 240.21F-8 (``Rule 21F-8'') through 240.21F-13 (``Rule
21F-13''). The Commission is also proposing to add a new rule that
would be codified as 17 CFR 240.21F-18 (``Rule 21F-18'').
Table of Contents
I. Background
A. The Whistleblower Award Program
B. Overview of the Proposed Rule Changes and Other Items
II. Discussion of Proposed Amendments
A. Proposed Amendment to Exchange Act Rule 21F-4(d) Defining an
``action''
B. Proposed Amendment to Exchange Act Rule 21F-4(e) Defining
``monetary sanctions''
C. Proposed Amendment to Exchange Act Rule 21F-3(b)(1) Defining
``related action''
D. Proposed Amendment to Exchange Act Rule 21F-6 Regarding
Awards to a Single Whistleblower Below $2 Million or in Cases
Yielding at Least $100 Million in Collected Monetary Sanctions and
Guidance on the Meaning of ``unreasonable delay'' Under Rule 21F-6
E. Proposed Amendment to Exchange Act Rule 21F-2 Addressing
Whistleblower Status and Certain Threshold Criteria Related to Award
Eligibility, Heightened Confidentiality From Identity Disclosure,
and Employment Anti-Retaliation Protection
F. Proposed Amendment to Rule 21F-8 To Add New Paragraph (d) To
Provide the Commission With Additional Flexibility Regarding the
Forms Used in Connection With the Whistleblower Program (and
Corresponding Amendments to Rule 21F-10, Rule 21F-11, and Rule 21F-
12)
G. Proposed Amendment to Rule 21F-8 To Add New Paragraph (e) To
Clarify and Enhance the Commission's Authority To Address Claimants
Who Submit False Information to the Commission or Who Abuse the
Award Application Process
H. Proposed Amendments to Rule 21F-9 To Provide Additional
Flexibility and Clarity Regarding Form TCR (and Corresponding
Technical Amendments to Rule 21F-10, Rule 21F-11, and Rule 21F-12)
I. Proposed Amendment to Rule 21F-12 Regarding the Materials
That May Form the Basis of the Commission's Award Determination
J. Proposed Amendment to Rule 21F-13 Regarding the
Administrative Record on Appeal
K. Proposed Rule 21F-18 Establishing a Summary Disposition
Process
L. Technical Amendment to Rule 21F-4(c)(2)
III. Proposed Interpretive Guidance Regarding the Meaning and
Application of ``independent analysis'' as Defined in Exchange Act
Rule 21F-4(b)(3)
A. Background: ``Original Information'' and Publicly Available
Information
B. ``Independent Analysis''
C. Leads to Successful Enforcement
IV. Request for Comment Regarding a Potential Discretionary Award
Mechanism for Commission Actions That Do Not Qualify as Covered
Actions, Involve Only a De Minimis Collection of Monetary Sanctions,
or Are Based on Publicly Available Information
V. General Request for Public Comment
VI. Paperwork Reduction Act
A. Background
B. Summary of the Proposed Amendments
C. Burden and Cost Estimates Related to the Proposed Amendments
D. Mandatory Collection of Information
E. Confidentiality
F. Request for Comment
VII. Economic Analysis
A. Economic Baseline
1. Whistleblower Programs
2. Supreme Court Decision in Digital Realty Trust, Inc. v.
Somers
3. IPF and Awards Issued by the SEC Whistleblower Program
4. Estimates of Current Annual Wages
B. Analysis of Benefits, Costs, and Economic Effects of the
Proposed Rules
1. Proposed Amendments to Rule 21F-2
2. Proposed Rule 21F-3(b)(4)
3. Proposed Rule 21F-4(d)(3)
4. Proposed Rule 21F-6(c)
5. Proposed Rule 21F-6(d)
6. Proposed Rule 21F-8(e)
7. Proposed Rule 21F-18
8. Proposed Interpretive Guidance Regarding the Meaning and
Application of ``independent analysis'' as Defined in Exchange Act
Rule 21F-4(b)(3)
[[Page 34703]]
C. Effects of the Proposed Rules on Efficiency, Competition, and
Capital Formation
IX. Small Business Regulatory Enforcement Fairness Act
X. Regulatory Flexibility Act Certification
XI. Statutory Basis
List of Subjects in 17 CFR Parts 240 and 249
Text of the Proposed Amendments
I. Background
A. The Whistleblower Award Program
In July 2010, Congress amended the Exchange Act to add new Section
21F.\1\ That provision, entitled ``Securities Whistleblower Incentives
and Protection,'' established the Commission's whistleblower program.
Among other things, Section 21F directs that the Commission pay awards,
subject to certain limitations and conditions, to whistleblowers who
voluntarily provide the Commission with original information about a
violation of the securities laws that leads to the successful
enforcement of an action brought by the Commission that results in a
covered judicial or administrative action \2\ and certain related
actions.\3\
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\1\ 15 U.S.C. 78u-6.
\2\ 15 U.S.C. 78u-6(a)(1).
\3\ 15 U.S.C. 78u-6(a)(5).
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In May 2011, the Commission adopted a comprehensive set of rules to
implement the whistleblower program. Those rules, which are codified at
17 CFR 240.21F-1 through 240.21F-17, provide the operative definitions,
requirements, and processes related to the whistleblower program. Among
other things, these rules:
Define key terms and phrases in Section 21F that determine
whether an individual's information qualifies for an award--terms such
as ``original information,'' ``voluntary,'' and ``leads to successful
enforcement'';
specify the form and manner in which an individual must
submit information to qualify as a whistleblower eligible for an award;
establish the procedures for anonymous submissions;
exclude certain individuals from eligibility, such as
individuals who are, or were at the time that they acquired the
original information provided to the Commission, a member, officer, or
employee of a foreign government;
explain which law-enforcement proceedings undertaken by
other authorities may qualify for a related action award from the
Commission;
establish the procedures for determining awards both in
Commission actions and related actions; and
identify the criteria that the Commission will consider in
setting the percentage amount of an award.
The Commission's whistleblower program has made significant
contributions to the effectiveness of the Commission's enforcement of
the federal securities laws. The Commission has received over 22,000
whistleblower tips since the inception of the program through the end
of Fiscal Year 2017. Original information provided by whistleblowers
has led to enforcement actions in which the Commission has obtained
over $1.4 billion in financial remedies, including more than $740
million in disgorgement of ill-gotten gains and interest, the majority
of which has been or is scheduled to be returned to harmed investors.
The Commission has ordered over $266 million in whistleblower awards to
55 individuals whose information and cooperation assisted the
Commission in bringing successful enforcement actions and, in some
instances, other enforcement authorities in bringing related actions
against wrongdoers. That said, approximately $112 million of that
amount was paid to just four individuals in connection with two
Commission enforcement actions and a related action.\4\
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\4\ The average (mean) of these awards was approximately $38
million and the median award was approximately $33 million.
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We recognize that individuals who step forward to provide
information to the Commission may do so at great personal peril and
professional sacrifice. We view the three key tenets of the program--
monetary awards, confidentiality, and retaliation protections--as
complementary and critical to the success of the program.
B. Overview of the Proposed Rule Changes and Other Items
After nearly seven years of experience administering the
whistleblower program, we have identified various ways in which the
program might benefit from additional rulemaking. We believe that the
changes that we are proposing will build on the program's success by
continuing to encourage individuals to come forward and by permitting
us to more efficiently process award applications, among other
potential benefits.
Based on our experience to date, we propose the following
substantive amendments to our rules:
Allowing awards based on deferred prosecution agreements
(``DPAs'') and non-prosecution agreements (``NPAs'') entered into by
the U.S. Department of Justice (``DOJ'') or a state attorney general in
a criminal case, or a settlement agreement entered into by the
Commission outside of the context of a judicial or administrative
proceeding to address violations of the securities laws: We propose an
amendment that would expressly allow for the payment of awards based on
money collected under these types of arrangements. Currently, our
whistleblower rules do not address whether the Commission may pay an
award when an eligible whistleblower voluntarily provides original
information that leads to a DPA or NPA entered into by DOJ or a state
attorney general in a criminal proceeding. Nor do our rules currently
address whether the Commission may pay an award to an eligible
whistleblower who voluntarily provides information that leads to a
settlement agreement entered into by the Commission outside of the
context of a judicial or administrative proceeding to address
violations of the securities laws. We are proposing to amend the
definition of an ``action'' in Rule 21F-4(d) \5\ to include, as
administrative actions, these arrangements, with the money paid under
such arrangements deemed to be ``monetary sanctions'' under Rule 21F-
4(e),\6\ and, thus to expressly permit us to pay awards thereon.
---------------------------------------------------------------------------
\5\ 17 CFR 240.21F-4(d).
---------------------------------------------------------------------------
Elimination of potential double recovery under the current
definition of related action: We propose an amendment to our rules to
clarify that a law-enforcement action would not qualify as a related
action if the Commission determines that there is a separate
whistleblower award scheme that more appropriately applies to the
enforcement action. Although neither Section 21F of the Exchange Act
(nor the whistleblower program rules thereunder) expressly addresses
this situation, the Commission and the Claims Review Staff in the
context of processing award applications have interpreted the term
``related action'' under Section 21F to exclude those matters brought
by one of the entities listed in Rule 21F-3(b)(1) \7\ for which there
is a more directly applicable award program. The proposed rule would
codify this interpretation.
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\7\ 17 CFR 240.21F-3(b)(1).
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Additional considerations for small and exceedingly large
awards: In the context of potential awards that could yield a payout of
$2 million or less to a whistleblower, the proposed rules would
authorize the Commission to adjust the award percentage upward under
certain circumstances (subject to the 30% statutory maximum) to an
[[Page 34704]]
amount that the Commission determines more appropriately achieves the
program's objectives of rewarding meritorious whistleblowers and
sufficiently incentivizing future whistleblowers who might otherwise be
concerned about the low dollar amount of a potential award. Relatedly,
in the context of potential awards that could yield total collected
monetary sanctions of at least $100 million, the proposed rules would
authorize the Commission to adjust the award percentage so that it
would yield a payout (subject to the 10% statutory minimum) that does
not exceed an amount that is reasonably necessary to reward the
whistleblower and to incentivize other similarly situated
whistleblowers; however, in no event would the award be adjusted below
$30 million.\8\ Currently, the whistleblower rules do not expressly
permit the Commission to consider whether a relatively small or
exceedingly large potential payout is appropriate to advance the
program's goals of rewarding whistleblowers and incentivizing future
whistleblowers. We are proposing to amend the whistleblower program
rules to include these considerations as additional award criteria.
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\8\ In determining whether a large award would provide a payout
that goes beyond what would be necessary to achieve the program's
goals, we anticipate that the Commission would consider, among other
factors, the value of the whistleblower's information and the
personal and professional sacrifices made in reporting the
information.
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The three proposed rule changes described above are intended to
serve two important and related objectives. First, the amendments are
designed to help ensure that an eligible, meritorious whistleblower is
appropriately rewarded for his or her efforts when the Commission or a
related-action authority recovers monetary sanctions from wrongdoing
that violates the securities laws. Second, the amendments would help
ensure that the Investor Protection Fund (IPF) that Congress has
established to pay meritorious whistleblowers is used in a manner that
effectively and appropriately leverages the IPF to further the
Commission's law-enforcement objectives.\9\
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\9\ By statute, the IPF ``is established in the Treasury of the
United States'' and ``is available to the Commission, without
further appropriation or fiscal year limitation,'' to pay ``awards
to whistleblowers'' under Section 21F(b). Exchange Act Sec.
21F(g)(1), 15 U.S.C. 78-6(g)(1). The IPF may also be used to fund
certain limited activities of the Inspector General and the Office
of the Whistleblower. As of the end May 2018, the balance of the IPF
for the first time fell below the $300 million threshold that
triggers the statutory replenishment mechanism; this occurred when
the Commission paid $83 million--its largest payout to date on an
enforcement action--to three individuals. For a complete description
of the mechanisms that Congress established to replenish the IPF,
see Section 21F(g)(3) of the Exchange Act, 15 U.S.C. 78-6(g)(3).
Generally speaking, the IPF is funded in the following way: (i)
Deposits of any monetary sanction collected by the Commission in any
judicial or administrative action brought by the Commission under
the securities laws that is not added to a disgorgement fund or
other fund under section 308 of the Sarbanes-Oxley Act of 2002 (15
U.S.C. 7246) or otherwise distributed to victims of a violation of
the securities laws, unless the balance of the IPF at the time the
monetary sanction is collected exceeds $300,000,000; (ii) deposits
of any monetary sanction added to a disgorgement fund or other fund
under section 308 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246)
that is not distributed to the victims for whom the fund was
established, unless the balance of the disgorgement fund at the time
the determination is made not to distribute the monetary sanction to
such victims exceeds $200,000,000; and (iii) if the amounts
deposited in the IPF under item (i) and (ii) above are not
sufficient to satisfy a whistleblower award, the Commission must
deposit money into the fund from the monetary sanctions collected in
the covered action that the whistleblower's information led to (even
if the money could have been directed to victims of the violation)
in an amount equal to the unsatisfied portion of the award.
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We believe that using the IPF to compensate whistleblowers who come
forward with original information that leads to a DPA or NPA entered
into by DOJ or a state attorney general, or a settlement agreement
entered into by the Commission outside of the context of a judicial or
administrative proceeding (provided the total money required to be paid
in the action, including any other proceedings that arise out of the
same nucleus of operative facts, exceeds $1,000,000) achieves both of
these objectives. We similarly believe that these objectives are
furthered by providing the Commission with additional discretion to
determine that an action does not qualify as a related action if
Congress or another authority has established a more directly
applicable or relevant award program. Additionally, we believe that
these two objectives are furthered by authorizing the Commission to
adjust upward the award percentage in certain cases where the award
would otherwise yield a payout of $2 million or less to a
whistleblower, as well as to consider whether, in the context of an
award issued in connection with certain large Commission or related
actions, any whistleblower award exceeds an amount that is reasonably
necessary to advance the program's goals. Absent this last amendment,
the Commission may find itself faced with the possibility of paying out
significantly large awards that are in excess of the amounts
appropriate to advance the goals of the whistleblower program. These
awards could substantially diminish the IPF, requiring the Commission
to direct more funds to replenish the IPF rather than making that money
available to the United States Treasury, where they could be used for
other important public purposes.\10\
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\10\ Any funds used to replenish the IPF otherwise would be
directed to the Treasury for use in funding other public programs.
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Beyond the amendments discussed above, we are proposing to modify
Exchange Act Rule 21F-2.\11\ The amendments that we are proposing to
this rule are in response to the Supreme Court's recent decision in
Digital Realty Trust, Inc. v. Somers.\12\ In that decision, the Court
held that Section 21F(a)(6) of the Exchange Act unambiguously requires
that an individual report a possible securities law violation to the
Commission in order to qualify for employment retaliation protection,
and that the Commission's rule interpreting the anti-retaliation
protections in Section 21F(h)(1) more broadly was therefore not
entitled to deference.\13\ We are proposing to modify Rule 21F-2 so
that it comports with the Court's holding by, among other things,
promulgating a uniform definition of ``whistleblower'' that would apply
to all aspects of Exchange Act Section 21F. We are also proposing to
provide certain related clarifications to Rule 21F-2 and to address
certain other interpretive questions that have arisen in connection
with the Court's holding.
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\11\ 17 CFR 240.21F-2.
\12\ 138 S. Ct. 767 (2018).
\13\ 138 S. Ct. at 781-82.
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In addition to the foregoing amendments, we are proposing several
other amendments that are intended to clarify and enhance certain
policies, practices, and procedures in implementing the program. We are
proposing to revise Exchange Act Rule 21F-4(e) \14\ to clarify the
definition of ``monetary sanctions'' so that it codifies the agency's
current understanding and application of that term. We are also
proposing to revise Exchange Act Rule 21F-9 \15\ to provide the
Commission with additional flexibility to modify the manner in which
individuals may submit Form TCR (Tip, Complaint or Referral). We are
similarly proposing to revise Exchange Act Rule 21F-8 \16\ to provide
the Commission with additional flexibility regarding the forms used in
connection with the whistleblower program.\17\ Further, we are
proposing an amendment to Exchange Act Rule 21F-12 \18\ to clarify the
list of materials that the Commission may rely upon in
[[Page 34705]]
making an award determination. We are also proposing an amendment to
Rule 21F-13 \19\ to clarify the materials that may comprise the
administrative record for purposes of judicial review.
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\14\ 17 CFR 240.21F-4(e).
\15\ 17 CFR 240.21F-9.
\16\ 17 CFR 240.21F-8.
\17\ 17 CFR 249.1800 and 249.1801.
\18\ 17 CFR 240.21F-12.
\19\ 17 CFR 240.21F-13.
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Two further changes are designed to help increase the Commission's
efficiency in processing whistleblower award applications. We are
proposing to add paragraph (e) to Exchange Act Rule 21F-8 \20\ to
clarify the Commission's ability to bar individuals from submitting
whistleblower award applications where they are found to have submitted
false information in violation of Exchange Act Section 21F(i) \21\ and
Rule 8(c)(7) \22\ thereunder, as well as to afford the Commission the
ability to bar individuals who repeatedly make frivolous award claims
in Commission actions. We are also proposing to add new Exchange Act
Rule 21F-18 to afford the Commission with a summary disposition
procedure for certain types of likely denials, such as untimely award
applications and those applications that involve a tip that was not
provided to the Commission in the form and manner that the Commission's
rules require.
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\20\ 17 CFR 240.21F-8.
\21\ 15 U.S.C. 78u-6(i).
\22\ 17 CFR 240.21F-8(c)(7).
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We are also proposing a technical correction to Exchange Act Rule
21F-4(c)(2) \23\ to modify an erroneous internal cross-reference, as
well as several technical modifications to Exchange Act Rules 21F-9,
10, 11, and 12 \24\ to accommodate certain of the substantive and
procedural changes described above.
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\23\ 17 CFR 240.21F-4(c)(2).
\24\ 17 CFR 240.21F-9 through 240.21F-12.
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We have included two additional items beyond the proposed
amendments to our rules. First, we are including proposed interpretive
guidance to help clarify the meaning of ``independent analysis'' as
that term is defined in Exchange Act Rule 21F-4 and utilized in the
definition of ``original information.'' Second, we are including a
general inquiry for public comment regarding whether the Commission in
a future rulemaking could establish a potential discretionary award
mechanism for Commission enforcement actions that either do not qualify
as covered actions, are based on publicly available information (and
not ``original information'' as that term is defined in Exchange Act
Rule 21F-4(b)(1)(i) \25\), or where the monetary sanctions collected
are de minimis.\26\
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\25\ 17 CFR 240-21F-4(b)(1)(i).
\26\ In July 2014, the Commission received two petitions for
rulemaking relating to the whistleblower program. The petitions for
rulemaking can be found on the Commission's website at this
location: https://www.sec.gov/rules/petitions.shtml. Both petitions
sought the same or similar amendments to the whistleblower program
rules in two respects. In connection with issuing this proposing
release, we have considered the two petitions and determined to
proceed as follows. First, to the extent that the petitions
requested clarification through rulemaking in connection with
employment anti-retaliation protections for internal reporting, we
believe that the amendments we are proposing to Exchange Act Rule
21F-2 (discussed above) appropriately address this issue following
the Supreme Court's recent decision in Digital Realty. Second, to
the extent the rulemaking petitions request that we add clarifying
language to Exchange Act Rule 21F-17(a), 17 CFR 240.21F-17(a), we
find the amendments unnecessary at this juncture because, as noted
by the petitioners, ``the plain language of Rule 21F-17 and existing
case law compel the conclusion'' that the contracts the petitioners
are concerned with are already ``unenforceable[.]'' See Exchange Act
Rule 21F-17(a), 17 CFR 240.21F-17(a) (providing that no person may
take any action to impede an individual from communicating directly
with the Commission staff about a possible securities law violation,
including enforcing, or threatening to enforce, a confidentiality
agreement (other than agreements dealing with information covered by
Sec. 240.21F-4(b)(4)(i) and (ii) of the chapter related to the
legal representation of a client) with respect to such
communications.). In fact, the Commission has successfully brought
nine enforcement actions for violations of Rule 21F-17. See
generally SEC National Exam Program Risk Alert: Examining
Whistleblower Rule Compliance at 1-2 & n. 3 (October 24, 2016),
available at https://www.sec.gov/ocie/announcement/ocie-2016-risk-alert-examining-whistleblower-rule-compliance.pdf (summarizing
Commission enforcement actions). Finally, in accordance with Rule
192 of the Commission's Rules of Practice, see 17 CFR 201.192, the
Secretary of the Commission shall notify the petitioners of the
action taken by the Commission following the publication of this
proposing release in the Federal Register.
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II. Discussion of Proposed Amendments
The proposed amendments are set forth below.
A. Proposed Amendment to Exchange Act Rule 21F-4(d) \27\ Defining an
``action'' \28\
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\27\ 17 CFR 240.21F-4(d).
\28\ The Commission anticipates that this proposed rule change,
if adopted, would apply to all new DPAs, NPAs, and Commission
settlement agreements covered by the proposed rule that are entered
into after the effective date of the rules. The proposed rule would
not apply to any such agreements entered on or before the effective
date of the rules.
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Section 21F of the Exchange Act authorizes us to pay whistleblower
awards in relation to the ``successful enforcement'' of ``covered
judicial or administrative actions'' brought by the Commission and
certain ``related actions'' of other authorities, most notably DOJ.\29\
Awards range between 10 percent and 30 percent ``of what has been
collected of the monetary sanctions imposed'' in the action.\30\
Proposed Rule 21F-4(d)(3) would provide that, for purposes of making a
whistleblower award, a DPA or NPA entered into by DOJ or a state
attorney general in a criminal case would be deemed to be an
``administrative action'' and any money required to be paid thereunder
would be deemed a ``monetary sanction.'' The same result would follow
for a settlement agreement entered into by the Commission outside of
the context of a judicial or administrative proceeding to address
violations of the securities laws. The premise of proposed Rule 21F-
4(d)(3) is the same as that underlying current Rule 21F-4(d)(1) \31\:
Our view that Congress did not intend for meritorious whistleblowers to
be denied awards simply because of the procedural vehicle that the
Commission (or the other authority) has selected to pursue an
enforcement matter.\32\
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\29\ 15 U.S.C. 78u-6(b)(1). A ``covered judicial or
administrative action'' is any judicial or administrative action
brought by the Commission under the securities laws that results in
monetary sanctions exceeding $1 million. Id. 6(a)(1). A ``related
action'' is a judicial or administrative action brought by any of
several authorities designated in the statute that is based upon the
original information provided by a whistleblower that led to
successful enforcement of a Commission covered action. Id. 6(a)(5).
\30\ Id. 6(b)(1)(A)-(B).
\31\ 17 CFR 240.21F-4(d)(1).
\32\ See Securities Whistleblower Incentives and Protections,
Exchange Act Release No. 64545, 76 FR 34300, 34327 (June 13, 2011).
Recognizing that an ``action'' is generally considered to be a
single captioned case or matter, the Commission adopted Rule 21F-
4(d)(1) to clarify that it would treat two or more separate cases
that arise out of the same nucleus of operative facts as a single
``action'' for purposes of making an award. In this way, the
sanctions ordered in closely connected proceedings, even if
individually under $1 million, are aggregated for purposes of
assessing whether the actions reach the $1 million ``covered
action'' threshold that is necessary to permit consideration of
whistleblower award claims. The critical principle behind this rule
is that a whistleblower should not be denied an award for his or her
contributions to the closely connected cases or matters merely
because the Commission (or other authority) determined not to bring
these cases as one captioned law-enforcement case.
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Moreover, we also believe that the statutory term ``administrative
action'' is sufficiently ambiguous and broad enough to permit us to
interpret the term to include DPAs and NPAs when these instruments are
employed by DOJ or a state attorney general, or settlement agreements
entered into by the Commission outside of the context of judicial or
administrative proceedings, as an appropriate resolution to a law-
enforcement investigation.\33\ We find it
[[Page 34706]]
particularly telling that Congress used the term ``action'' in Section
21F of the Exchange Act, rather than the term ``proceeding,'' to
describe the universe of administrative enforcement outcomes that might
give rise to a whistleblower award. As used elsewhere in Section 21F,
as well as in other provisions of the securities laws and the
Commission's rules thereunder, the term ``proceeding'' refers to
various specifically identified formal processes instituted before the
Commission.\34\ Therefore, the use of the term ``administrative
action'' in describing actions that can give rise to whistleblower
awards suggests that Congress did not clearly intend to limit the scope
of the Commission's authority under Section 21F (outside of judicial
actions) to only the Commission's formal adjudicatory proceedings
specified in the securities laws (or adjudicatory proceedings of
designated related action authorities).
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\33\ In DOJ's practice, DPAs and NPAs occupy an important middle
ground between declining prosecution and obtaining the conviction of
a corporation in circumstances where the collateral consequences of
a corporate conviction for innocent third parties would be
significant. See United States Attorneys' Manual 9-28.200, 9-
28.1100, available at https://www.justice.gov/usam/united-states-attorneys-manual. As one example, DPAs and NPAs have been a
prominent tool in DOJ's criminal enforcement of the Foreign Corrupt
Practices Act (``FCPA''), 15 U.S.C. 78dd-1 et seq., an area that
overlaps with our own enforcement jurisdiction. In 2017, DOJ entered
into six DPAs or NPAs to resolve FCPA investigations of corporate
entities, securing over $1.4 billion in monetary recoveries. See
FCPA Related Enforcement Actions: 2017, available at https://www.justice.gov/criminal-fraud/case/related-enforcement-actions/2017.
\34\ See, e.g., Exchange Act Sections 21F(h)(2)(A), 15 U.S.C.
78u-6(h)(2)(A) (disclosure of whistleblower identities to a
``respondent in connection with a public proceeding instituted by
the Commission''), 21B, 15 U.S.C. 78u-2 (``Civil Remedies in
Administrative Proceedings''), 21C, 15 U.S.C. 78u-3 (``Cease-and-
Desist Proceedings''); Securities Act of 1933 Section 8A, 15 U.S.C.
77h-1 (``Cease-and-Desist Proceedings''); Investment Advisers Act
Section 203(i), 15 U.S.C. 80b-3(i) (``Money Penalties in
Administrative Proceedings''); Investment Company Act Section 9(d),
15 U.S.C. 80a-9(d) (``Money Penalties in Administrative
Proceedings''); see also SEC Rule of Practice 101(4), 17 CFR
201.101(4) (defining ``enforcement proceeding'').
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The Commission has previously exercised its interpretive authority
to pay a whistleblower award with respect to a DPA entered into by DOJ
on the basis that such agreements are filed in a federal court action
that charges the defendant with violations of law.\35\ However, as is
further discussed below, DOJ's practice with respect to NPAs has been
not to commence an accompanying proceeding in either a judicial or
administrative tribunal. Moreover, we have entered into settlement
agreements outside of judicial or administrative proceedings.
Notwithstanding this distinction in form (i.e., whether an accompanying
judicial or administrative proceeding was undertaken), these agreements
are all similar in important respects: Typically, they reward
meaningful cooperation, are premised on significant remedial and
compliance commitments, and obtain monetary remedies for past
violations. Based on our experience with the whistleblower program, we
are of the view that the entry of each of these types of agreements
should be considered the successful enforcement of an administrative
action within the meaning of Section 21F, and that whistleblowers who
voluntarily provide original information that leads to such enforcement
should not be disadvantaged because DOJ, a state attorney general in a
criminal case, or the Commission, in the exercise of enforcement
discretion, may elect to proceed in a form that does not include the
filing of a complaint or indictment in federal (or state) court, or the
institution of an administrative proceeding.\36\ For this reason, we
are proposing Rule 21F-4(d)(3) to clarify that these agreements would
be treated as ``administrative actions'' upon which whistleblower
awards may be based (provided the total money required to be paid in
the Commission action, including any other proceedings that arise out
of the same nucleus of operative facts, exceed $1,000,000).
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\35\ See generally DOJ Criminal Division and SEC Enforcement
Division, A Resource Guide to the Foreign Corrupt Practices Act at
74 (2012), available at https://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf (``FCPA Resource Guide'') (describing function
and operation of DPAs).
\36\ See United States v. Fokker, 818 F.3d 733, 737 (D.C. Cir.
2016) (``In certain situations, rather than choose between the
opposing poles of pursuing a criminal conviction or forgoing any
criminal charges altogether, the Executive may conclude that the
public interest warrants the intermediate option of a deferred
prosecution agreement.'').
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In arriving at this preliminary interpretation, we have found
several considerations to be persuasive. First, we believe that our
rulemaking authority under the Exchange Act and our authority to define
Exchange Act terms is best read as permitting us to incorporate such
agreements within the definition of an ``action.'' \37\ Second, as
discussed above, we do not believe that Congress's use of the phrase
``administrative action'' in Section 21F limits us to considering
whistleblower awards only when investigations are resolved through
formal adjudicatory administrative proceedings. This is especially so
given that such an approach would appear to draw arbitrary distinctions
among otherwise meritorious whistleblowers based solely on the vehicle
that we, DOJ, or a state criminal law authority, in the exercise of
enforcement discretion, may view as the most appropriate in a
particular case. Third, we are cognizant of the context in which
Section 21F was enacted. Congress enacted the Commission's
whistleblower program in 2010, which is the same year that the
Commission initiated, as part of its enforcement cooperation program,
forms of settlement agreements outside of the context of a judicial or
administrative proceeding as an alternative mechanism to resolve
securities law violations.\38\ Given that Commission actions are the
primary focus of the whistleblower program, it is reasonable to
understand that Congress may not have focused on the implications of
such agreements when enacting Section 21F of the Exchange Act.
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\37\ Section 21F(j) of the Exchange Act, 15 U.S.C. 78u-6(j),
grants us ``the authority to issue such rules and regulations as may
be necessary or appropriate to implement'' the whistleblower award
program. Similarly, Section 23(a)(1) of the Exchange Act, 15 U.S.C.
78w(a)(1), expressly provides the Commission the ``power to make
such rules and regulations as may be necessary or appropriate to
implement the provisions'' of the Exchange Act. In addition, we have
broad definitional authority pursuant to Section 3(b) of the
Exchange Act, 15 U.S.C. 78c(b), which provides us with the ``power
by rules and regulations to define . . . terms used in [the Exchange
Act].''
\38\ SEC Announces Initiative to Encourage Individuals and
Companies to Cooperate and Assist Investigations, SEC Press Release
2010-6 (Jan. 13, 2010). To date, we have entered into 17 settlements
outside of judicial or administrate proceedings requiring payment of
disgorgement, prejudgment interest, and penalties totaling more than
$53 million.
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For similar reasons, we believe that the payments required of a
company under the terms of the agreements that would be covered by the
proposed rule should be deemed to be ``monetary sanctions'' within the
meaning of Section 21F of the Exchange Act.\39\ Section 21F(b)(1)
authorizes us to pay meritorious whistleblowers between 10 percent and
30 percent ``of what has been collected of the monetary sanctions
imposed in the action or related actions.'' \40\ ``Monetary sanctions''
are defined, in pertinent part, as money that are ``ordered to be
paid'' as a result of a judicial or administrative action.\41\ Although
the actions that would be covered by the proposed rule take the form of
an agreement between a company and the Government, payment of
disgorgement or other amounts is required of the company in order to
resolve a Commission enforcement investigation or a DOJ criminal
investigation without formal action by a court or agency.\42\
[[Page 34707]]
Accordingly, our view is that it is reasonable to treat the monetary
components of the agreements that would be covered by the proposed rule
as ``monetary sanctions'' that are ``imposed'' within the meaning of
Section 21F. Proposed Rule 21F-4(d)(3) thus would clarify that any
money required to be paid under a DPA or NPA will be deemed a monetary
sanction.\43\
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\39\ Our view on this issue would not be impacted by the
revisions that we are proposing in the next section to the
definition of ``monetary sanctions.''
\40\ 15 U.S.C. 78u-6(b)(1).
\41\ Id. (a)(4); 17 CFR 240.21F-4(e).
\42\ We believe that the agreements covered by this proposed
rule impose monetary sanctions for purposes of Section 21F of the
Exchange Act because they effectively compel or require monetary
payments. For example, when the Commission has utilized certain
agreements entered outside of judicial or administrative
proceedings, the Commission has reserved the authority under the
agreement to pursue an enforcement action if the individual or
company fails to pay the monetary obligations. Enforcement Manual
6.2.2 (Nov. 28, 2017), available at https://www.sec.gov/divisions/enforce/enforcementmanual.pdf. When the Commission has utilized
certain other settlement forms entered outside of judicial or
administrative proceedings, the staff has to date retained its
ability to recommend an enforcement action to the Commission against
the individual or company. Id. at 6.2.3. DOJ DPAs and NPAs have
similar mechanisms available to effectively require an individual or
company to comply with the monetary obligations specified therein or
face prosecution for the violations that are the subject of the
agreement. See U.S. Gov't Accountability Off., GAO-10-110, DOJ Has
Taken Steps to Better Track Its Use of Deferred and Non-Prosecution
Agreements, but Should Evaluate Effectiveness at 11 (2009) (``As
part of DPAs and NPAs, companies are generally required to comply
with a set of terms for a specified duration in exchange for
prosecutors deferring the decision to prosecute or deciding not to
prosecute,'' including ``monetary payments--such as restitution to
victims of crime, forfeiture of the proceeds of the crime, and
monetary penalties imposed by DOJ . . . .'') (emphasis added).
\43\ We believe the statute and our current rules already
authorize payment of a related action award in connection with a
settlement reached pursuant to the Financial Industry Regulatory
Authority's Acceptance, Waiver, and Consent (``AWC'') process. An
AWC is a form of FINRA disciplinary proceeding in which sanctions,
including fines can be imposed on a member firm or associated
person. See FINRA Rule 9216, available at https://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=3926.
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Finally, we are proposing conforming amendments to Rule 21F-11(b)
\44\ to make clear that the time period for filing a claim for an
agreement covered by this proposed rule would run from earliest public
availability of the instrument reflecting the arrangement if evidenced
by a press release or similar dated publication notice, or, absent such
publication notice, the date of the last signature necessary for the
agreement.\45\
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\44\ 17 CFR 240.21F-11(b).
\45\ In a rare case where a claimant could demonstrate that
compliance with this proposed rule was impracticable because an
agreement covered by it was not made available to the public before
the passage of the claim deadline calculated under the rule, the
Commission could consider exercising its authority to waive
compliance with the rule. See Section 36(a) of the Exchange Act, 15
U.S.C. 78mm(a), and Exchange Act Rule 21F-8(a), 17 CFR 240.21F-8(a).
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Request for Comment
1. Should DPAs and NPAs entered by DOJ or a state attorney general
in a criminal case be treated as administrative actions, and the
monetary payments obtained through these DPAs and NPAs treated as
monetary sanctions, for purposes of making whistleblower awards? Should
the same result follow for settlement agreements entered by the
Commission to resolve securities law violations? Why or why not?
2. Are there other types of arrangements (e.g., the use of
declination letters in cases where the subject company pays all
disgorgement, forfeiture amounts and/or restitution resulting from the
misconduct at issue \46\) that should be included in any rule the
Commission adopts? How would any such arrangements satisfy the
statutory requirements that they constitute a ``judicial or
administrative action brought by'' the Commission or a related-action
authority and that they include ``monetary sanctions'' (i.e., ``monies
. . . ordered to be paid'') that are ``imposed'' in the action? \47\
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\46\ See United States Attorneys' Manual 9-47.120 available at
https://www.justice.gov/usam/usam-9-47000-foreign-corrupt-practices-act-1977#9-47.120.
\47\ See 15 U.S.C. 78u-6(a)(1), (4) and (5) and (b)(1)(A)-(B).
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3. Are there specific standards that we should apply in determining
whether other vehicles for resolving investigations should be deemed to
be administrative actions upon which whistleblower awards can be based?
Is it sufficient that a resolution results in a monetary payment?
4. As discussed above, we are proposing conforming amendments to
Rule 21F-11(b) \48\ to make clear that the time period for filing a
claim for an agreement covered by this proposed rule would run from
earliest public availability of the instrument reflecting the
arrangement if evidenced by a press release or similar dated
publication notice, or, absent such publication notice, the date of the
last signature necessary for the agreement. Please comment on whether
this conforming edit fully covers all potential agreements covered by
proposed Rule 21F-4(d)(3). If there are other types of arrangements
that should be included, would any additional changes to this rule be
necessary or appropriate?
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\48\ 17 CFR 240.21F-11(b).
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B. Proposed Amendment to Exchange Act Rule 21F-4(e) 49
Defining ``monetary sanctions'' 50
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\49\ 17 CFR 240.21F-4(e).
\50\ The Commission anticipates that this proposed rule change,
if adopted, would be utilized by the Commission after the effective
date of the final rules in determining whether an action qualifies
as a ``covered action'' and in calculating any outstanding payments
to be made to meritorious whistleblowers.
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We propose to amend the definition of ``monetary sanctions'' to
provide additional clarity concerning the class of payments that fall
within the term's scope. The proposed definition, which is based on the
Commission's experiences to date in administering the program, codifies
the understanding of the term ``monetary sanctions'' that is already
employed by the agency.
Under Section 21F, the determination of what qualifies as a
monetary sanction is important for two reasons. First, a Commission
action qualifies as a ``covered action'' for which a whistleblower
award might be made only if the action ``results in monetary sanctions
exceeding $1,000,000.'' \51\ Whether a payment obligation is a
``monetary sanction'' is thus a threshold question for the Commission
in determining whether to post a Notice of Covered Action.\52\ Second,
to the extent that one or more whistleblowers receives an award, award
payments are calculated based upon the amount that ``has been collected
of the monetary sanctions imposed in the action or related actions.''
\53\
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\51\ 15 U.S.C. 78u-6(a)(1).
\52\ See Exchange Act Rule 21F-10(a), 17 CFR 240.21F-10(a).
\53\ 15 U.S.C. 78u-6(b)(1).
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Section 21F(a)(4) of the Exchange Act defines the term ``monetary
sanctions,'' when used with respect to any judicial or administrative
action, to mean: (A) Any monies, including penalties, disgorgement, and
interest, ordered to be paid; and (B) any monies deposited into a
disgorgement fund or other fund pursuant to section 308(b) of the
Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246(b)), as a result of such
action or any settlement of such action.\54\
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\54\ 15 U.S.C. 78u-6(a)(4).
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Exchange Act Rule 21F-4(e) is substantively identical. Based on our
experience to date in administering the program, we believe that it
would be beneficial to provide additional clarity regarding the scope
of the potential payments that are encompassed within subparagraph (A)
of the statutory definition.\55\
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\55\ We are not proposing to provide any additional
clarification regarding subparagraph (B) as we believe that it does
not create uncertainty as to the scope of the money that it covers.
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The language used in subparagraph (A) of Section 21F(a)(4), when
read in isolation, could potentially be understood to direct that the
Commission treat any order to pay money that is entered in a judicial
or administrative action as a monetary sanction for purposes of the
whistleblower award program. Interpreted in this way, monetary
[[Page 34708]]
sanctions would include, for example, orders to pay discovery
sanctions, receivership fees and costs, taxes, and even attorney's fees
imposed under the Equal Access to Justice Act (``EAJA'').\56\
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\56\ See 5 U.S.C. 504; 28 U.S.C. 2412.
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We believe, however, that other portions of Section 21F counsel in
favor of a narrower understanding of which money ``ordered to be paid''
in an action should be treated as monetary sanctions for purposes of
the whistleblower program. We find particularly relevant the definition
of a ``covered action'' in Section 21F(a)(1),\57\ which provides that
the Commission action must ``result[ ] in monetary sanctions exceeding
$1,000,000'' in order for a whistleblower award to be considered. We
believe that the phrase ``results in'' suggests that Congress was
addressing those monetary obligations that the action secures ``as
relief'' for the violations that are the subject of the Commission's
enforcement action.\58\ Similarly, we believe that the phrase
``monetary sanctions imposed in the action'' in Section 21F(b)(1) \59\
indicates that the congressional focus was on monetary obligations that
are in the nature of relief for the violations. So, for example, while
in normal parlance a person might say that civil penalties were
``imposed'' as a result of a securities-law violation, we do not
believe that one would say that a court order approving a court-
appointed receiver's request for fees or costs ``impos[ed]'' a monetary
sanction.
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\57\ 15 U.S.C. 78u-6(a)(1).
\58\ See generally Black's Law Dictionary 1541 (10th ed. 2014)
(defining a ``sanction'' as ``[a] penalty or coercive measure that
results from a failure to comply with a law, rule, or order'')
(emphasis added).
\59\ 15 U.S.C. 78u-6(b)(1)(A) and (B).
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Finally, we find support for our proposed approach in the purpose
of Section 21F to reward whistleblowers for their contributions to the
``successful enforcement'' of Commission actions and related
actions,\60\ and in the common-sense understanding that relief against
wrongdoers is perhaps the essential measure of an action's success.
Given this context, we believe that the term ``monetary sanctions'' is
better understood to mean those requirements to pay money that the
Commission or a related-action authority obtain ``as relief'' in the
underlying action.
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\60\ See 15 U.S.C. 78u-6(b)(1).
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Based on the language within Section 21F, therefore, we believe
that the language in subparagraph (A) of the statutory definition is
better understood to encompass only those required payments in a
Commission action or related action that are designed as relief for the
violations successfully resolved in the action. Accordingly, we propose
to amend Exchange Act Rule 21F-4(e) to provide that the term ``monetary
sanctions'' means: (1) A required payment that results from a
Commission action or related action and which is either (i) expressly
designated as disgorgement, a penalty, or interest thereon, or (ii)
otherwise required as relief for the violations that are the subject of
the covered action or related action; or (2) any money deposited into a
disgorgement fund or other fund pursuant to section 308(b) of the
Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246(b)), as a result of such
action or any settlement of such action.\61\
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\61\ Our use of the phrase ``required payment'' rather than
``ordered'' is intended to be consistent with proposed Rule 21F-
4(d)(3), and recognizes that whistleblower tips may be important to
successful enforcement actions that the agreements described in that
proposed rule in which the Commission, DOJ, or a state attorney
general in a criminal case require substantial monetary relief that
is not, however, contained in a Commission order a court order, or
an order issued by an administrative-law judge. See discussion of
proposed Rule 21F-4(d)(3), supra. In our view, a payment that is
required as part of such a resolution is reasonably treated as
``ordered'' when the agency has some mechanism to compel the payment
either directly or indirectly. This could include, but does not
necessarily require, the ability to obtain a court order requiring
the payment. In the context of the agreements described in proposed
Rule 21F-4(d)(3), the mechanism to compel the payment could include
the ability either to revive an action or to bring an action if the
signatory does not make the payments provided for in the agreement.
---------------------------------------------------------------------------
We believe that paragraph (e)(1)(i) of the proposed definition
should generally be straightforward to apply. This part of the rule
encompasses any payment requirement that is expressly designated as
disgorgement, a penalty, or interest thereon. That money paid by a
wrongdoer in satisfaction of a disgorgement or penalty obligation may
thereafter be used to pay costs of a receiver, trustee, or fund
administrator would not change the analysis under this part of the
proposed rule. Because the wrongdoer was ordered to pay such money
pursuant to a disgorgement or penalty obligation, paragraph (e)(1)(i)
would be satisfied.
With respect to paragraph (e)(1)(ii), only requirements to pay
money as relief for the underlying violations would qualify. Thus, for
example, if a court orders an asset freeze and appoints a receiver in a
Commission enforcement action, and, without separately entering a
disgorgement order, the court subsequently issues an order approving
the receiver's plan to distribute money to injured investors, we would
treat that second order as a monetary sanction under paragraph
(e)(1)(ii) of the proposed rule.\62\ However, if the receiver requests
approval to use frozen funds to pay creditors, taxes to a governmental
authority, attorney's fees, or other costs of the receivership, such
payments would not qualify ``as relief'' obtained because of the
successful enforcement action and would not constitute monetary
sanctions under paragraph (e)(1)(ii).
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\62\ Where a receiver is appointed to gather assets for
potential distribution to harmed investors, an award payment to a
meritorious whistleblower would not need to await actual
distribution of the receivership assets to the harmed investors. In
our view, the statutory requirements that the monetary sanctions be
both ``ordered'' and ``collected'' before a payment to a
whistleblower can be made would typically be satisfied at the time a
court approves the distribution to the harmed investors of assets
within the receiver's control. See Exchange Act section 21F(a)(4)
(``ordered'') & 21F(b)(1) (``collected''), 15 U.S.C. 78u-6(a)(4), &
78u-6(b)(1).
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In proposing the amended rule language, we have also considered the
legislative purpose underlying whistleblower award provisions
generally. In our view, these types of award programs are intended to
allow a whistleblower to receive a percentage of the monetary relief
that the government is able to obtain as remedies for the violations
that are the subject of the action to which the whistleblower's
information led. The approach outlined above would comport with this
understanding of how whistleblower award programs generally
operate.\63\ We have also considered the fact that a broader approach
could lead to potentially irrational results such as the Commission
paying whistleblowers a share of any discovery sanctions or EAJA fees
imposed on the government, even though such monetary sanctions would
have no connection to the information the whistleblower provided that
led to the enforcement action and that contributed to the success of
that action.
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\63\ Cf. S. Rep. 111-176 at 110 (2010) (``The Whistleblower
Program aims to motivate those with inside knowledge to come forward
and assist the Government to identify and prosecute persons who have
violated securities laws and recover money for victims of financial
fraud.'').
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Request for Comment
5. Should ``monetary sanctions'' be defined as those obligations to
pay money that are obtained ``as relief'' for the violations that are
charged in a Commission enforcement action or a related action? Why or
why not?
6. Are there additional classes of monetary requirements or payment
obligations (beyond those discussed above) that may be ordered in an
action covered by the Commission's whistleblower award program that the
[[Page 34709]]
Commission should specifically consider or address in clarifying the
definition of ``monetary sanctions''?
C. Proposed Amendment to Exchange Act Rule 21F-3(b)(1) 64
Defining ``related action'' 65
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\64\ 17 CFR 240.21F-3(b)(1).
\65\ The Commission anticipates this proposed rule change, if
adopted, would apply only to covered-action and related action award
applications that are connected to a Notice of Covered Action (see
Exchange Act Rule 21F-10(a), 17 CFR 240.21F-10(a)) posted on or
after effective date of the final rules.
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Under Exchange Act Section 21F(b) \66\ and Rule 21F-11,\67\ any
whistleblower who obtains an award based on a Commission enforcement
action may be eligible for an award based on monetary sanctions that
are collected in a related action. Exchange Act Section 21F(a)(5) \68\
and Rule 21F-3(b)(1) \69\ provide that a related action is a judicial
or administrative action that is both: (i) Brought by DOJ, an
appropriate regulatory authority (as defined in Rule 21F-4(g)),\70\ a
self-regulatory organization (as defined in Rule 21F-4(h) \71\), or a
state attorney general in a criminal case; and (ii) based on the same
original information that the whistleblower voluntarily provided to the
Commission and that led to the successful enforcement of the Commission
action.
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\66\ 15 U.S.C. 78u-6(b).
\67\ 17 CFR 240.21F-11.
\68\ 15 U.S.C. 78u-6(a)(5).
\69\ 17 CFR 240.21F-3(b)(1).
\70\ 17 CFR 240.21F-4(g).
\71\ 17 CFR 240.21F-4(h).
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The proposed amendment adding paragraph (b)(4) to Rule 21F-3 would
apply in situations where both the Commission's whistleblower program
and a second, separate whistleblower award scheme have potential
application to the same action. During the implementation and
administration of our whistleblower program, it has become increasingly
apparent to us that additional, separate whistleblower award schemes
might apply to an action that could otherwise qualify as a related
action. In this regard we note that, since the adoption of our
whistleblower program rules, two states have adopted their own
whistleblower award programs in connection with state securities-law
enforcement actions.\72\ We are also aware that DOJ might pursue law-
enforcement actions that potentially implicate both the Commission's
whistleblower program and the whistleblower award program that the
Internal Revenue Service (``IRS'') administers.\73\ Further, Congress
in 2015 established a new motor-vehicle-safety whistleblower award
program that allows employees or contractors of a motor-vehicle
manufacturer, parts supplier, or dealership who report serious
violations of federal vehicle-safety laws to obtain an award of 10
percent to 30 percent of any monetary sanction over $1 million that the
Federal Government recovers based on that information.\74\ To date, the
Commission has never paid an award on a matter where a second
whistleblower program also potentially applied to the same matter, nor
has the Commission ever indicated that it would do so.
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\72\ In 2011, Utah established a whistleblower-award scheme to
provide rewards of up to 30 percent of the money collected in state
securities-law enforcement actions. Utah Code Annotated 61-1-101 et
seq. The following year, Indiana enacted a whistleblower award
scheme to provide rewards up to 10 percent of the monies collected
in a state securities-law enforcement action. Indiana Code 23-19-7-1
et seq.
\73\ 26 U.S.C. 7623.
\74\ 49 U.S.C. 30172 (enacted by Section 24352 of the Fixing
America's Surface Transportation Act of 2015 (FAST Act), Pub. L.
114-94).
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Proposed paragraph (b)(4) would expressly authorize two mechanisms
for the Commission to use in situations where at least one other award
scheme might also apply. First, the first sentence of proposed
paragraph (b)(4) would provide that, notwithstanding the definition of
related action in Rule 21F-3(b)(1), if a judicial or administrative
action is subject to a separate monetary award program established by
the Federal Government, a state government, or a self-regulatory
organization, the Commission will deem the action a related action only
if the Commission finds (based on the unique facts and circumstances of
the action) that its whistleblower program has the more direct or
relevant connection to the action.\75\ In analyzing this question, the
Commission will consider whether Congress (or a state) has enacted a
specific whistleblower program that appears to apply directly to the
case at hand; if so, we will generally determine that Congress
reasonably would not have intended our more general, secondary
``related action'' award mechanism to sweep in the case. In reaching
this determinination, we would look to the complaint in the action, the
overall monetary sanctions recovered (e.g., are they principally tied
to a different whistleblower program for which Congress provided an
award mechanism), and the court's final order to assess which award
program has the closer relationship to the overall case. We might also
consult the agency involved with that other case to obtain its overall
assessment of whether the action is in fact one that is primarily tied
to violations for which Congress (or the states) have established a
more specifically applicable whistleblower program and for which our
general, ``related action'' award mechanism should not apply.
Critically, this standard would not yield a clear brightline but would
turn on the particular facts and circumstances of the case at hand and
the Commission would explain the grounds for its conclusion in any
final order.
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\75\ Notably, the Utah whistleblower-award program (see note 72,
supra) provides that a person may not receive an award thereunder if
he or she ``qualifies for an award as described in Section 21F of
the Securities Exchange Act, 15 U.S.C. Sec. 78u-6, and regulations
issued under that section.'' We assume that this provision is
intended to prevent a double recovery on a Utah criminal-enforcement
action brought by the State's Attorney General that could
potentially be covered by both the Commission's whistleblower
program and the Utah program.
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Second, the second sentence of proposed paragraph (b)(4) provides
that even if the Commission determines to deem the action a related
action, the Commission will not make an award to you for the related
action if you have already been granted an award by the authority
responsible for administering the other whistleblower award program;
further, if you were denied an award by the other award program, you
will not be permitted to readjudicate any issues before the Commission
that the authority responsible for administering the other
whistleblower award program resolved against you as part of the award
denial.\76\ The proposed rule provides that, if the Commission makes an
award before an award determination is finalized by the authority
responsible for administering the other award scheme, the Commission
would condition its award on the meritorious whistleblower making a
prompt, irrevocable waiver of any claim to an award from the other
award scheme.
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\76\ This sentence of proposed paragraph (b)(4) is modeled after
existing Rule 21F-3(b)(3), 17 CFR 240.21F-3(b)(3), which is
discussed further below.
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The proposed rule also provides that, in determining whether a
potential related action has a more direct or relevant connection to
the Commission's whistleblower program than another award program, the
Commission would consider the nature, scope, and impact of the
misconduct charged in the purported related action, and its
relationship to the federal securities laws. This inquiry would include
consideration of, among other things: (i) The relative extent to which
the misconduct charged in the potential related action implicates the
public policy interests underlying the federal securities laws (e.g.,
investor protection) versus other law-enforcement or
[[Page 34710]]
regulatory interests (e.g., tax collection or fraud against the Federal
Government); (ii) the degree to which the monetary sanctions imposed in
the potential related action are attributable to conduct that also
underlies the federal securities law violations that were the subject
of the Commission's enforcement action; and (iii) whether the potential
related action involves state-law claims and the extent to which the
state may have a whistleblower award scheme that potentially applies to
that type of law-enforcement action.\77\ Thus, for example, if an
action by DOJ charges a scheme to avoid tax obligations and imposes
monetary sanctions, we would expect that such an action would lack a
more direct or relevant connection to the Commission's whistleblower
program relative to the IRS's award program.\78\ As a second example,
where a state whistleblower award program is available to award a
whistleblower whose tip leads to state criminal charges in connection
with a fraudulent securities offering, we anticipate that the
Commission would not view such an action as a related action under the
test in proposed paragraph (b)(4). In this circumstance, the state
program would be the more direct or relevant program and the
appropriate avenue for the whistleblower to seek an award.
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\77\ To the extent that a state adopts a whistleblower award
program relating directly to securities law violations, we would
generally anticipate the Commission would find that the state award
scheme should apply over the Commission's award program. However, to
the extent that the particular state criminal action may implicate
an award scheme that is not directed at securities-law violations
(such as a state-award scheme focused on consumer protection), the
Commission might conclude that our whistleblower program should not
apply based on an assessment of the particular facts and
circumstances of the state action.
\78\ By contrast, to the extent that a DOJ enforcement action
centers on insider-trading violations that are based on the same
misconduct that was the subject of the Commission's covered action,
and that most of the monetary sanctions arise from the insider-
trading violations, the Commission would likely treat the matter as
a related action notwithstanding any potential restitution ordered
due to any tax violations included within the case.
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In proposing paragraph (b)(4), we acknowledge that, on its face,
Exchange Act Section 21F does not exclude from the definition of
related actions those judicial or administrative actions that have a
less direct or relevant connection to our whistleblower program than
another whistleblower scheme. We nonetheless perceive ambiguity when
considering this language in the context of the overall statutory
scheme. We believe that an understanding focused exclusively on the
statutory definition of related action would produce a result that
Congress neither contemplated nor intended. We believe that our
rulemaking authority under the Exchange Act and our authority to define
Exchange Act terms permit us to reach this interpretation.\79\ We base
this determination on several considerations.
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\79\ Section 23(a)(1) of the Exchange Act, 15 U.S.C. 78w(a)(1),
expressly provides the Commission the ``power to make such rules and
regulations as may be necessary or appropriate to implement the
provisions'' of the Exchange Act, and has long been understood to
provide the Commission with broad authority to issue rules and
regulations carrying the force of law. Similarly, Section 21F(j), 15
U.S.C. 78u-6(j), grants us ``the authority to issue such rules and
regulations as may be necessary or appropriate to implement'' the
whistleblower award program. In addition, we have broad definitional
authority pursuant to Section 3(b) of the Exchange Act, 15 U.S.C.
78c(b), which provides us with the ``power by rules and regulations
to define . . . terms used in [the Exchange Act].''
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First, when Congress established the Commission's whistleblower
program, it set a firm ceiling on the maximum amount that should be
awarded for any particular action--``not more than 30 percent, in
total, of what has been collected of the monetary sanctions imposed''
in the action.\80\ Indeed, it appears that in establishing federal
whistleblower award programs in the modern era Congress has determined
that an award of more than thirty percent on any particular action is
not necessary or appropriate.\81\ Yet if both the Commission's
whistleblower program and another whistleblower award scheme were to
apply to the same action, this would create the potential for a total
award exceeding the 30-percent ceiling due to a dual recovery.
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\80\ 15 U.S.C. 78u-6(b)(1)(B).
\81\ See, e.g., 7 U.S.C. 26 (providing under the CFTC's
whistleblower program for awards of ``not more than 30 percent, in
total, of what has been collected of the monetary sanctions imposed
in the action or related actions''); 26 U.S.C. 7623(b)(1) (providing
under the IRS administered whistleblower award program for ``an
award . . . not more than 30 percent of the collected proceeds
(including penalties, interest, additions to tax, and additional
amounts)''); 31 U.S.C. 3730 (providing in a False Claims Action that
a qui tam plaintiff shall receive ``not more than 30 percent of the
proceeds of the action or settlement''). Our preliminary analysis
indicates that Congress's determination not to go above a 30-percent
ceiling for awards appears to comport with a similar determination
by those states that have adopted their own false claims acts and
securities-law whistleblower programs.
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Second, the purpose of the related action award component of the
Commission's whistleblower program was to allow meritorious
whistleblowers the opportunity to obtain additional financial awards
for the ancillary recoveries that may result from the same original
information that the whistleblowers gave to the Commission. In this
way, the potential for a related action recovery can further enhance
the incentives for an individual to come forward to the Commission. But
neither the text of Section 21F, nor the relevant legislative history
\82\ suggests that Congress considered the unusual situation in which
there may be a separate whistleblower award scheme that has a more
direct or relevant connection to the judicial or administrative
action,\83\ and that would therefore be providing a financial incentive
to encourage individuals to report misconduct without the need for the
incentive effect produced by the related-action component of the
Commission's award program.
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\82\ See generally S. Rep. No. 111-176 at 110-12 (2010).
\83\ See generally Radzanower v. Touche Ross & Co., 426 U.S.
148, 153 (1976) (``It is a basic principle of statutory construction
that a statute dealing with a narrow, precise, and specific subject
is not submerged by a later enacted statute covering a more
generalized spectrum.''); Anthony Scalia & Bryan A. Garner, Reading
Law: The Interpretation of Legal Texts (2012) at 183 (noting that a
specifically applicable statutory provision should govern a more
general provision because ``the specific provision comes closer to
addressing the very problem posed by the case at hand and is thus
more deserving of credence''); id. at 184 (explaining that ``the
general/specific canon [of statutory construction] does not meant
that the existence of a contradictory specific provision voids the
general provision[,]'' but rather that ``its application to cases
covered by the specific provision is suspended'').
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Third, we believe that permitting potential whistleblowers to
recover under both our award program and a separate award scheme for
the same action would produce the irrational result of encouraging
multiple ``bites at the apple'' in adjudicating claims for the same
action and potentially allowing multiple recoveries.\84\ In the
adopting release that accompanied the original whistleblower rules, the
Commission recognized the irrational result that would flow from
allowing a whistleblower to have multiple separate opportunities to
adjudicate his or her contributions to a case and to potentially obtain
multiple separate rewards on that same enforcement action. Further, the
Commission barred this result from occurring in the specific contexts
that the Commission considered at the time it adopted the whistleblower
program rules. Specifically, the Commission adopted Rule 21F-3(b)(3),
which provides that the Commission will not pay on a related action if
the whistleblower program administered by the Commodity Futures Trading
[[Page 34711]]
Commission (``CFTC'') has issued an award for the same action, nor will
the Commission allow a whistleblower to readjudicate any issues decided
against the whistleblower as part of the CFTC's award denial. In
adopting that rule, the Commission made clear its view that a
whistleblower should neither have two recoveries on the same action nor
multiple bites at the adjudicatory apple.\85\ Relatedly, the Commission
explained in the adopting release that it would for similar reasons not
make an award to a whistleblower who was also a qui tam plaintiff under
the False Claims Act.\86\ Although at the time of the original
rulemaking for the whistleblower program the Commission did not
expressly consider the potential for multiple separate awards due to
the existence of any other award schemes (such as the whistleblower
program administered by the IRS), the principles underlying Rule 21F-
3(b)(3) appear similarly relevant to that circumstance.
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\84\ Mova Pharmaceutical Corp. v. Shalala, 140 F.3d 1060, 1068
(D.C. Cir. 1998) (``If a literal construction of the words of a
statute be absurd, the act must be so construed as to avoid the
absurdity.''); see also United States v. X-Citement Video, Inc., 513
U.S. 64, 68-69 (1994) (rejecting the ``most natural grammatical
reading'' of a statute to avoid ``absurd'' results).
\85\ 76 FR 34300, 34305/3.
\86\ Id. n.52 (``[W]e do not believe Congress intended Section
21F of the Exchange Act to permit additional recovery for the same
action above what it specified in the False Claims Act.'').
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To illustrate the significance of our existing rule and the rule
that we are proposing, consider a future DOJ enforcement action
involving predominately tax claims that results from the same original
information that a Commission whistleblower shared with both the
Commission and the CFTC. In this scenario, it is entirely possible
based purely on the words of the relevant statutes that the SEC and the
CFTC could each have to pay up to 30 percent on the DOJ action, and
that the IRS could have to pay an additional 30 percent; the Commission
whistleblower could thus take home an amount that is equal to as much
as 90 percent of the money collected for the violations in the DOJ
action. In our view, this is an ``obviously unintended'' outcome that
would ``make[ ] no substantive sense,'' \87\ and the rule that we
already have in place and the rule that we are proposing would prevent
it and similar duplicative payments from multiple whistleblower
programs.
---------------------------------------------------------------------------
\87\ Scalia & Garner, supra note 33, at 235, 239 (emphasis in
original).
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In addition to the foregoing, we are also proposing two amendments
to the definition of ``related action'' in Rule 21F-3(b)(1). First, the
proposed amendment would add clarity to the existing requirement that,
to potentially obtain an award for a related action, a whistleblower
must have provided to the other entity (or the Commission must have
shared with the other entity) the same original information that the
whistleblower provided to the Commission and that led to the successful
enforcement of the Commission action.\88\ We think that where the
Commission staff determines to share the whistleblower's information
with the other entity, it is consistent with the purposes of the
program to allow an award even if the whistleblower did not directly
step forward to that agency.\89\
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\88\ See Rules 21F-3(b)(2), 17 CFR 240.21F-3(b)(2), and 21F-
4(c)(1)-(3), 17 CFR 240.21F-4(c)(1)-(3).
\89\ Section 21F provides express authority for the Commission
to share information that may identify a whistleblower with other
authorities that may, in turn, bring related actions. See 15 U.S.C.
78u-6(a)(5) and (h)(2)(D)(i).
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This new language to the definition of ``related action'' merely
clarifies what is already required by Exchange Act Rule 21F-11(c),\90\
which provides in relevant part that a whistleblower must ``demonstrate
[that the whistleblower] directly (or through the Commission)
voluntarily provided the governmental agency, regulatory authority or
self-regulatory organization the same original information that led to
the Commission's successful covered action[.]'' Further, we believe
that this interpretation is consistent with the requirement in Section
21F(a)(5) of the Exchange Act \91\ that a related action must be
``based upon the original information provided by a whistleblower.'' To
be ``based upon'' the whistleblower's original information, in our
view, the same information that the whistleblower provided to the
Commission must have been provided to the other authority and that
information must have itself directly contributed to the other
authority's investigative or litigation efforts leading to the success
of that authority's enforcement action. In practice, this can occur
either because the whistleblower provided the original information to
the other authority, or because the Commission through its information
sharing mechanisms provided the original information to the other
authority, and in either case the authority utilized that information
directly in its own investigation and/or its resulting enforcement
action.
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\90\ 17 CFR 240.21F-11(c).
\91\ 15 U.S.C. 78u-6(a)(5).
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We note that, under our existing interpretation of the ``based
upon'' language in Section 21F(a)(5) and the clarifying rule that we
are proposing, the other authority's enforcement action would not be a
related action in circumstances where the other authority's enforcement
action was in some manner ``based upon'' the results or findings of the
Commission's enforcement action without the other authority ever
actually receiving and utilizing the whistleblower's original
information. Rather, in this situation the whistleblower's original
information could, at best, be described as a derivative factor
potentially contributing to the success of the other authority's
action, and we deem this too attenuated a causal connection to meet the
``based upon'' standard, which in our view requires actual reliance on
the whistleblower's original information by the other entity.\92\
Indeed, in these circumstances any claim for an award would fail under
Rule 21F-3(b)(2), which unambiguously requires that the success of a
related action be based upon ``the same original information that the
whistleblower gave to the Commission'' as a predicate to the Commission
authorizing a related action award.\93\
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\92\ The ``based upon'' language in Exchange Act section
21F(a)(5), 15 U.S.C. 78u-6(a)(5) is separate and distinct from the
requirement that the whistleblower's original information must have
``led to'' the success of the other entity's action, see Exchange
Act section 21F(b)(1), 15 U.S.C. 78u-6(b)(1); see also Exchange Act
Rule 21F-4(c), 17 CFR 240.21F-4(c). Even if a whistleblower
satisfies the ``based upon'' standard because his information was
directly provided to the other entity by the whistleblower or the
Commission, and used in some fashion by that entity, this does not
mean the whistleblower's information necessarily ``led to'' the
success of that action.
\93\ 17 CFR 240.21F-3(b)(2). Rule 21F-3(b)(2) contemplates that
``the Commission may seek confirmation of the relevant facts
regarding the whistleblower's assistance from the authority that
brought the related action,'' and we will deny a related action
award where sufficient and reliable information cannot be obtained
from the other authority. 76 FR 34300, 34305/1. These requirements
would be rendered null if the ``based upon'' requirement could be
satisfied without the other authority actually receiving and
utilizing the whistleblower's original information.
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Second, we are making a technical modification to the definition of
``related action'' in Rule 21F-3(b)(1) that would make clear that the
existing clause ``based on'' the same original information that the
whistleblower voluntarily provided to the Commission, and that ``led
the Commission to obtain monetary sanctions totaling more than
$1,000,000,'' applies to all related actions and not just criminal
actions brought by a state attorney general. This technical
modification would conform the definition in the rule to the
substantive requirements of the statutory definition as set forth in
Section 21F(a)(6) of the Exchange Act.\94\
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\94\ 15 U.S.C. 78u-6(a)(6).
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Request for Comment
7. Is the proposed ``direct or relevant'' standard appropriate for
assessing whether an action should qualify as a
[[Page 34712]]
related action? Are there alternative formulations that should be
adopted instead?
8. Instead of adopting the proposed rule, which would authorize the
Commission on a case-by-case basis to consider whether an action should
qualify as a related action, should the Commission adopt a categorical
exclusion from the definition of related action for any judicial or
administrative action that may have an alternative applicable award
scheme?
9. As part of this rulemaking, we are considering whether to repeal
Exchange Act Rule 21F-3(b)(3), 17 CFR 240.21F-3(b)(3),\95\ so that
proposed Rule 21F-3(b)(4) would also apply to potential related actions
that might produce a double recovery with the CFTC's whistleblower
program. Existing Rule 21F-3(b)(3) applies somewhat differently than
our proposed Rule 21F-3(b)(4), as it does not provide the Commission
express authority to determine whether a potential related action is
more closely connected with the SEC's whistleblower program or the
CFTC's whistleblower program. Should we repeal existing Exchange Act
Rule 21F-3(b)(3) so that proposed Rule 21F-3(b)(4) would apply instead
to afford a uniform treatment for all potential related actions for
which multiple whistleblower programs might apply? Please explain.
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\95\ Exchange Act Rule 21F-3(b)(3) provides that the Commission
will not make an award to an individual for a related action if the
individual has already been granted an award by the CFTC for the
same action pursuant to its whistleblower program under Section 23
of the Commodity Exchange Act (7 U.S.C. 26). Similarly, if the CFTC
has previously denied an award to an individual in a related action,
the individual will be precluded from relitigating any issues before
the Commission that the CFTC resolved against the individual as part
of an award.
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D. Proposed Amendment to Exchange Act Rule 21F-6 Regarding Awards to a
Single Whistleblower Below $2 Million or in Cases Yielding at Least
$100 Million in Collected Monetary Sanctions 96 and Guidance
on the Meaning of ``Unreasonable Delay'' Under Rule 21F-6.
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\96\ The Commission anticipates this proposed rule change, if
adopted, would apply only to covered-action and related-action award
applications that are connected to a Notice of Covered Action (see
Exchange Act Rule 21F-10(a), 17 CFR 240.21F-10(a)) posted on or
after effective date of the final rules.
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Rule 21F-6 \97\ establishes the analytical framework that the
Commission follows both in setting the appropriate percentage amount of
an award in connection with a particular Commission or related action
and in determining an individual percentage award for each
whistleblower where the Commission makes awards to more than one
whistleblower in connection with the same action. In the adopting
release accompanying the promulgation of the whistleblower program
rules, the Commission explained that Rule 21F-6 ``provides general
principles without mandating a particular result'' and ``the
determination of the appropriate percentage of a whistleblower award
will involve a highly individualized review of the facts and
circumstances surrounding each award using the analytical framework set
forth'' in the rule.\98\
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\97\ 17 CFR 240.21F-6.
\98\ 76 FR 34300, 34331/2.
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Rule 21F-6 identifies four criteria that may increase an award
percentage and three criteria that may decrease a whistleblower's award
percentage. As provided in Rule 21F-6(a), the criteria that may
increase an award percentage are: (1) Significance of the information
provided by the whistleblower; (2) assistance provided by the
whistleblower; (3) law-enforcement interest in making a whistleblower
award; and (4) participation by the whistleblower in internal
compliance systems. As provided in Rule 21F-6(b), the criteria that may
decrease an award percentage are: (1) Culpability of the whistleblower;
(2) unreasonable reporting delay by the whistleblower; and (3)
interference with internal compliance and reporting systems by the
whistleblower.
Proposed paragraph (c) would add to Rule 21F-6's existing
analytical framework by providing a mechanism for the Commission to
adjust upwards any awards that would potentially be below $2 million to
a single whistleblower. Specifically, proposed Rule 21F-6(c) would
provide that, if the resulting award after applying the award factors
specified in paragraphs (a) and (b) would yield a potential payout to a
single whistleblower below $2 million (or any such greater amount that
the Commission may periodically establish through publication of an
order in the Federal Register), the Commission may adjust the award
upward so that the likely total award payout to the whistleblower
reflects a dollar amount that the Commission determines is appropriate
to achieve the program's objectives of rewarding meritorious
whistleblowers and sufficiently incentivizing future whistleblowers who
might otherwise be concerned about the low dollar amount of a potential
award; provided that in no event shall this provision be utilized to
raise a potential award payout (as assessed by the Commission at the
time it makes the award determination) above $2 million (or by such
other amount as the Commission may designate by order) or will the
total amount awarded to all whistleblowers in the aggregate be greater
than 30 percent.
We believe that proposed paragraph (c) could provide an important
new tool for the Commission to ensure that even in cases where the
collected monetary sanctions may be relatively small (and award amounts
correspondingly modest), whistleblowers could receive an appropriate
award for their efforts in coming forward to the Commission. We also
anticipate that, where the proposed rule is triggered, there would be a
presumption in favor of some award enhancement, though the precise
amount of the enhancement may vary from case to case depending on the
unique facts and circumstances at issue. In this way, we believe
proposed paragraph (c) could provide an important additional incentive
for potential whistleblowers to come forward.\99\
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\99\ We believe that proposed paragraph (c) would in many
respects work similar to proposed paragraph (d), as discussed
further below; this would include, for example, how we would
determine whether the $2 million threshold is met in cases involving
joint whistleblowers. To the extent that either proposed paragraph
(c) or proposed paragraph (d) is triggered by a potential award, it
would open up discretion for the Commission to assess the award
factors in Exchange Act Rules 21F-6(a)-(b), 17 CFR 240.21F-6(a)-(b),
in terms of dollar amounts, not merely in terms of award
percentages. This would give the Commission, for example, the
authority to boost a 20 percent award upwards based on a
reassessment of the positive factors relative to the actual dollar
amounts at issue in the particular award. Thus, even if the
whistleblower might otherwise receive a 20 percent award on a small
case (for example, one with collections of $100,000), the Commission
could reassess the whistleblower's contributions in dollar terms and
determine to enhance the award upwards (potentially up to the 30
percent maximum, which in the particular example would yield a
payout of $30,000). The Commission could do so if it determines that
this enhancement in dollar terms would better acknowledge the
whistleblower's contribution and better help incentivize similarly
situated future whistleblowers. Further, in assessing whether the $2
million threshold has been, or likely will be satisfied, the
Commission will consider collectively the total award amounts from
all the Commission and related actions that were the result of the
whistleblower's original information.
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We note that the new authority proposed in paragraph (c) would come
with important limitations. Specifically, the Commission will not
adjust an award upward under the proposed provision if any of the
negative award factors that are identified in Exchange Act Rule 21F-
6(b) \100\--and which are specified above--were found to be present
with respect to the whistleblower's award claim, or if the
[[Page 34713]]
award claim triggers Exchange Act Rule 21F-16 (concerning awards to
whistleblowers who engage in culpable conduct).\101\ Thus, for example,
if a whistleblower whose award claim might otherwise be eligible for an
enhancement under this provision were found by the Commission to have
unreasonably delayed reporting to the Commission under Exchange Act
Rule 21F-6(b)(2), then the Commission could not increase his or her
award under this provision.
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\100\ 17 CFR 240.21F-6(d).
\101\ 17 CFR 240.21F-16.
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In addition, we are proposing a new paragraph (d) that would add to
Rule 21F-6's existing analytical framework by providing a mechanism for
the Commission to conduct an enhanced review of awards in situations
where a whistleblower has provided information that led to the success
of one or more covered or related actions that, collectively, result in
at least $100 million in collected monetary sanctions. As we explain
below, under proposed paragraph (d), the Commission, first, would
consider the dollar amount of an award at given percentage levels in
determining whether and how to adjust the award based on the positive
and negative factors in paragraphs (a) and (b) of this section; and
second, the Commission could determine that an exceedingly large
potential payout resulting from the assessment under paragraphs (a) and
(b) was not reasonably necessary to fulfill the purposes of the program
and thus exercise its discretion to reduce the award to an appropriate
amount. The Commission's ability to reduce an award under this
provision would be subject to two significant limitations. First, in no
event could the Commission reduce the total payout for any award(s)
resulting from the whistleblower's original information below $30
million. Second, the Commission could not reduce the award for any
specific action such that the total amount paid to all whistleblowers
for that action would go below the 10 percent minimum statutory floor
of collected monetary sanctions in that action.\102\
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\102\ For example, if the collected amount is $150 million, the
Commission could exercise its discretion to reduce a potential
payout of 25% ($37.5 million), but the Commission could not reduce
the award below $30 million. In another example, if the collected
amount is $400 million, the Commission could exercise its discretion
to reduce a potential payout of 25% ($100 million), but the
Commission could not reduce the award below 10% ($40 million).
Finally, if the collected amount is $150 million and the potential
payout is 18% ($27 million), then the Commission could not reduce
that award because it already is below the $30 million floor.
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An important principle underlying proposed paragraph (d) is that,
as the dollar value of an award amount grows exceedingly large, there
is a significant potential for a diminishing marginal benefit to the
program in terms of compensating the whistleblower and incentivizing
future whistleblowers. In these situations, we believe that it is in
the public interest that we scrutinize the dollar impact of these
awards more carefully in considering award enhancements and reductions
under the existing award criteria of paragraphs (a) and (b) of this
section and, further, where appropriate, adjust an award downward so
that the dollar amount of the payout is more in line with the program's
goals of rewarding whistleblowers and incentivizing future
whistleblowers from a cost-benefit perspective (again, subject to the
$30 million floor for any whistleblower subject to a reduction under
this provision and the 10 percent statutory minimum referenced above).
As an illustration of a potential situation to which proposed
paragraph (d) might be utilized, consider the settlements that the
Commission and DOJ entered with Siemens AG in 2008. The total monetary
sanctions collected in these two actions was $800 million (the
Commission received $350 million in disgorgement of profits \103\ and
DOJ received $450 million in criminal penalties \104\). Suppose that
these two actions occurred today and that these actions were based on
original information voluntarily provided to the Commission by an
eligible whistleblower. In such a situation, the Commission would be
required to pay an award to that whistleblower of between $80 million
(a 10 percent award) and $240 million (a 30 percent award) for the two
actions. Critically, under the existing framework of Rule 21F-6--
without proposed paragraph (d)--the Commission in setting the
appropriate amount of an award would be unable to consider the
extraordinarily large dollar amounts that would be associated with any
assessments and adjustments made when applying the existing award
factors of Rule 21F-6; the Commission would also lack the authority to
adjust the award amount downward if it found that amount unnecessarily
large for purposes of achieving the whistleblower program's goals. So
if the hypothetical meritorious whistleblower were an individual who
did everything right in connection with his or her whistleblowing (that
is, he or she were the model whistleblower), the Commission would
almost certainly be obligated to pay this individual an award at or
near the maximum $240 million level under the existing rules. What
paragraph (d) would do, as we explain below, is to afford the
Commission the discretion to determine whether such an extraordinarily
large payout is actually necessary to further the whistleblower
program's goals of rewarding whistleblowers and incentivizing future
whistleblowers, and if not, proposed paragraph (d) would afford the
Commission the ability to adjust the actual payout to an award amount
that is closer to the $80 million minimum that would be required to be
paid pursuant to Section 21F(b). We believe that adopting paragraph (d)
to afford us a discretionary mechanism to make such common-sense
adjustments to extraordinarily large awards to ensure that they do not
exceed an amount that is appropriate to achieve the goals and interests
of the program is, to put it simply, good public policy.
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\103\ See SEC Litigation Release No. 20829 (dated Dec. 15, 2008)
(discussing the settlement reached SEC v. Siemens Aktiengellschaft,
Civ. Action No. 08-CV-02167 (D.D.C.)).
\104\ See DOJ Press Release entitled ``Siemens AG and Three
Subsidiaries Plead Guilty to FCPA Violations and Agree to Pay $450
Million in Combined Criminal Fines'' (dated Dec. 15, 2008)
(available at: www.justice.gov/archive/opa/pr/2008/December/08-crm-1105.html).
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Turning to the text of proposed paragraph (d), this new provision
would do two important things that should help us ensure that any large
awards are in fact aligned with the program's goals and not
unnecessarily large to achieve the program's goals. First, proposed
paragraph (d)(1) would permit the Commission to consider the potential
dollar amount of the payout to a whistleblower resulting from his or
her original information (in any Commission actions or related actions,
collectively) when applying each of the existing award criteria; when
the potential amount of an award payout could be in the range of 10 to
30 percent of at least $100 million, we believe it is reasonable and
appropriate to consider the adjustments that we make for each award
factor in dollar terms rather than to apply exclusively a percentage
assessment that does not take into account what those percentage
adjustments would translate to in actual dollars paid to the
whistleblower.\105\
[[Page 34714]]
This would allow us to consider the relative (or marginal) value of the
actual dollar amounts associated with any enhancements that we are
considering under the positive award factors. We think that this is
particularly important where the percentage enhancements are
corresponding with particularly large dollar enhancements because, to
the extent that individuals are motivated to come forward based on a
potential award, it is the total dollar payout that would be relevant
to them. Allowing us to assess each enhancement or reduction in dollar
terms should permit us to more realistically and concretely assess the
appropriate amount that is reasonably necessary to recognize a
whistleblower's contributions in cases involving large potential
awards.
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\105\ The statutory framework that Section 21F establishes
appears to permit--and at a minimum does not expressly prohibit--the
Commission from considering the dollar amount of a potential award.
Indeed, the language in Section 21F refers to the ``amount of the
award,'' which appears to afford the Commission discretion to set
the awards based on a consideration of the appropriate dollar amount
that should be paid (provided that this dollar amount is between 10
percent and 30 percent of the collected monetary sanctions).
Notwithstanding the statutory language, the Commission's existing
rules do not expressly authorize the Commission to consider the
dollar amount of a potential award when setting the award
percentage. Proposed paragraph (d) would make it clear that the
Commission may consider the dollar amount of a potential award when
setting the award percentage where at least $100 million in monetary
sanctions has been collected.
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Second, proposed paragraph (d)(2) would permit the Commission to
adjust the award downward if, after consideration of the existing award
factors in paragraphs (a) and (b) of this section, the Commission finds
that the potential award amount (from any Commission actions and
related actions, collectively) exceeds what is reasonably necessary to
reward the whistleblower and to incentivize similarly situated
whistleblowers.\106\ Importantly, proposed paragraph (d)(2) would not
mandate that the Commission make a downward adjustment. Further,
proposed paragraph (d)(2) would make clear that any adjustment to a
whistleblower's award under that paragraph shall not yield a potential
award payout (as assessed by the Commission at the time that it makes
the award determination) below $30 million, nor may any downward
adjustment result in the total amount awarded to all the meritorious
whistleblowers, collectively, for each covered or related action
constituting less than 10 percent of the monetary sanctions collected
in that action.
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\106\ Notably, this authority to make a downward adjustment
would be available only if the resulting payout after applying the
existing award factors would be at least $30 million (or such
greater alternative amount that the Commission may periodically
establish through publication of an order in the Federal Register).
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Critically, the $30 million reference in proposed rule (d)(2) would
not be a ceiling on awards, and we do not intend that it would be
applied as such. Rather, $30 million for a potential payout is the
floor below which we would not lower any award that is subject to a
reduction under the proposed rule. Further, the proposed amendment
would be triggered only in situations where a whistleblower (including
two or more individuals who acted together as a joint whistleblower)
provides information that leads to the success of one or more covered
actions and related actions that results in at least $100 million in
collected monetary sanctions.\107\ In the nearly seven years of
experience that we have had in implementing and administering the
whistleblower program, we have issued final orders granting 50
whistleblower awards to 55 individuals (including, as explained above,
individuals who acted as joint whistleblowers).\108\ To date, only two
Commission covered actions and related actions have crossed the
threshold of collecting at least $100 million in monetary sanctions and
for which the payout exceeded our proposed $30 million floor.\109\
Those two actions taken alone involved the payment of $112 million to
four individuals.
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\107\ In assessing whether the $100 million threshold has been
crossed to invoke proposed paragraph (d), we preliminarily
anticipate considering not just the likely payout in any Commission
covered actions that resulted from the whistleblower's information,
but also any potential payout that might result from any related
actions that resulted from the whistleblower's information. Thus,
for example, if a Commission covered action and a related action
brought by the Department of Justice, and a related action brought
by an appropriate regulatory authority, collectively, resulted in
the collection of at least $100 million in monetary sanctions based
on a whistleblower's original information, then proposed paragraph
(d) would be triggered. We would then decide whether one or more of
the awards should be adjusted downward to yield a total payout that
complies with the terms of the proposed rule. Further, we note that
in the context of a joint whistleblower, for purposes of applying
the proposed rule, we would treat them collectively as one
whistleblower in applying proposed paragraph (d), including in
assessing whether the $100 million threshold is satisfied; however,
in determining whether and to what extent to make a downward
adjustment, we would expect to consider the need to appropriately
incentivize individuals even when acting jointly to come forward and
report to the Commission.
\108\ These totals are through April 2018 and treat as single
awards several cases where whistleblowers' original information led
to multiple covered actions that were processed together in one
award Order recognizing the total contributions of the
whistleblower. Similarly, consistent with the approach proposed
above governing cases where we grant an award for both a Commission
enforcement action and a related action by another agency based on
the same information provided by the whistleblower (see 17 CFR
240.21F-3(b)), we consider covered-action awards together with their
corresponding related action awards as single whistleblower awards.
\109\ One of the awards that exceeded $30 million was issued in
September 2014 for more than $30 million in a Commission action and
related actions. See Order Determining Whistleblower Award Claim,
Exchange Act Release No. 34-73174 (Sept. 22, 2014), available at
https://www.sec.gov/rules/other/2014/34-73174.pdf. Two other awards
were issued in March 2018 for $49 and $33 million, respectively, to
three individuals (two of whom were acting as joint whistleblowers)
in a single covered action. See Order Determining Whistleblower
Award Claim, Exchange Act Release No. 34-82897 (March 19, 2018),
available at https://www.sec.gov/rules/other/2018/34-82897.pdf.
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We believe that the $100 million collected-monetary-sanctions
threshold reflects the appropriate level at or above which it would be
reasonable for the Commission to consider whether the likely award
payout from the collected monetary sanctions will exceed an amount that
is appropriate to achieve the program's goals. For matters involving
collected sanctions at or above the $100 million threshold, we think
the potential for a whistleblower award to exceed the amount necessary
to achieve the program's goals exists and that awards based on $100
million or more are sufficiently large to warrant heightened scrutiny
under the rule that we are proposing. Our proposed approach in
triggering proposed paragraph (d) based on the amount of monetary
sanctions collected is not unlike the approach that the DOJ utilizes
(and which some courts also utilize) in the context of the False Claims
Act (``FCA'') when determining the appropriate amount of an award to a
relator. Specifically, DOJ has developed a series of guidelines to
determine the appropriate size of an award, and one consideration that
may lead to a downward adjustment is whether the ``FCA recovery was
relatively large.'' \110\
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\110\ See Claire M. Sylvia, The False Claims Act: Fraud Against
the Government section 8.4 (updated June 2018) (citing DOJ Relator's
Guidelines, reprinted in 11 False Claims Act and Qui Tam Q. Rev. 17
(Oct. 1997); see also U.S. ex rel. Simmons v. Samsung Electronics
Am., Inc., 116 F. Supp. 3d 575, 580-81 (quoting and applying the DOJ
award guidelines).
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We similarly believe that the $30 million floor is appropriate. In
our view, there is a potential that as the payout to a whistleblower
grows beyond the $30 million floor, the marginal benefit of each
additional dollar paid may decrease to such an extent that, in terms of
furthering the program's overall goals, the payout may be more than is
reasonably necessary. In our judgment $30 million represents a
reasonable line at which to draw the floor.\111\ In this
[[Page 34715]]
regard, we note that utilizing 2016 data on net worth, an individual
who received just the $30 million floor--even allowing for a reduction
due to taxes--would find himself or herself in the range of the the top
99.5 percentile to 99.9 percentile of the U.S. population by net
worth.\112\ Further, the analysis conducted in Part VII(B)(5)
demonstrates for us that even this sum (again, allowing for a reduction
due to taxes) if modestly invested should produce a reasonable lifetime
income stream for most potential whistleblowers. We thus believe it is
appropriate and reasonable to afford the agency a mechanism to more
closely scrutinize awards that exceed this floor to determine whether
and to what extent they are necessary to reward the whistleblower or
incentivize similarly situated whistleblowers.
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\111\ See, e.g., WorldCom, Inc. v. FCC, 238 F.3d 449, 462 (D.C.
Cir. 2001) (citation omitted) (explaining that ``[a]n agency has
`wide discretion' in making line-drawing decisions and `[t]he
relevant question is whether the agency's numbers are within a zone
of reasonableness' ''); see also, e.g., National Shooting Sports
Foundation, Inc. v. Jones, 716 F.3d 200, 214, (D.C. Cir. 2013)
(citation omitted) (``An agency `is not required to identify the
optimal threshold with pinpoint precision. It is only required to
identify the standard and explain its relationship to the underlying
regulatory concerns.'').
\112\ In 2016, approximately 0.5 percent of the U.S. population
had a net worth of $16.12 million while 0.1 percent of the U.S.
population had a net worth of $43.1 million. See https://dqydj.com/net-worth-brackets-wealth-brackets-one-percent/.
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While we believe that the $30 million floor should reflect an
amount that in most cases would be an extremely attractive inducement
for company insiders across many industries to come forward to report
securities-law violations, we recognize that future experience in the
years ahead could suggest that some adjustment is appropriate.\113\
Accordingly, to the extent that our experience with the program in
future years may suggest that an adjustment to the floor is
appropriate, we propose to establish a mechanism by which the
Commission may publicly notice an order announcing such an increase by
publishing it in the Federal Register.
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\113\ The economic analysis, infra Part VII, discusses various
potential annual incomes that a meritorious whistleblower might
obtain from investing a $30 million award payout in various types of
annuities. We note that, to the extent that certain whistleblowers
may experience significant harmful consequences, such as large
financial sacrifices or career-ending ramifications, as a result of
their whistleblowing activities, the proposed rule (should it be
triggered by the potential payout) would allow the Commission the
flexibility to consider these particular facts and circumstances to
determine an appropriate award level. Proposed paragraph (d) would
allow the Commission similar flexibility in situations involving
multiple individuals acting as a joint whistleblower.
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In considering the appropriateness of the $30 million floor below
which we could not make a downward departure for any payouts stemming
from a whistleblower's original information, we also note that the
monetary incentive may often be an important reason a whistleblower
comes forward, but it is typically not the only reason in our
experience to date. In this regard, we note that the monetary incentive
is one component in a package of reporting incentives made available
under Section 21F, which includes employment retaliation protections
and confidentiality requirements (including, critically, the ability of
whistleblowers to remain anonymous through the course of an
investigation and resulting enforcement action).\114\ Indeed, our
experience to date has been that approximately one-half of the
whistleblowers who have received awards for information regarding their
current or former employers took advantage of the opportunity to submit
their tips to the Commission anonymously; the ability to report
anonymously is an additional attractive feature of our program that
helps to encourage company insiders and others to come forward by
lessening their fear of potential exposure.
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\114\ See 15 U.S.C. 78u-6(d) (anonymity); id. 78u-6(h)(1)
(employment retaliation protection); id. 78u-6(h)(2)
(confidentiality protections); see also 17 CFR 240.21F-9(c) and
240.21F-10(c).
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In advancing proposed paragraph (d), we are mindful of our own
responsibility to investors and the general public to ensure that the
Investor Protection Fund (IPF) that Congress established to fund awards
is used efficiently and effectively to achieve the program's
objectives.\115\ We recognize that the Commission has obtained
significant monetary judgments against parties in enforcement actions
in recent years. Several individual matters involved orders in excess
of $300 million in monetary sanctions in FY-2016 and FY-2017.\116\ If
there were an eligible whistleblower in one of these matters, and
assuming the Commission collected the amounts ordered, an exceedingly
large whistleblower award, beyond what we believe was intended when the
program was established, could result. Multiple such awards would, in
turn, cause the funds in the IPF to be diminished. As of the end May
2018, the balance of the IPF for the first time fell below the $300
million threshold that triggers the statutory replenishment mechanism;
this occurred when the Commission paid $83 million--its largest payout
to date on an enforcement action--to three individuals.\117\ Whenever
the reserve in the IPF falls below $300 million, Section 21F(g)(3)
requires the Commission to replenish the IPF.\118\ These funds
otherwise would be directed to the Treasury, where they could be made
available for use in funding other valuable public programs.
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\115\ See Exchange Act section 21F(g), 15 U.S.C. 78u-6(g).
\116\ See, e.g., SEC Division of Enforcement Annual Report for
2017 (Nov. 15, 2017), available at https://www.sec.gov/files/enforcement-annual-report-2017.pdf.
\117\ At the end of 2010, the IPF had just under $452 million in
it, with no awards having yet been made. See Annual Report on the
Dodd-Frank Whistleblower Program, Fiscal Year 2011, at 8 (available
at: https://www.sec.gov/files/whistleblower-annual-report-2011.pdf),
and by the end of fiscal year 2017, the IPF had approximately $322
million in it. Thus, from the end of 2010 until the end of fiscal
year 2017, approximately $130 million in awards were paid out. The
$83 million awards that were just paid for a single enforcement
action were approximately equal to 64% of the sum of all of the
other awards that the Commission had paid up through fiscal year
2017.
\118\ See 15 U.S.C. 78u-6(g)(3).
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In light of the foregoing, we believe that, where a whistleblower's
original information leads to Commission or related actions that,
collectively, involve at least $100 million in collected monetary
sanctions, it is consistent with the interests of investors and the
broader public interest that the Commission have a mechanism to ensure
that the payout does not exceed an amount beyond what is reasonably
necessary to achieve the program's goals and, to the extent that it is,
to adjust the award percentage so that it better aligns with those
goals. In our view, proposed paragraph (d) would provide such a
mechanism if adopted.
We generally anticipate that the Commission's application of
proposed paragraph (d) would be based on the unique facts and
circumstances of each award matter. We believe that in determining
whether a payout exceeds what is appropriate to achieve the program's
objectives, the Commission would carefully assess the potential payout
in relation to both any unusually detrimental circumstances that impact
the whistleblower and the level of financial incentive that may be
necessary to encourage future similarly situated whistleblowers to come
forward. Facts that would be relevant to determining whether the large
payout may be appropriate given the specific whistleblower's
circumstances include, for example, whether the whistleblower made an
extraordinary and highly unusual sacrifice by coming forward (such as
placing himself or herself in legal jeopardy to bring the Commission
information that it would otherwise not have been able to obtain or
demonstrably suffering career-ending consequences commensurate with the
potential large award). In a situation involving two or more
individuals acting as a joint whistleblower, we would consider the need
to appropriately incentivize individuals even when acting jointly to
come forward and report to the Commission.
[[Page 34716]]
Facts that would be relevant to determining whether the large payout is
necessary and appropriate to encourage future similarly situated
whistleblowers to come forward include the industry in which
knowledgeable whistleblowers might work, the type of position held by
that whistleblower,\119\ and the compensation levels within that
industry,\120\ and whether potential whistleblowers may be located
overseas and the likely compensation levels in those countries (to the
extent available).\121\
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\119\ According to the Office of the Whistleblower, of the 55
individuals who have received awards, approximately 10 percent were
high-ranking corporate executives at companies of varying sizes.
Each whistleblower award determination is based on the facts and
circumstances of the case, including the monetary sanctions
collected. Based on this subset of prior cases, a large majority of
these executives received awards that were under $5 million.
\120\ We would generally contemplate using publicly available
data on compensation levels in making this determination. Award
applicants could submit information as part of their award
application to the extent that they are concerned that the proposed
rule might be implicated by their application.
\121\ The existence of any of these facts would not foreclose
the Commission from finding that any large payout that exceeded the
$30 million floor in proposed rule 21F-6(d) was nonetheless not
reasonably necessary to achieve the program's goals and to thus
reduce the award to an appropriate amount. Conversely, the absence
of special circumstances or extraordinary sacrifices does not mean
that the Commission would in all cases determine to reduce the
amount of the award.
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In making any downward adjustment to a large award, the Commission
would retain discretion to determine the appropriate award amount and
proposed paragraph (d) is not intended to mandate any specific
reduction or one-size-fits-all result. Nonetheless, we anticipate that
in those cases where proposed paragraph (d) is triggered and the
Commission determines that a downward adjustment is warranted, the
extent to which the Commission exercises its authority to decrease such
awards would vary along a sliding scale that corresponds with the
overall size of the potential award in dollar terms. For example, we
generally anticipate that the nature and magnitude of any decrease
applied to an award in the $35-40 million range would typically be less
than the magnitude of the decrease applied to an award in the $100-$150
million range. In our view, this sliding-scale approach would make
sense because the larger the dollar amount of a payout away from the
$30 million floor, the greater the likelihood of diminishing marginal
benefits to the program from each additional dollar paid to the
whistleblower. In no event, however, would the Commission decrease an
award below the $30 million floor (or whatever future floor the
Commission might establish by order) using the authority afforded to
the Commission pursuant to the proposed rule.
We preliminarily contemplate that proposed paragraph (d) would be
applied in any instance where the Commission determines to process two
or more separate covered actions together in the same final order,
provided that both actions involve the same information submitted by
the whistleblower. We would similarly expect that the Commission could
apply this rule if, after having made an award to a whistleblower, the
Commission subsequently processes an award application for that
whistleblower (either in connection with a second covered action or a
related action) and the subsequent award application is based on the
same general information from the whistleblower as the earlier award
determination.
We do not believe that the proposed rule conflicts with the
statutory directive in Section 21F(c)(1)(B)(ii) \122\ that ``[i]n
determining the amount of an award,'' the Commission ``shall not take
into consideration the balance of the [IPF].'' This statutory provision
prevents the Commission from adjusting an individual award based on the
availability of money in the IPF. Critically, proposed paragraph (d)
would not permit the Commission to consider the balance of the IPF when
determining whether an award should be reduced. Rather, as noted above,
paragraph (d) would only authorize the Commission to consider whether a
potential award payout exceeds an amount that is reasonably necessary
to achieve the program's goals. In this way, proposed paragraph (d)
would provide a mechanism for the Commission to ensure that it is
granting awards in an efficient and effective manner that serves the
``twin goals of protecting investors and increasing public confidence
in the markets'' \123\ and our adoption of this proposed rule would be
within our authority to adopt ``additional relevant [award] factors.''
\124\ To make this clear, we are adding a provision to proposed
pararagraph (d) stating that the Commission shall not take into account
the balance of the IPF in determining whether to make a downward
adjustment under the proposed paragraph or in making any other award
determinations under Exchange Act Rule 21F-6.
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\122\ 15 U.S.C. 78u-6(c)(1)(B)(ii).
\123\ 76 FR 34300, 34356/2.
\124\ Exchange Act section 21F(c)(1)(B)(iv); 15 U.S.C. 78u-
6(c)(1)(B)(iv).
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Finally, the proposed rule would provide certain standards for the
Commission to consider in determining whether to issue an order that
adjusts the $2 million award threshold, the $100 million threshold, and
the $30 million award(s) floor under proposed paragraphs (c) or (d),
respectively. Specifically, the proposed rule would state that in
issuing such an order ``the Commission shall consider (among other
factors that it deems relevant) whether the adjustment is necessary or
appropriate to encourage whistleblowers to come forward and the
potential impact the adjustments might have on the Investor Protection
Fund.''
* * * * *
Guidance regarding the meaning of ``unreasonable delay'' in
existing Rule 21F-6(b)(2) and proposed Rule 21F-6(c). In proposing the
foregoing modifications to the criteria that govern award
determinations, we believe it is appropriate to provide guidance on our
approach regarding ``unreasonable delay'' as relates to an award
determinations. We believe that any delay in reporting to the
Commission beyond 180 days is presumptively unreasonable. In light of
the Supreme Court's recent decisions in Kokesh v. SEC \125\ and Gabelli
v. SEC,\126\ delay on the part of a whistleblower can have a
debilitating impact on the Commission's ability to make a full recovery
of ill-gotten gains and to obtain civil penalties and, in this way,
delay may impair our ability to return funds to investors who have been
harmed by the wrongdoing. Further, although this 180-day presumption is
not expressly codified in either Exchange Rule 21F-6(b)(2),\127\ which
deals with ``unreasonable delays,'' or the rule that we are proposing,
we would typically expect to treat any delay exceeding this period as
unreasonable for purposes of both rules going forward. That said, in
assessing unreasonable delay under both the existing rule and the
proposed rule, we would still consider any highly unusual facts and
circumstances of a particular award application in assessing
unreasonable delay, such that the general presumption of ``unreasonable
delay'' might be overcome in certain rare instances. Finally, we
caution that
[[Page 34717]]
shorter periods of delay (i.e., less than 180 days) may also readily
qualify as unreasonable depending on the particular facts and
circumstances at issue, including, for example, whether the violations
were ongoing, whether investors continued to experience harm or the
whistleblower continued to profit from the wrongdoing during the period
of the whistleblower's delay or whether the delay had a discernable
impact on the monetary sanctions that were ordered in the enforcement
action. Put simply, a whistleblower who delays reporting to the
Commission should expect that his or her ``reward'' for reporting might
well be negatively impacted.
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\125\ 137 S. Ct. 1635 (2017) (providing that the Commission must
bring any enforcement action seeking to obtain disgorgement within
five years of the date the violation occurred).
\126\ 568 U.S. 442 (2013) (providing that the Commission must
bring any enforcement action seeking to obtain civil penalties
within five years of the date the violation occurred).
\127\ 17 CFR 240.21F-6(b)(2).
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Request for Comment
10. With respect to proposed paragraph (c), is it appropriate to
consider increasing smaller awards and would doing so help to further
incentivize insiders and others to come forward with tips? If so, is
the $2 million ceiling for invoking the rule appropriate or is it
either too high or too low? Please explain.
11. With respect to proposed paragraph (c), should the enhancement
authority be unavailable in the situation where a whistleblower's award
was reduced under Rule 21F-6(b) or Rule 21F-16? Please explain.
12. Would the proposed amendments to paragraph (d) of Rule 21F-6
appropriately balance the Commission's various programmatic interests,
in particular encouraging company insiders and others to come forward
while also ensuring that awards are not unnecessarily large beyond an
amount that is sufficient to compensate whistleblowers and achieve the
Commission's law-enforcement interests? If not, is there an alternative
formulation of the proposed rule that the Commission should adopt to
guard against payouts that are in excess of amounts that are reasonably
necessary to further the Commission's goals?
13. With respect to proposed paragraph (d), are the $100 million
collected sanctions threshold and the $30 million floor appropriate? Is
there another threshold or floor that the Commission should adopt? If
so, please explain what should be the appropriate threshold or floor.
14. In considering whether to make a downward adjustment to a
potential award under proposed paragraph (d), is it reasonable for the
Commission to consider the likely amount of the award in relation to
the whistleblower program's goals of rewarding meritorious
whistleblowers and sufficiently incentivizing future similarly situated
whistleblowers?
a. In the release, we explain that facts that would be relevant to
determining whether the large payout may be appropriate given the
specific whistleblower's circumstances include, for example, whether
the whistleblower made an extraordinary and highly unusual sacrifice by
coming forward (such as placing himself or herself in legal jeopardy to
bring the Commission information that it would otherwise not have been
able to obtain or demonstrably suffering career-ending consequences
commensurate with the potential large award). Are there other (or
additional) considerations that the Commission should assess in making
that determination?
b. Also in the release, we explain that facts that would be
relevant to determining whether the large payout is needed and
appropriate to encourage future similarly situated whistleblowers to
come forward include the industry in which knowledgeable whistleblowers
might work, the type of position held by that whistleblower, and the
compensation levels within that industry, and whether potential
whistleblowers may be located overseas and the likely compensation
levels in those countries (to the extent available). Are there other
(or additional) considerations that the Commission should assess in
making that determination?
15. In the context of two or more individuals acting together as a
whistleblower, should the $30 million floor in proposed paragraph (d)
apply where the aggregate award to both individuals exceeds $30 million
or where the award to each individual would potentially exceed $30
million? Please explain the reasons for your views.
16. In determining whether the $100 million threshold has been met
for application for the proposed rule, should the Commission consider
not just the likely payout in any Commission covered action that
results from the original information that the whistleblower provided
to the Commission, but also any potential payout that might result from
any related actions? Why or why not?
17. As discussed above, the Commission could apply proposed
paragraph (d) if, after having made an award to a whistleblower, the
Commission subsequently processes an award application for that
whistleblower (either in connection with a second covered action or a
related action) and the subsequent award application is based on the
``same general information'' from the whistleblower as the earlier
award determination. Is there a different standard that the Commission
should apply for invoking the rule in these situations? In particular,
should the proposed rule be applicable in either a narrower or a
broader set of circumstances where information provided by a
whistleblower results in multiple actions? Please explain the reasons
for your view.
18. Proposed paragraph (d) would permit the Commission to consider
the potential dollar amount of the award when applying each of the
existing award criteria in Exchange Act Rule 21F-6(a) and 6(b),
provided that the Commission determined that the likely total payout to
the whistleblower resulting from the original information that he or
she provided was $100 million or greater. As explained above, this
would allow the Commission to consider each award factor in dollar
terms rather than to apply exclusively a percentage assessment that
does not take into account what those percentage adjustments would
translate to in actual dollars paid to the whistleblower.
a. Should the Commission consider the dollar value of an award that
involves the collection of at least $100 million in monetary sanctions
in determining the size of the award? Why or why not?
b. As part of this rulemaking, should we expand this approach so
that it would cover all awards considered under Exchange Act Rule 21F-
6, even those below the $100 million threshold? Would such a revision
to the award determination approach under Exchange Act Rule 21F-6 allow
us to better assess each enhancement or reduction in dollar terms (as
well as percentage terms) so that we could more realistically and
concretely assess the impact of each award factor on the overall award
to ensure that we are appropriately rewarding the whistleblower and
incentivizing future whistleblowers? Why or why not?
19. With respect to the interpretive guidance concerning
``unreasonable delay,'' is the 180-day rebuttable presumption of
unreasonable delay appropriate? Does establishing such a presumption
help to put individuals on notice that they should come forward without
an inappropriate delay? Please explain.
[[Page 34718]]
E. Proposed Amendment to Exchange Act Rule 21F-2 128
Addressing Whistleblower Status and Certain threshold Criteria Related
to Award Eligibility, Heightened Confidentiality From Identity
Disclosure, and Employment Anti-Retaliation Protection 129
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\128\ 17 CFR 240.21F-2.
\129\ The Commission anticipates that this proposed rule change,
if adopted, would apply as follows: With respect to employment
retaliation claims, the proposed rule would apply only to
employment-retaliation violations occurring after the effective date
of the rules; with respect to award eligibility and confidentiality
protections, the proposed rule would apply only to information about
a potential securities law violation that is submitted for the first
time by an individual after the effective date of the rules.
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As adopted by the Commission in 2011, Rule 21F-2(a) \130\ describes
the qualifications to be a whistleblower for purposes of the award
program and heightened confidentiality protections, and Rule 21F-2(b)
\131\ provides a separate, broader definition of the term that is
applicable to the employment anti-retaliation provisions in Section
21F(h)(1) of the Exchange Act.\132\ Specifically, unlike Rule 21F-2(a),
Rule 21F-2(b) defines a whistleblower not by reference to the statutory
definition of the term in Exchange Act Section 21F(a)(6) \133\--i.e.,
as one who reports to the Commission--but instead by reference to the
protected activities described in Section 21F(h)(1)(A)(i)-(iii),
including the internal reporting described in clause (iii) of that
provision.\134\ The Supreme Court recently held in Digital Realty
Trust, Inc. v. Somers,\135\ however, that a whistleblower under Section
21F of the Exchange Act must report a possible securities law violation
to the Commission in order to qualify for employment retaliation
protection under Section 21F(h)(1), and that the Commission's rule
interpreting the term more broadly in connection with Section 21F's
retaliation protections was therefore not entitled to deference.\136\
The Court reasoned that Dodd-Frank's definition of ``whistleblower,''
codified in Section 21F(a)(6), requires such a report to the Commission
as a prerequisite for anti-retaliation protection, and that this
definition is ``clear and conclusive.'' \137\ The Court also determined
that strict application of the definition's reporting requirement in
the employment anti-retaliation context is consistent with Congress's
core objective of `` `motivat[ing] people who know of securities law
violations to tell the SEC.' '' \138\
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\130\ 17 CFR 240.21F-2(a).
\131\ 17 CFR 240.21F-2(b).
\132\ 15 U.S.C. 78u-6(h)(1).
\133\ 15 U.S.C. 78u-6(a)(6).
\134\ 15 U.S.C. 78u-6(h)(1)(A)(i)-(iii).
\135\ 138 S. Ct. 767 (2018).
\136\ Digital Realty, 138 S. Ct. at 781-82.
\137\ Id.
\138\ Id. at 777 (quoting S. Rep. No. 111-176, at 38 (2010)).
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Accordingly, we believe that it is appropriate to amend Rule 21F-2
to conform to the Supreme Court's construction of Section 21F. Proposed
Rule 21F-2(a) would provide a uniform definition for whistleblower
status to apply for all purposes under Section 21F--award eligibility,
confidentiality protections, and anti-retaliation protections--
consistent with the Supreme Court's application of the whistleblower
definition in Section 21F(a)(6), which defines the term
``whistleblower'' as any individual who provides, or 2 or more
individuals acting jointly who provide, information relating to a
violation of the securities laws to the Commission, in a manner
established, by rule or regulation, by the Commission.\139\
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\139\ 15 U.S.C. 78u-6(a)(6).
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Proposed Rule 21F-2(a) would track this whistleblower definition by
conferring whistleblower status only on (i) an individual (ii) who
provides the Commission with information ``in writing'' and only if
(iii) ``the information relates to a possible violation of the federal
securities laws (including any law, rule, or regulation subject to the
jurisdiction of the Commission) that has occurred, is ongoing, or is
about to occur.'' We address these three points in turn.
First, proposed Rule 21F-2(a)(2) would provide whistleblower status
to individuals and not to legal entities (such as corporations). This
proposed provision would carry forward the similar language in existing
Rule 21F-2(a)(1) without substantive change. We believe this position
follows from the use of the term ``individual'' in the whistleblower
definition in Section 21F(a)(6) and is consistent with the focus in
Section 21F(h)(1)(A) on retaliation by employers in the terms and
conditions of employment.
Second, proposed Rule 21F-2(a)(1) would afford whistleblower status
only to an individual who provides the Commission with information ``in
writing.'' As the Supreme Court recognized,\140\ the whistleblower
definition in Section 21F(a)(6) gives the Commission express authority
to establish the required ``manner'' of reporting by rule or
regulation. In the awards eligibility and confidentiality contexts, our
whistleblower rules (specifically, Rule 21F-2(a)(2) \141\ and Rule 21F-
9(a) \142\) already require that information be provided to the
Commission in writing either through the online portal at www.sec.gov
or by mailing or faxing a Form TCR (Tip, Complaint or Referral) to the
Commission's Office of the Whistleblower. We now believe it is
appropriate to exercise our discretion to require that an individual
provide information ``in writing'' to the Commission to qualify as a
``whistleblower,'' not only in the awards and confidentiality context
but also in the anti-retaliation context.\143\ Our experience to date
in the awards context suggests that requiring that information be
provided in writing presents, at most, a minimal burden to individuals
who want to blow the whistle to the Commission while facilitating the
staff's ability to track its use of the information. Moreover, if we
recognized additional manners of reporting for anti-retaliation
purposes (such as placing a telephone call), the Commission's staff
could be ensnared by disputes in private anti-retaliation lawsuits over
what information was provided to whom on what dates. Requiring that any
reporting be done in writing obviates these difficulties.\144\
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\140\ Digital Realty, 138 S. Ct. at 781 (``[T]he statute
expressly delegates authority to the SEC to establish the `manner'
in which information may be provided to the Commission by a
whistleblower.'') (citing Section 21F(a)(6)).
\141\ 17 CFR 240.21F-2(a).
\142\ 17 CFR 240.21F-9(a).
\143\ We believe that Section 21F(a)(6) and Digital Realty do
not require a uniform ``manner'' of providing information for all
purposes under Section 21F, and that we have discretion whether to
specify different manners for the awards, confidentiality, and
retaliation contexts. But we believe that specifying a uniform
``manner'' of providing information--that is, in writing--for all
three contexts is appropriate for the reasons that follow in the
discussion above. See also 15 U.S.C. 78u-6(c)(2)(D) (``No award
under subsection (b) shall be made . . . to any whistleblower who
fails to submit information to the Commission in such form as the
Commission may, by rule, require.'').
\144\ We believe it appropriate not to enumerate the activities
in Section 21F(h)(1)(A)(ii) (specifically, ``initiating, testifying
in, or assisting in any investigation or judicial or administrative
action of the Commission'') as additional manners of providing
information to the Commission under Section 21F(a)(6). See Digital
Realty, 138 S. Ct. at 781 (``Nothing in today's opinion prevents the
agency from enumerating additional means of SEC reporting--including
through testimony protected by clause (ii)'' of Section
21F(h(1)(A).). Given clause (ii)'s cross-reference to ``such
information'' provided under clause (i), we believe that clause (ii)
is best read as extending employment retaliation protections to acts
of continued cooperation by a person who has already provided
information to the Commission.
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Third, proposed Rule 21F-2(a)(1) would afford whistleblower status
only to an individual who provides the Commission with information that
``relates to a possible violation of the
[[Page 34719]]
federal securities laws (including any law, rule, or regulation subject
to the jurisdiction of the Commission) that has occurred, is ongoing,
or is about to occur.'' Much of this language carries over from
existing Rule 21F-2 \145\ and simply reflects the extent to which that
provision already tracked the whistleblower definition in Section
21F(a)(6). At the same time, we are mindful of the whistleblower
definition's focus on ``information relating to a violation of the
securities laws'' \146\ and of the Supreme Court's admonition that
Section 21F, as enacted by Dodd-Frank, is ``a law concerned only with
encouraging the reporting of `securities law violations,' '' as opposed
to other types of misconduct.\147\ Consistent with that statutory
language and purpose, we believe it is appropriate to clarify what is
implicit in the phrase ``securities laws''--namely, that whistleblower
status (and thus Section 21F's employment retaliation protection)
extends only to reports of possible violations of federal law, not
state law, and that it extends broadly to reports of possible
violations of any law, rule, or regulation subject to the jurisdiction
of the Commission.\148\ Although Section 3(a)(47) of the Exchange Act
defines the phrase ``securities laws'' more narrowly as encompassing
only certain statutes,\149\ by its terms that definition only applies
``unless the context otherwise requires.'' \150\ We believe that the
context of Section 21F requires departing from that definition, given
the textual clues that Congress designed Section 21F to encompass
whistleblowing with respect to the full sweep of federal securities
statutes, rules, and regulations,\151\ given Congress's core objective
of `` `motivat[ing] people who know of securities law violations to
tell the SEC,' '' \152\ and given the many securities regulations whose
reported violations would fail to trigger award eligibility and anti-
retaliation protection if ``securities laws'' were more narrowly
defined.\153\
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\145\ 17 CFR 240.21F-2(a)(1).
\146\ 15 U.S.C. 78u-6(a)(6) (emphasis added).
\147\ Digital Realty, 138 S. Ct. at 781 (quoting S. Rep. No. 11-
176, at 38).
\148\ As proposed, Rule 21F-2 would not repeat the parenthetical
``(including any law, rule, or regulation subject to the
jurisdiction of the Commission)'' when the phrase ``federal
securities laws'' reappears later in the rule. This would be
strictly for concision and ease of reading, and not to imply any
difference of meaning.
\149\ Section 3(a)(47) of the Exchange Act states that the term
``securities laws'' means the Securities Act of 1933 (15 U.S.C. 78a
et seq.), the Securities Exchange Act of 1934 (15 U.S.C. 78a et
seq.), the Sarbanes-Oxley Act of 2002, the Trust Indenture Act of
1939 (15 U.S.C. 77aaa et seq.), the Investment Company Act of 1940
(15 U.S.C. 80a-1 et seq.), the Investment Advisers Act of 1940 (15
U.S.C. 80b et seq.), and the Securities Investor Protection Act of
1970 (15 U.S.C. 78aaa et seq.).
15 U.S.C. 78c(a)(47).
\150\ 15 U.S.C. 78c(a).
\151\ See, e.g., Section 21F(h)(1)(A)(iii) (protecting
``disclosures that are required or protected under . . . any other
law, rule, or regulation subject to the jurisdiction of the
Commission'').
\152\ Digital Realty, 138 S. Ct. at 777 (quoting S. Rep. No.
111-176, at 38).
\153\ See American Bankers Assn v. SEC, 804 F.2d 739, 753 (D.C.
Cir. 1986) (``We read the context clause [in Section 3 of the
Exchange Act] as meaning only that if in the case of a frequently
occurring statutory term, its immediate context suggests that a
literal application of the statutory definition would produce absurd
consequences or run counter to the obvious thrust of the section,
the agency may appropriately modify the definition.'') (emphasis
added).
---------------------------------------------------------------------------
Additionally, proposed Rule 21F-2(a) would confer whistleblower
status ``as of the time that'' an individual meets all three of the
above conditions. We believe that this language would clarify that
whistleblower status is conferred only prospectively and not
retrospectively once all three conditions to achieve whistleblower
status are met.
Proposed Rule 21F-2(b), (c), and (d) would specify how the
whistleblower status conferred by subsection (a) operates across the
various contexts of awards eligibility, confidentiality protections,
and anti-retaliation protections, respectively. Much like current Rule
21F-2(a), proposed Rule 21F-2(b) would specify that, to be eligible for
an award in a Commission action based on information provided to the
Commission, a person ``must comply with the procedures and the
conditions described in Rules 21F-4, 21F-8, and 21F-9 (respectively,
sections 240.21F-4, 240.21F-8, and 240.21F-9 of this chapter).'' \154\
Proposed Rule 21F-2(b) reiterates, ``You should carefully review those
rules before you submit any information that you may later wish to rely
upon to claim an award.'' We believe that this proposed language will
adequately alert individuals who intend to claim an award that they
must comply with the cross-referenced rules, especially proposed Rule
21F-9(a) and (b), which require the submission of information to the
Commission either on Form TCR or through www.sec.gov, accompanied by a
declaration sworn under penalty of perjury that the information
submitted is true and correct.\155\ In our experience to date in the
awards context, compliance with existing Rule 21F-9(a) has proven to be
beneficial for enabling the Commission to determine, in a precise and
reliable manner, which persons submitted which information on which
dates.
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\154\ We note that, under the Commission's existing rules, in
order to make an award in connection with a related action brought
by one of the regulatory or law-enforcement entities listed in Rule
21F-3(b)(1) (17 CFR 240.21F-3(b)(1)), we must determine that the
same original information that the whistleblower gave to the
Commission also led to the successful enforcement of the related
action under the same criteria that govern awards made in connection
with Commission actions (see Rule 21F-3(b)(2), 17 CFR 240.21F-
3(b)(2)). This means that a whistleblower must comply with the other
procedures and conditions described in Rules 21F-4 and 21F-8 (17
CFR. 240.21F-4 and 240.21F-8) for a related action in the same
manner and to the same degree as is required for the Commission
action to which the other entity's action is related. For example,
under Rule 21F-4(c) (17 CFR 240.21F-4(c)) the whistleblower must
provide the same original information that he or she provided to the
Commission directly to the other regulatory or law-enforcement
entity and that the information the whistleblower gave to the other
entity must lead to successful enforcement of that entity's action
using the same criteria described in Rule 21F-4(c)(1)-(3) (17 CFR
240.21F-4(c)(1)-(3)) for Commission enforcement actions. However, we
are proposing to modify this requirement through our amendments to
Exchange Act Rule 21F-3 (17 CFR 24.21F-3) to also permit an award in
situations where the Commission itself shares the whistleblower's
information with the other agency.
\155\ We believe that additional express authority in this
regard is conferred by Section 21F(c)(2)(D) of the Exchange Act. See
15 U.S.C. 78u-6(c)(2)(D) (``No award under subsection (b) shall be
made . . . to any whistleblower who fails to submit information to
the Commission in such form as the Commission may, by rule,
require.'').
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Proposed Rule 21F-2(c) would specify that, to qualify for
confidentiality protections afforded by Section 21F(h)(2) of the
Exchange Act \156\ based on information provided to the Commission, a
person ``must comply with the procedures and the conditions described
in'' Rule 21F-9(a)--that is, must submit information using the
Commission's online portal or Form TCR.\157\ We believe it is
appropriate to adopt this provision both to codify the current practice
of the Commission's staff and to clarify for future whistleblowers the
conditions for receiving confidentiality protections. Further,
requiring whistleblowers to adhere to the procedures specified in Rule
21F-9(a) helps the staff to appreciate quickly and clearly which
whistleblowers are seeking the heightened confidentiality protections
provided by Section 21F(h)(2) of the Exchange Act when, among other
things, sharing the whistleblowers' information with other governmental
agencies.\158\
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\156\ 15 U.S.C. 78u-6(h)(2).
\157\ 17 CFR 240.21F-9(a).
\158\ We are proposing to make a conforming amendment to
Exchange Act Rule 21F-7(a) (17 CFR 240.21F-7(a)) to acknowledge the
proposed requirement that a whistleblower must submit information
according to the procedures specified in Exchange Act Rule 21F-9(a)
(17 CFR 240.21F-9(a)) in order to qualify for the heightened
confidentiality protections provided for in Exchange Act 21F(h)(2),
15 U.S.C. 78u-(h)(2).
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[[Page 34720]]
Proposed Rule 21F-2(d) would revise existing Rule 21F-2(b) to
define the scope of anti-retaliation protections in a way that mirrors
the Supreme Court's authoritative reading of Section 21F. As the Court
explained in Digital Realty, the whistleblower definition in Section
21F(a)(6) ``first describes who is eligible for protection--namely, a
whistleblower who provides pertinent information `to the Commission,'
'' \159\ while ``[t]he three clauses of [Section 21F(h)(1)(A)] then
describe what conduct, when engaged in by a whistleblower, is shielded
from employment discrimination.'' \160\ Consistent with that reading,
proposed Rule 21F-2(d) would explain both who is eligible for
protection as a whistleblower and also what conduct by such a person is
protected from employment retaliation, by requiring a person to satisfy
several criteria listed in paragraph (d)(1).
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\159\ 138 S. Ct. at 777 (quoting Section 21F(a)(6), 15 U.S.C.
78u-6(a)(6)).
\160\ Id. (citing Section 21F(h)(1)(A)(i)-(iii), 15 U.S.C. 78u-
6(h)(1)(A)(i)-(iii)).
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In explaining who is eligible for employment retaliation
protection, proposed Rule 21F-2(d)(1)(i) would first require that a
person ``qualify as a whistleblower under subsection (a) before
experiencing the retaliation'' for which redress is sought. We believe
that this proposed rule implements the most natural reading of Section
21F(h)(1)(A), which prohibits retaliation ``against[ ] a
whistleblower'' (emphasis added) \161\ and also follows from the
Supreme Court's focus in Digital Realty on whether the plaintiff had
reported to the Commission before the alleged retaliation.\162\ In
addition, proposed Rule 21F-2(d)(1)(ii) would carry forward the
requirement in existing Rule 21F-2(b)(1)(i) \163\ that the person
``reasonably believe'' that the information provided relates to a
possible securities law violation.
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\161\ 15 U.S.C. 78u-6(h)(1)(A).
\162\ See 138 S. Ct. at 778 (``Somers did not provide
information `to the Commission' before his termination, Sec. 78u-
6(a)(6), so he did not qualify as a `whistleblower' at the time of
the alleged retaliation. He is therefore ineligible to seek relief
under Sec. 78u-6(h).'').
\163\ 17 CFR 240.21F-2(b)(1)(i).
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In explaining what conduct is protected from retaliation, Rule 21F-
2(d)(1)(iii) requires that a person must perform a ``lawful act'' that
both is performed in connection with any of the activities described in
Section 21F(h)(1)(A)(i)-(iii) \164\ and ``relate[s] to the subject
matter of'' the person's submission to the Commission under proposed
Rule 21F-2(a).\165\ We believe that extending protection to all such
lawful acts is most consistent with the text of Section 21F(h)(1)(A),
which prohibits retaliation not simply for the activities described in
Section 21F(h)(1)(A)(i)-(iii) but for ``any lawful act done by the
whistleblower'' in performing those activities. Given the breadth of
Congress's language, we preliminarily anticipate that anti-retaliation
protection under proposed Rule 21F-2(d)(1)(iii) will properly encompass
actions that are preparatory to the conduct described in Section
21F(h)(1)(A)(i)-(iii), such as printing and completing a Form TCR and
depositing the completed form in a mailbox. We also preliminarily
anticipate that protected conduct under proposed Rule 21F-2(d)(1)(iii)
will not be limited strictly to reports to the Commission, since that
limitation would render clauses (ii) and (iii) of Section 21F(h)(1)(A)
superfluous, given clause (i)'s express coverage of Commission
reports.\166\
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\164\ 15 U.S.C. 78u-6(h)(1)(A)(i)-(iii).
\165\ We are not proposing to define the term ``lawful act''
under Section 21F(h)(1)(A) or otherwise to offer guidance as to its
meaning. We note that the term does appear in a number of federal
employment anti-retaliation statutes, but it does not appear that
any of these statutes define the term. See, e.g., Marcella
Auerbachian and Michael W. Paddock, Legal Ethics: Lines in the
Sand--The Intersection of Bringing and Defending a Qui Tam False
Claims Act Case, 20141006 AHLA Seminar Papers 19 (Oct. 6, 2014)
(available on Westlaw) (``The FCA does not define `lawful acts' '').
\166\ We are aware of one circuit decision suggesting in dicta,
before the Digital Realty decision, that anti-retaliation protection
under Section 21F(h)(1) should be limited exclusively to reports to
the Commission. See Martensen v. Chicago Stock Exch., 882 F.3d 744,
746 (7th Cir. 2018). We preliminarily believe that, in this respect,
Martensen is inconsistent with the Supreme Court's subsequent
decision in Digital Realty. See 138 S. Ct. at 779 (``With the
statutory definition incorporated, clause (iii) protects a
whistleblower who reports misconduct both to the SEC and to another
entity, but suffers retaliation because of the latter, non-SEC,
disclosure.'').
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At the same time, proposed Rule 21F-2(d)(1)(iii) would limit anti-
retaliation protection to lawful acts that ``relate to the subject
matter'' of the person's submission to the Commission under proposed
Rule 21F-2(a). Given the silence of Section 21F and the Supreme Court's
reluctance to address whether any subject-matter connection should be
required,\167\ we believe it appropriate to clarify that, to receive
protection, a lawful act must relate to the subject matter of the
submission to the Commission.\168\
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\167\ See Digital Realty, 138 S. Ct. at 780-81.
\168\ We preliminarily believe that this clarification helps
avoid the incongruous result that a person could qualify just once
as a whistleblower and then receive lifetime protection for any non-
Commission reports described in clause (iii) with respect to
distinct securities law violations that occur years later. Given the
Supreme Court's instruction that Congress's core objective was to
encourage reports to the Commission, 138 S. Ct. at 777, it makes
more sense that such a person needs to return to the Commission to
report the later violations in order to receive protection.
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Proposed Rule 21F-2(d)(2) would address a timing issue under
Section 21F's anti-retaliation provisions by clarifying that a person
does not need to qualify as a whistleblower under Rule 21F-2(a) before
performing the lawful act described in Rule 21F-2(d)(1)(iii), in order
to be eligible for anti-retaliation protection. In other words, whether
conduct is protected from retaliation would not depend on whether the
person performing that conduct reported to the Commission beforehand or
afterward (in order to qualify as a whistleblower). Section 21F is
silent on this issue, and we believe that this clarification will help
maintain appropriate incentives for persons to make the internal
reports described in Section 21F(h)(1)(A)(iii) before or at the same
time as reporting to the Commission. Proposed Rule 21F-2(d)(2) would
reiterate, however, that a person must qualify as a whistleblower under
proposed Rule 21F-2(a) before experiencing retaliation. Thus, for
example, an individual who experiences repeated retaliation for a prior
lawful act, and who first reports to the Commission while the
retaliation is still ongoing, would be protected with respect to any
retaliation experienced after the Commission report but not for any
retaliation experienced before the Commission report.
Proposed Rule 21F-2(d)(3) would carry forward existing Rule 21F-
2(b)(1)(iii) \169\ without substantive change. That provision states
that the anti-retaliation protections apply regardless of whether a
person satisfies the procedures and conditions to qualify for an award
described in Rules 21F-4, 21F-8, and 21F-9 (such as, for example,
submitting the information to the Commission using the electronic TCR
portal on whe Commission's website or completing the required
declaration as to the accuracy of the information submitted in the
whislteblower's tip).
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\169\ 17 CFR 240.21F-2(b)(1)(iii).
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Proposed Rule 21F-2(d)(4) would carry forward existing Rule 21F-
2(b)(2) \170\ without substantive change. That provision states that
the retaliation prohibition in Section 21F(h)(1) \171\ and the rules
thereunder shall be enforceable in an action or proceeding brought by
the Commission.
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\170\ 17 CFR 240.21F-2(b)(2).
\171\ 15 U.S.C. 78u-6(h)(1).
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To illustrate how we anticipate proposed Rule 21F-2 would operate
in practice, consider the following hypothetical scenario: An employee
at a
[[Page 34721]]
publicly traded issuer overhears a conversation by colleagues
discussing a scheme to create an artificial boost for reported sales.
The employee investigates and discovers that sales invoices are being
generated without any corresponding movement of inventory, and then
reports the possible misconduct to the issuer's chief compliance
officer. But a week passes without any action being taken on the
report. If the Commission then receives an email from that employee in
which the employee reports the same possible misconduct, and in sending
the email the employee reasonably believed that the report relates to a
possible securities laws violation, then the employee would qualify as
a whistleblower under Rule 21F-2(a) and would be eligible for anti-
retaliation protections under Rule 21F-2(d)(1)(i)-(ii) as of the time
the employee provides the information to the Commission. Assuming that
the employee's internal report was within the scope Section 806(a) of
Sarbanes-Oxley, that internal report itself would be a protected
``lawful act'' under Rule 21F-2(d)(1)(iii). The fact that the employee
made the internal report before the Commission report would not make a
difference for anti-retaliation protections under Rule 21F-2(d)(2).
That said, if the employee wanted to be eligible for an award under
Rule 21F-2(b) and to qualify for confidentiality protections under Rule
21F-2(c), he or she would need to make his or her first report of that
information to the Commission using Form TCR or through the online
portal at www.sec.gov, as required by Rule 21F-9(a), and not through an
email to the Commission. To qualify for an award, the employee would
additionally need to comply with the procedures and the conditions
described in Rules 21F-4, 21F-8, and 21F-9.
Request for Comment
20. Is it reasonable to require that an individual provide
information to the Commission ``in writing'' to qualify as a
whistleblower? Is this approach either too restrictive or too broad?
Are there situations in which only some other form of communication
would be possible or preferred? Please explain.
21. Should our whistleblower rules enumerate any other ``manner''
of providing information to the Commission for purposes of anti-
retaliation protection? For example, should our rules enumerate
testifying under oath in an investigation or judicial or administrative
action of the Commission as an additional ``manner'' of providing
information to the Commission? \172\
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\172\ See Digital Realty, 138 S. Ct. at 781 (``Nothing in
today's opinion prevents the agency from enumerating additional
means of SEC reporting--including through testimony protected by
clause (ii)'' of Section 21F(h)(1)(A).).
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22. Does the proposed rule reasonably require that the lawful acts
done by the whistleblower must relate to the subject matter of the
whistleblower's submission to the Commission in order for the
employment retaliation protections to apply? Should a different
standard apply? Why or why not?
23. Does the proposed rule appropriately address the timing of an
individual's report to the Commission relative to the protected conduct
and to any retaliation?
24. In determining the amount of an award, the Commission considers
participation in internal compliance systems. Given the change in anti-
retaliation protections, should the Commission still use this criteria
in determining the size of whistleblower awards? Why or why not?
25. Would it be necessary or appropriate to specify additional
types of misconduct that fall within the prohibition in Section
21F(h)(1)(A) against ``any other manner [of] discriminat[ion] against[
] a whistleblower''? For example, should our rules clarify that if an
employer rejects a prospective employee, or a past employer attempts to
cause such rejection, because that individual had engaged in activity
protected under Rule 21F-2, this would be a form of retaliation covered
by Section 21F(h)(1)(A)? \173\
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\173\ The Supreme Court has held that a former employer's
retaliatory negative reference was actionable under Title VII. See,
e.g., Robinson v. Shell Oil Co., 519 U.S. 337, 346 (1997). Other
federal anti-retaliation statutes have been held to cover such
conduct, which is often referred to as ``blacklisting.'' See Black's
Law Dictionary (10th ed. 2014) (defining ``blacklist'' as ``[t]o put
the name of (a person) on a list of those who are disfavored and are
therefore to be avoided or punished,'' and giving as an example,
``the firm blacklisted the former employee''). The Department of
Labor's regulations implementing Section 806 of the Sarbanes-Oxley
Act of 2002 expressly prohibit ``blacklisting'' of an employee, 29
CFR 1980.102(a), and define an ``employee'' as ``an individual
presently or formerly working for a covered person, an individual
applying to work for a covered person, or an individual whose
employment could be affected by a covered person.'' Id. Sec.
1980.101(g). In relevant part, Section 806 of the Sarbanes-Oxley Act
is similar to Section 21F(h), providing that no covered entity or
person may discharge, demote, suspend, threaten, harass, or in any
other manner discriminate against an employee in the terms and
conditions of employment, and, under Section 21F(h)(1)(A), that no
employer may discharge, demote, suspend, threaten, harass, directly
or indirectly, or in any other manner discriminate against, a
whistleblower in the terms and conditions of employment.
Both statutes broadly prohibit ``any . . . manner'' of
discrimination in the terms or conditions of employment. See also
Wanamaker v. Columbian Rope Co., 108 F.3d 462, 466 (2d Cir. 1997)
(noting that former employees can state a claim for retaliation
under the Age Discrimination in Employment Act for
``blacklist[ing]''); Boscarello v. Audio Video Sys., Inc., 784 F.
Supp. 2d 577, 582 (E.D. Va. 2011) (former contractor stated a
retaliation claim under the Fair Labor Standards Act against former
employer by alleging blacklisting).
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F. Proposed Amendment to Rule 21F-8 To Add New Paragraph (d) To Provide
the Commission With Additional Flexibility Regarding the Forms Used in
Connection With the Whistleblower Program (and Corresponding Amendments
to Rule 21F-10, Rule 21F-11, and Rule 21F-12) \174\
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\174\ The Commission anticipates that proposed Rule 21F-8(d)(1),
if adopted, would apply only in connection with submissions of
information that are made by an individual after the effective date
of the proposed rules. Further, the Commission preliminarily
anticipates that proposed Rule 21F-8(d)(2), if adopted, would apply
only to covered-action and related-action award applications that
are connected to a Notice of Covered Action (see Exchange Act Rule
21F-10(a), 17 CFR 240.21F-10(a)) posted on or after effective date
of the final rules.
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Currently an applicant seeking to submit information to the
Commission in order to qualify as a whistleblower (for purposes of the
award and confidentiality components of the whistleblower program) must
submit this information by using one of two methods: (1) By providing
the information through an online portal on the Commission's website,
or (2) by submitting the paper Form TCR that was adopted by the
Commission as part of the original whistleblower rulemaking in
2011.\175\ Periodically the Commission has determined that it would be
beneficial to modify the online portal. However, this has resulted in
discrepancies forming over time between the information collected
through the online portal and that elicited by Form TCR.
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\175\ See Exchange Act Rule 21F-9(a), 17 CFR 240-21F-9(a). Under
the proposed amendments to Exchange Act Rule 21F-2, 17 CFR 240.21F-
2, these procedures will remain necessary in order for a
whistleblower to be eligible for an award and to obtain the
confidentiality protections afforded by Exchange Act Section
21F(h)(2), 15 U.S.C. 78u-6(h)(2), even though an individual's status
as a ``whistleblower'' would no longer turn on compliance with these
procedures.
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To provide the Commission with the ability to make timely
corresponding adjustments to the Form TCR when the Commission
determines to modify the online portal, the Commission proposes to
modify Exchange Act Rule 21F-8 \176\ by adding a new paragraph (d)(1)
providing that the Commission will periodically designate on the
Commission's web page a Form TCR
[[Page 34722]]
(Tip, Complaint, or Referral) that individuals seeking to be eligible
for an award through the process identified in Sec. 240.21F-9(a)(2)
shall use.
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\176\ 17 CFR 240.21F-8.
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In addition to the paper Form TCR, the Commission also adopted a
paper Form WB-APP when it adopted the existing rules for the
whistleblower program. Individuals seeking awards must make their award
request using Form WB-APP. Like Form TCR, Form WB-APP can only be
modified by amending the Code of Federal Regulations. However, we
believe that it may be beneficial to provide the Commission with
greater administrative flexibility to modify the form. Providing the
Commission with the ability to modify the form's informational
requirements in a timely fashion should also help promote the program's
overall efficiency. Accordingly, the Commission proposes to modify
Exchange Act Rule 21F-8 by adding a new paragraph (d)(2) providing the
Commission will also periodically designate on the Commission's web
page a Form WB-APP for use by individuals seeking to apply for an award
in connection with a Commission covered judicial or administrative
action (15 U.S.C. 21F(a)(1)), or a related action (Sec. 240.21F-
3(b)(1) of the chapter).
In proposing this additional flexibility, we note that both Form
TCR and Form WB-APP elicit information used by the Commission to
administer its whistleblower award program and are not public
disclosure documents. Moreover, we anticipate that the forms designated
on the Commission's website for use in the whistleblower program would
be substantially similar to those currently referenced in the Code of
Federal Regulations.
In accordance with the changes discussed above, the following
corresponding amendments would be made. First, the Form TCR \177\ that
the Commission adopted when it promulgated its whistleblower rules in
2011 would be repealed and the parenthetical Code of Federal Regulation
citations to that form in Exchange Act Rule 21F-9(c) \178\ and Rule
21F-12(a)(2) \179\ would be removed. Second, the existing Form WB-APP
currently referenced in the Code of Federal Regulations would be
repealed and Rule 21F-10,\180\ Rule 21F-11,\181\ and Rule 21F-12 \182\
would be amended by removing the parenthetical references found
throughout those rules to the Code of Federal Regulation citation to
the current Form WB-APP.
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\177\ 17 CFR 249.1800.
\178\ 17 CFR 21F-9(c).
\179\ 17 CFR 21F-12(a)(2).
\180\ 17 CFR 21F-10.
\181\ 17 CFR 21F-11.
\182\ 17 CFR 21F-12.
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Request for Comment
26. Are there any additional considerations or limitations that the
Commission should consider in connection with the proposed rule change?
For example, should we provide that any revisions to paper Form TCR or
Form WB-APP shall not take effect for a 30-day period after posting on
the Commission website?
G. Proposed Amendment to Rule 21F-8 To Add New Paragraph (e) To Clarify
and Enhance the Commission's Authority To Address Claimants Who Submit
False Information to the Commission or Who Abuse the Award Application
Process \183\
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\183\ The Commission anticipates these proposed rule changes
would apply only to whistleblower submissions that are made after
the effective date of the proposed rules.
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In our experience implementing the whistleblower award program to
date, a small number of claimants have imposed an undue burden on the
award determination process by submitting dozens and in some cases over
a hundred award applications that lack any colorable connection between
the tip that they provided and the Commission enforcement actions for
which they are seeking awards. Processing these frivolous award
applications uses staff resources that could otherwise be devoted to
potentially meritorious award applications. Beyond the diversion of
staff resources, we have found that, by utilizing the procedural
opportunities to object to an award, these repeat applicants can
significantly delay the processing of meritorious award applications
and the eventual payment of awards.
To prevent these repeat submitters from continuing to abuse the
award application process to the detriment of potentially meritorious
applicants, we believe that it would be appropriate to adopt a rule
that would permit the Commission to permanently bar any applicant from
seeking an award after the Commission determines that the applicant has
abused the process by submitting three frivolous award
applications.\184\ Specifically, under our proposal, if an applicant
submits three or more award applications for Commission actions that
the Commission finds to be frivolous or lacking a colorable connection
between the tip (or tips) and the Commission action, the Commission may
permanently bar the applicant from submitting any additional award
applications (either for Commission actions or related actions) and the
Commission would not consider any other award applications that the
claimant has submitted or may seek to submit in the future.\185\
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\184\ We are relying on our broad rulemaking authority to
propose the amendments in this section. As noted earlier, Section
21F(j) of the Exchange Act, 15 U.S.C. 78u-6(j) grants us ``the
authority to issue such rules and regulations as may be necessary or
appropriate to implement'' the whistleblower award program.
Similarly, Section 23(a)(1) of the Exchange Act, 15 U.S.C.
78w(a)(1), expressly provides the Commission the ``power to make
such rules and regulations as may be necessary or appropriate to
implement the provisions'' of the Exchange Act, and has long been
understood to provide the Commission with broad authority to issue
rules and regulations carrying the force of law.
\185\ Under the proposed rule, the Commission would not consider
any applications made for related actions in assessing whether an
applicant has submitted three or more award applications that are
frivolous or lack any colorable connection between the tip and the
enforcement action. The Commission would assess only applications
submitted for Commission actions.
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The proposed rule would expressly provide, however, that the Office
of the Whistleblower shall as an initial matter (i.e., before any
preliminary determination or preliminary summary disposition would be
issued) advise any claimant of the Office's assessment that the
claimant's award application for a Commission action is frivolous or
lacking a colorable connection between the tip and the action for which
the individual has sought an award. If the applicant withdraws the
application at that time, it would not be considered by the Commission
in determining whether to exercise its authority to impose a bar for
three or more frivolous applications or applications lacking a
colorable connection between the tip and the Commission action for
which the award was sought.
In addition, the proposed rule would codify the Commission's
current practice with respect to applicants who violate Rule 21F-
8(c)(7).\186\ That rule provides that an applicant shall be ineligible
for an award if, in the whistleblower's submission, his or her other
dealings with the Commission, or his or her dealings with another
authority in connection with a related action, he or she knowingly and
willfully make any false, fictitious, or fraudulent statement or
representation, or use any false writing or document knowing that it
contains any false, fictitious, or fraudulent statement or entry with
intent to mislead or otherwise hinder the Commission or
[[Page 34723]]
another authority.\187\ The Commission has issued two final orders that
have permanently barred the applicants from submitting any further
whistleblower award applications based on violations of Rule 21F-
8(c)(7). The proposed rule would clarify and codify the Commission's
authority to bar applicants by providing that if the Commission finds
that a claimant has violated paragraph (c)(7) of Rule 21F-8, the
Commission may permanently bar the applicant from making any future
award applications, and shall decline to process any other award
applications that the claimant has already submitted.
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\186\ 17 CFR 240.21F-8(c)(7).
\187\ See Exchange Act section 21F(i), 15 U.S.C. 78u-6(i).
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In our view, it is appropriate to assess whether an applicant who
engages in egregious behavior vis-[agrave]-vis the Commission in
violation of Rule 21F-8(c)(7) should be permanently ineligible from
obtaining an award. Such egregious conduct can result in the
unnecessary and wasteful diversion of staff resources and in extreme
cases it may expose investors and the public to potential harm
(particularly where the misconduct concerns ongoing Commission law-
enforcement actions).\188\ Moreover, we believe that this proposed rule
could discourage individuals from engaging in the egregious conduct
prohibited by Rule 21F-8(c)(7), particularly when they are submitting
their award applications, because they should recognize that it may not
only lead to a denial of their current award claim but may also
permanently disqualify them from obtaining a whistleblower award.
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\188\ Importantly, the proposed rule would apply to false,
fictitious, or fraudulent representations, statements, or documents
beyond those made in connection with an award determination. For
example, if the Commission finds that an individual knowingly or
willfully made a false representation in testimony to the Commission
in one matter, the Commission could bar that individual in
connection with a whistleblower award submitted by that individual
for an entirely separate matter. In this way, we believe that the
proposed rule would provide an important additional incentive for
individuals to behave truthfully and honestly with the Commission in
all aspects of their dealings with the agency.
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Under the proposed rule, the Commission would consider a permanent
bar in the context of processing an award application. We expect that
the preliminary determination or preliminary disposition addressing the
award application would include a recommendation that the applicant be
permanently barred; this should serve to place the applicant on notice
that a bar is being considered and afford the applicant an opportunity
to advance any arguments in connection with a potential bar before the
Commission issues a final order.\189\
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\189\ We do not intend to foreclose the potential that the
Commission could impose such a bar in the context of a formal
adjudicatory proceeding to which the individual was a respondent if
the Enforcement Division made such a request and the parties
litigated it before the Commission.
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Request for Comment
27. Is it appropriate for OWB to advise a claimant of the Office's
assessment that the claimant's award application for a Commission
action is frivolous, and to offer the claimant the opportunity to
withdrawal his or her award application(s), such that the
application(s) would not be considered by the Commission in determining
whether to impose a bar?
28. Is it appropriate for the Commission to adopt a rule that would
permanently bar any applicant after he or she has been found by either
the Commission to have submitted at least three frivolous award
applications? Should the number of frivolous award applications be
fewer or greater before a bar would be imposed?
29. Are there any additional procedures, considerations, or
limitations that the Commission should consider in connection with the
proposed rule change?
H. Proposed Amendments to Rule 21F-9 To Provide Additional Flexibility
and Clarity Regarding Form TCR (and Corresponding Technical Amendments
to Rule 21F-10, Rule 21F-11, and Rule 21F-12) \190\
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\190\ The Commission anticipates these proposed rule changes, if
adopted, would apply only in connection with submissions of
information that are made by an individual to qualify as a
whistleblower after the effective date of the proposed rules.
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As noted above, Exchange Act Rule 21F-9(a) \191\ currently provides
that to qualify as a whistleblower an individual may submit information
about a possible securities law violation by one of two methods: ``(1)
Online, through the Commission's website located at www.sec.gov,'' or
``(2) [b]y mailing or faxing a Form TCR (Tip, Complaint or Referral)
(17 CFR 249.1800) to the SEC Office of the Whistleblower, 100 F Street
NE, Washington, DC 20549-5631, Fax (703) 813-9322.'' We propose to
amend this rule to conform to the proposed amendments to Exchange Act
Rule 21F-2 and to clarify that online submissions must be made through
the Commission's online TCR portal. Similarly, we propose to revise the
rule text to provide the Commission additional discretion in
designating where paper Form TCRs may be sent and how whistleblowers
may submit information to the Commission to qualify for an award or
confidentiality protections.
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\191\ 17 CFR 240.21F-9(a).
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The revised language in Rule 21F-9(a) would provide that to submit
information in a manner that satisfies Sec. 240.21F-2(b) and (c) of
the chapter, an individual must submit his or her information to the
Commission by either of these methods: (1) Online, through the
Commission's website located at www.sec.gov, using the Commission's
electronic TCR portal (Tip, Complaint or Referral); (2) by mailing or
faxing a Form TCR to the SEC Office of the Whistleblower at the mailing
address or fax number identified on the SEC's web page for making such
submissions; or (3) by any other such method that the Commission may
expressly designate on its website as a mechanism that satisfies Sec.
240.21F-2(b) and (c).\192\ We believe that the clarifications and
flexibility afforded by the proposed revisions should help to make the
whistleblower program more user-friendly for potential
whistleblowers.\193\ New paragraph (b)(3) would, among other things,
afford the Commission discretion to identify alternative mechanisms for
submitting information in instances where, for example, the
Commission's on-line portal may be unavailable due to a maintenance or
replacement.\194\
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\192\ For purposes of the Exchange Act Rule 21F-12(a)(2), which
provides that a ``whistleblower's Form TCR'' may be included within
the administrative record upon which the Commission relies in
considering a whistleblower award application, the reference to Form
TCR in this rule refers to both the online submission made through
the Commission's electronic TCR portal and the paper Form TCR.
\193\ The changes that we are proposing to Exchange Act Rule
21F-2, 17 CFR 240.21F-2--specifically the unified definition of
``whistleblower'' that would apply in the award, employment anti-
retaliation, and confidentiality contexts--as well as the amendments
that we are proposing to Exchange Act Rule 9(a), 17 CFR 240.21F-
9(a), would render inapplicable on a going-forward basis the formal
interpretation that the Commission issued in 2015 regarding the
meaning of Exchange Act Rule 21F-9. See 80 FR 47829, 47830/1, 2015
WL 4710732 (Aug. 10, 2015) (``Rule 21F-9(a) . . . specif[ies] the
reporting procedures that must be followed by an individual who
seeks to qualify as a whistleblower under Rule 21F-2(a). . . .'').
\194\ We are making a conforming amendment to Exchange Act Rule
21F-9(b), 17 CFR 240-21F-9(b), to make clear that if a whistleblower
provides information pursuant to a method permited by proposed
section 9(b)(3), the whistleblower must also complete the
declaration required by Exchange Act Rule 21F-9(b).
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We are also proposing to add new paragraph (e) to Exchange Act Rule
21F-9 to clarify that the first time an individual provides information
to the Commission that the individual will rely upon as a basis for
claiming an award, the individual must provide that
[[Page 34724]]
information in accordance with the procedures specified in Rules 21F-
9(a) and (b). If an individual fails to do so, the individual will--
subject to the limited exception discussed below--be barred from
subsequently resubmitting the same information to the Commission in
accordance with Rules 21F-9(a) and (b) and seeking to obtain an award
based on that information, even if the individual has previously
qualified as a whistleblower under the proposed amendment to Rule 21F-
2(a) by submitting the information in some other written form.\195\ To
date, this has been the approach that the Commission has followed in
making award determinations.\196\ We believe that the proposed rule
language would provide additional clarity to potential whistleblowers
to further alert them to the importance of following the procedures
specified in Rules 21F-9(a) and (b).\197\ In proposing this amendment,
we observe that compliance with the procedures in Rules 21F-9(a) and
(b) advances many programmatic purposes. These include allowing the
Commission to promptly determine whether an individual who submits
information is subject to heightened whistleblower confidentiality
protections; helping the staff efficiently process the information and
other documentation provided by the individual and assess its potential
credibility; and assisting the Commission in eventually evaluating the
individual's potential entitlement to an award.
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\195\ To illustrate the intersection of proposed amended Rule
21F-2(a) and proposed Rule 21F-9(e): An individual who provides the
Commission with information about a possible violation of the
federal securities laws in writing will qualify as a whistleblower
and obtain the retaliation protections provided under Section
21F(h)(1) of the Exchange Act, 15 U.S.C. 78u-6(h)(1). However, to be
eligible for an award as to that information, the individual must
make the initial submission of that information in accordance with
the procedures set forth in Rules 21F-9(a) and (b); i.e., the
individual must submit the information on Form TCR or through the
Commission's online TCR portal and must execute the required
declaration. The individual may remain award-eligible for any new
information that is submitted in accordance with the Rule 21F-9
procedures, but not for the information that was previously
submitted without following those procedures.
\196\ In a few instances, the Commission has allowed individuals
to perfect a defective submission provided that the individual did
so promptly and before any significant investigative steps had
occurred with respect to the submission. Any opportunity to perfect
a defective submission would, under the proposed rule, be governed
by the limited exception provided therein (which is generally
consistent with the opportunities the Commission has to date
provided in allowing individuals to perfect their submissions).
\197\ If the proposed amendments in this release are adopted,
Exchange Act 21F-9(a) would be revised to provide that to submit
information in a manner that satisfies Sec. 240.21F-2(b) and (c) of
the chapter an individual must submit his or her information to the
Commission by any of these methods: (1) Online, through the
Commission's website located at www.sec.gov, using the Commission's
electronic TCR portal (Tip, Complaint or Referral); (2) Mailing or
faxing a Form TCR to the SEC Office of the Whistleblower at the
mailing address or fax number designated on the SEC's web page for
making such submissions; or (3) By any other such method that the
Commission may expressly designate on its website as a mechanism
that satisfies Sec. 240.21F-2(b) and (c). Based on the proposed
modifications to Exchange Act Rule 21F-9(b), it would provide that,
further, to be eligible for an award, the individual must declare
under penalty of perjury at the time he or she submits the
information pursuant to paragraph (a)(1), (2), or (3) of the section
that the information is true and correct to the best of his or her
knowledge and belief.
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Proposed paragraph (e) would also incorporate a limited exception
that would permit the Commission, in its sole discretion, to make an
award to a whistleblower who failed to comply with the procedural
requirements of Rules 21F-9(a) and (b) when the individual first
provided information to the Commission. The limited exception permitted
by paragraph (e) would provide that notwithstanding the foregoing, the
Commission, in its sole discretion, may waive an individual's non-
compliance with paragraphs (a) and (b) of Rule 21F-9 if the Commission
determines that the administrative record clearly and convincingly
demonstrates that the individual would otherwise qualify for an award
and the individual demonstrates that he or she complied with the
requirements of paragraphs (a) and (b) within 30 days of the first
communication with the staff about the information that the individual
provided.\198\ There may be some situations where an individual will
have provided information to the Commission about a potential
securities law violation but may have failed to perfect his or her
submission in accordance with the procedures required to be a
whistleblower eligible for an award. For example, an individual may
learn about a potential securities law violation that is about to occur
and may telephonically inform the staff in an effort to permit the
Commission to take action before the violation occurs. Similarly, the
Office of the Whistleblower periodically receives letters from
individuals seeking to report securities law violations and the Office
will generally provide deficiency notices to these individuals to the
extent that it appears that these individuals want to become
whistleblowers eligible for an award.\199\ We believe that, to the
extent that the information that any such individual might provide
could be the basis for the Commission bringing a successful enforcement
action, the Commission should have within its discretion the ability to
make an award provided that the individual complies with Rules 21F-9(a)
and (b) within 30 days of receiving a deficiency letter (or having any
other communication with the staff concerning the information that the
individual provided).\200\
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\198\ By requiring that the Commission must find that the
administrative record ``clearly and convincingly'' demonstrates that
the individual would (but for the untimely compliance with the
requirements of Exchange Act Rules 21F-9(a) and (b)) qualify for an
award, we mean to make this discretionary mechanism available only
in those cases where there can be no serious doubt about the
individual's contribution to the successful action and the
individual's compliance with the award criteria and eligibility
conditions. Otherwise, in determining whether to employ its
discretion, the Commission would have to potentially expend
considerable staff time and effort carefully developing an
administrative record and analyzing whether the applicant would have
been a meritorious whistleblower, and only then turn to decide
whether to exercise its discretion to waive what is otherwise a
threshold procedural requirement.
\199\ Individuals do not have an entitlement to a deficiency
letter and their failure to receive one will not be deemed a basis
to excuse their failure to comply with the terms of Exchange Act
Rule 21F-2. It is each individual's own responsibility to comply
with the requirements of the Commission's rules with respect to
submitting information to qualify for an award.
\200\ We believe that using a 30-day time period is sufficient
here. We note that in connection with judicial proceedings 30-day
filing deadlines are not uncommon--indeed, Congress itself provided
only a 30-day window for unsuccessful whistleblowers to challenge a
Commission final order denying their award application, see Exchange
Act section 21F(f), 15 U.S.C. 78u-6(f)--and that our proposed Rule
21F-18, discussed infra, affords a 30-day time period for applicants
to respond to preliminary summary dispositions that would be issued
under that proposed rule.
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Request for Comment
30. Does proposed Rule 21F-9(a) provide additional clarity and
flexibility that may help make the submission of information by
potential whistleblowers more user-friendly? Are there any additional
factors that the Commission should assess in connection with the
proposed rule amendments?
31. Please comment on the limited exception provided for in
proposed Rule 9(e) appropriate. Should the exception be adopted? If so,
should it be narrowed or broadened? Should the 30-day time period be
extended or reduced?
[[Page 34725]]
I. Proposed Amendment to Rule 21F-12 Regarding the Materials That May
Form the Basis of the Commission's Award Determination \201\
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\201\ The Commission anticipates this proposed rule change, if
adopted, would apply only to covered-action and related-action award
applications that are connected to a Notice of Covered Action (see
Exchange Act Rule 21F-10(a), 17 CFR 240.21F-10(a)) posted on or
after effective date of the final rules.
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Rule 21F-12 \202\ lists the materials that the Commission and the
Claims Review Staff (``CRS'') may rely upon to make a whistleblower
award determination. We are proposing to make two clarifying amendments
to that rule.
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\202\ 17 CFR 240.21F-12.
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First, Rule 21F-12(a)(3) \203\ currently permits the Commission and
the CRS to rely upon the whistleblower's Form WB-APP, including
attachments, and ``any other filings or submissions from the
whistleblower in support of the award application.'' Based on this
provision's silence as to the timeliness of such ``other filings or
submissions,'' some whistleblower award claimants have submitted
hundreds of pages of supplemental information on an ongoing basis even
after expiration of the respective time periods for responding to a
Notice of Covered Action or a Preliminary Determination, resulting in
significant administrative burdens on the Office of the Whistleblower
and potential delays to the whistleblower claims process. We believe
that expressly excluding untimely supplemental submissions from
consideration by the Commission and the CRS would incentivize
applicants to make thorough submissions in the first instance when
responding to the Notice of Covered Action and the CRS's Preliminary
Determination (or a Preliminary Summary Disposition issued by the
Office of the Whistleblower under Proposed Rule 21F-18, discussed
infra), which should reduce these administrative burdens and the
potential for delays to the claims process.
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\203\ 17 CFR 240.21F-12(a)(3).
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Accordingly, we propose amending Rule 21F-12(a)(3) to clarify that
the Commission and the CRS (and the Office of the Whistleblower when
processing a claim pursuant to proposed Rule 21F-18) may rely upon
materials timely submitted by the whistleblower in response either to
the Notice of Covered Action, to a request from the Office of the
Whistleblower or the Commission, or to the Preliminary Determination.
The deadline for filing a claim for a whistleblower award is ninety
(90) days after the relevant Notice of Covered Action under Rule 21F-
10(a) & (b) \204\ and Rule 21F-11(a) & (b).\205\ Consistent with Rule
21F-8(b),\206\ the Commission may specify a deadline when it requests
additional information from the whistleblower in support of an award
application. The time frame for responding to the Preliminary
Determination is expressly established by Rule 21F-10(e) \207\ and Rule
21F-11(e).\208\ Under our proposal, materials submitted outside those
respective time frames would not be considered absent extraordinary
circumstances excusing the delay.\209\
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\204\ 17 CFR 240.21F-10(a) & (b).
\205\ 17 CFR 240.21F-11(a) & (b).
\206\ 17 CFR 240.21F-8(b).
\207\ 17 CFR 240.21F-10(e).
\208\ 17 CFR 240.21F-11(e).
\209\ See Exchange Act Rule 21F-8(a), 17 CFR 240.21F-8(a).
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Second, we propose amending Rule 21F-12(a)(6),\210\ which currently
provides in pertinent part that the Commission and the Claims Review
Staff in making an award determination may consider any ``documents or
materials including sworn declarations from third-parties that are
received or obtained by the Office of the Whistleblower to assist the
Commission resolve the claimant's award application, including
information related to the claimant's eligibility.'' We propose to
modify this provision to clarify that it applies only to materials
submitted by third parties, because some claimants have misinterpreted
it as also encompassing materials submitted by the claimants
themselves. Moreover, in light of the modification that we are
proposing to Rule 21F-12(a)(3) to require that a claimant make a
``timely'' submission in response to a Preliminary Determination, we
believe that it is important to clarify that Rule 21F-12(a)(6) does not
apply to information provided by whistleblowers.
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\210\ 17 CFR 240.21F-12(a)(6).
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Request for Comment
32. Does the proposed amendment as to timeliness provide an
appropriate safeguard against abusive supplemental filings by
whistleblower award claimants?
33. Do the proposed amendments provide sufficient clarity? Is there
alternative language that might provide greater clarity about the
materials that the Commission and the CRS may rely upon in making an
award determination?
J. Proposed Amendment to Rule 21F-13 Regarding the Administrative
Record on Appeal \211\
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\211\ The Commission anticipates this proposed rule change, if
adopted, would apply only to covered-action and related action award
applications that are connected to a Notice of Covered Action (see
Exchange Act Rule 21F-10(a), 17 CFR 240.21F-10(a)) posted on or
after effective date of the final rules.
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Rule 21F-13 \212\ describes the availability of judicial review and
the record on appeal of a whistleblower award determination by the
Commission. Rule 21F-13(b) provides that the record on appeal will
consist of the Preliminary Determination (or a Preliminary Summary
Disposition issued under proposed Rule 21F-18, discussed infra), the
Final Order of the Commission, ``and any other items from those set
forth in Rule 21F-12(a) of this chapter that either the claimant or the
Commission identifies for inclusion in the record.'' \213\ That
provision thus ensures that the record on appeal will include the
materials described in Rule 21F-12(a) that were the basis for the
Commission's award determination.
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\212\ 17 CFR 240.21F-13.
\213\ 17 CFR 240.21F-13(b).
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Some claimants have interpreted Rule 21F-13(b) as permitting them
to designate materials for inclusion in the record on appeal that
technically meet the descriptions in Rule 21F-12(a) but that were never
actually before the Commission in issuing the Final Order. However,
that interpretation creates significant tension with the basic
principle of administrative law that, on appeal, ``the court's review
is limited to the administrative record before the agency at the time
of its decision.'' \214\ That interpretation also would inappropriately
expand the record on appeal beyond the limits in Rule 16 of the Federal
Rules of Appellate Procedure.\215\
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\214\ EarthReports, Inc. v. FERC, 828 F.3d 949, 959 (D.C. Cir.
2016).
\215\ Rule 16(a) states,
The record on review or enforcement of an agency order consists
of:
(1) The order involved;
(2) any findings or report on which it is based; and
(3) the pleadings, evidence, and other parts of the proceedings
before the agency.
Fed. R. App. P. 16(a)(1)-(3) (emphases added).
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As amended, Rule 21F-13(b) would eliminate the designation of items
for inclusion in the record on appeal and instead would define the
record on appeal in a manner that conforms more closely to Rule 16 of
the Federal Rules of Appellate Procedure. Materials designated or
submitted by a whistleblower for the first time after the Commission
issues its Final Order
[[Page 34726]]
would not be deemed part of the administrative record.
Under amended Rule 21F-13(b), the record on appeal therefore would
include the Final Order of the Commission, any materials that were
considered by the Commission in issuing the Final Order, and any
materials that were part of the claims process leading from the Notice
of Covered Action to the Final Order. In the interest of clarity, Rule
21F-13(b) would specify that this includes, but is not limited to, the
materials that are part of the claims process described in Rules 21F-10
and 21F-11 and proposed Rule 21F-18: The Notice of Covered Action,
whistleblower award applications filed by the claimant, the Preliminary
Determination (or Preliminary Summary Disposition), materials that were
considered by the Claims Review Staff in issuing the Preliminary
Determination (or by the Office of the Whistleblower in issuing a
Preliminary Summary Disposition), and materials that were timely
submitted by the claimant in response to the Preliminary Determination
(or the Preliminary Summary Disposition). Additional materials not
specifically listed in the parenthetical in proposed Rule 21F-13(b)
might become part of the claims process and therefore part of the
record if, for example, the Office of the Whistleblower obtains
materials from a third party and provides them to the Commission for
its consideration in resolving a whistleblower award application. See
Rule 21F-12(a)(6).
In addition, we are proposing to amend the second sentence of Rule
21F-13(b) to clarify that the record on appeal would not include any
pre-decisional or internal deliberative process materials that are
prepared exclusively to assist either the Commission or the CRS. That
provision currently references only the Commission. This change would
clarify the Commission's current practice in order to give greater
clarity to claimants pursuing appeals.
We also propose adding a third sentence to Rule 21F-13(b) providing
that, when more than one claimant applies for an award under a single
Notice of Covered Action, the Commission may exclude from the record on
appeal any materials that exclusively concern any claimant other than
the claimant who brought the appeal, as necessary to comply with the
confidentiality protections in Section 21F(h)(2)(A) of the Exchange
Act.\216\ This sentence would codify the Commission's current practice
in order to give greater clarity to claimants pursuing appeals.
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\216\ 15 U.S.C. 78u-6(h)(2)(A).
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Request for Comment
34. We seek comments about whether the proposed language
sufficiently conforms to Rule 16 of the Federal Rules of Appellate
Procedure and whether alternative language would provide greater
conformity or clarity.
K. Proposed Rule 21F-18 Establishing a Summary Disposition Process
217
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\217\ The Commission anticipates that proposed Rule 21F-18, if
adopted, would apply to any whistleblower award application for
which the Commission has not yet issued a Preliminary Determination
as of the effective date of the proposed rules, as well as to any
future award applications that might be filed.
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Over the course of the years that the Commission has implemented
the whistleblower award program, it has become apparent to us that a
significant number of award applications may be denied on relatively
straightforward grounds because they do not implicate novel or
important legal or policy questions. These grounds for denial include,
among other things, the fact that the individual did not comply with
the form-and-manner requirements as specified in Rule 21F-9 for
submitting information to be eligible for an award, or that the
information was not used by the staff responsible for investigating,
preparing and litigating the covered action and thus the individual's
information did not ``lead to'' the success of the covered action.
In an effort to provide a more timely resolution of relatively
straightforward denials, we are proposing a summary disposition
process. This process would be in lieu of the claims adjudication
processes that are specified in Rule 21F-10 and Rule 21F-11.\218\ The
principal difference between the proposed summary disposition process
and the existing processes specified in Rule 21F-10 and 21F-11 is that
for a claim designated for summary disposition the CRS would not be
involved in reviewing the record, issuing a Preliminary Determination,
considering any written response filed by the claimant, or issuing the
Proposed Final Determination; these functions would be assumed by the
Office of the Whistleblower in an effort to streamline the Commission's
consideration of denials that are relatively straightforward.
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\218\ 17 CFR 240.21F-10; 17 CFR 240.21F-11.
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The proposed summary disposition process incorporates two other
modifications that should help expedite the processing of denials.
First, the 30-day period for replying to a Preliminary Summary
Disposition would be shorter than the 60-day period for replying to a
Preliminary Determination provided for by Rule 21F-10(e)(2) \219\ and
21F-11(e)(2).\220\ We believe that this shorter period should be
sufficient for a claimant to reply and that it is appropriate given
that the matters subject to summary disposition should be relatively
straightforward. Second, under the proposed summary disposition
process, a claimant would not have the opportunity to receive the full
administrative record upon which a Preliminary Denial would have been
based. Instead, the Office of the Whistleblower would (to the extent
appropriate given the nature of the denial) provide the claimant with a
staff declaration that contains the pertinent facts upon which the
Preliminary Summary Disposition is based. Given the relatively
straightforward nature of the matters that would generally be eligible
for summary disposition, we believe that this modification from the
record-review process specified in Rules 21F-10 and 21F-11 should still
afford any claimant a sufficient opportunity to provide a meaningful
reply to a Preliminary Summary Denial. This should eliminate the delay
that can arise when a claimant does not expeditiously request the
record, thereby helping to further expedite the summary adjudication
process.
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\219\ 17 CFR 240.21F-10(e)(2) (providing that if an individual
decides to contest the Preliminary Determination, he or she must
submit his or her written response and supporting materials within
sixty (60) calendar days of the date of the Preliminary
Determination, or if a request to review materials is made pursuant
to paragraph (e)(1) of the section, then within sixty (60) calendar
days of the Office of the Whistleblower making those materials
available for your review.).
\220\ 17 CFR 240.21F-11(e)(2). We believe that 30-day response
period is sufficient and have considered the fact that judicial
proceedings often rely on this same time period for filing
responsive materials. See, e.g., Fed. R. of App. P. 31(a)(1)
(establishing a default 30-day time period for an appellee or
respondent to file a response brief to the appellant or petitioner's
opening brief). See also Rule 450(a) of the SEC's Rules of Practice
(providing that in adjudicatory proceedings pending before the
Commission ``[o]pposition briefs shall be filed within 30 days after
the date opening briefs are due'').
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The proposed summary disposition process would be available for any
non-meritorious award application that falls within any of the
following five categories: (1) Untimely award application; \221\ (2)
noncompliance with the requirements of Rule 21F-9,\222\ which concerns
the manner for submitting a tip to be eligible for an
[[Page 34727]]
award; (3) claimant's information was never provided to or used by the
staff handling the covered action or the underlying investigation (or
examination), and those staff members otherwise had no contact with the
claimant; (4) noncompliance with Rule 21F-8(b),\223\ which requires an
applicant to submit supplemental information that the Commission may
require \224\ and to enter into a confidentiality agreement; and (5)
failure to specify in the award application the submission that the
claimant made pursuant to Rule 21F-9(a) \225\ upon which the claim to
an award is based. In addition, the proposed rule would provide that
other defective or non-meritorious award applications could be subject
to the summary disposition process under appropriate circumstances.
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\221\ The time periods for submitting an award application are
specified in Rule 21F-10(b) and Rule 21F-11(b). See 17 CFR 240.21F-
10(b) & 240.21F-11(b).
\222\ 17 CFR 240.21F-9.
\223\ 17 CFR 240.21F-8(b).
\224\ The authority to require additional information of an
applicant is delegated to the Office of the Whistleblower. See 17
CFR 240.21F-10(d).
\225\ 17 CFR 240.21F-9(a).
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Under the proposed summary disposition process, the Office of the
Whistleblower would issue a Preliminary Summary Disposition denying an
application. This Preliminary Summary Disposition would be in lieu of
the Preliminary Determination that the Claims Review Staff would issue
under Rule 21F-10 or Rule 21F-11. A claimant would then have a 30-day
period to reply with a written response explaining the grounds for
contesting the denial. Failure to file a timely written response would
constitute a failure to exhaust the administrative process and the
Preliminary Summary Disposition would automatically become the final
order with respect to that applicant's award claim. If an applicant
does file a timely response, the Office of the Whistleblower would
consider the full record, including the applicant's response (and any
materials the applicant timely submitted therewith), and prepare a
Proposed Final Summary Disposition to be provided to the
Commission.\226\ Similar to the procedure under Rule 21F-10 and 21F-11,
the Commission would have thirty (30) days to consider the Proposed
Final Summary Disposition; if no Commissioner requests that the full
Commission consider the Proposed Final Summary Disposition within the
30-day period, it would become the final order of the Commission. If a
Commissioner does request full Commission consideration, the Commission
would consider the matter and issue a final order. The Office of the
Whistleblower would then notify the claimant of the final order.
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\226\ Although the CRS has to date approved all proposed final
orders involving a challenge to a preliminary determination, we do
not believe the absence of the CRS's role at the comparable stage of
the proposed summary disposition process should have a meaningful
impact given the relatively straight-forward nature of the claims
that would be processed under the proposed rule. Further, as a
matter of agency internal procedure, all proposed final orders are
reviewed by the Office of the General Counsel and we anticipate that
this review would occur in connection with all Proposed Summary
Dispositions issued under this proposed rule, further reducing any
potential negative impact from the elimination of the CRS's role.
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If the Commission has received more than one award application for
a particular matter, the Office of the Whistleblower could use the
summary disposition process for any of those award applications that
qualify, even if other of the applications are subjected to the regular
consideration processes specified in Rules 21F-10 and 21F-11. Even in
the multiple whistleblower context, we believe that there could be
efficiencies in summarily considering and disposing of applications
that constitute reasonably straightforward denials. For example, this
could free up staff resources to concentrate on the meritorious claims
or the more difficult determinations. Relatedly, to the extent that a
claim is denied under the summary disposition process while other
claims may remain pending under the Rule 21F-10 or Rule 21F-11 process,
this should allow the summarily denied claimant an earlier ability to
exhaust his opportunities for judicial review.\227\ This, in turn, may
potentially permit the Commission to more promptly pay any meritorious
whistleblower on any award that may eventually result from the final
order issued under the Rule 21F-10 or Rule 21F-11 process.\228\
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\227\ We note that, the Commission has consistently interpreted
Rules 10 and 11 to require that all claims processed under those
rules should be addressed in one omnibus final order. The summary
disposition process that we are proposing would, we believe, permit
a more expeditious adjudication of any relatively straightforward
denials that might otherwise have been folded into a final order
under Rule 10 or 11.
\228\ Pursuant to Rule 21F-14(c)(2), 17 CFR 240.21F-14(c)(2),
the Commission cannot pay an award to any meritorious whistleblower
in a particular matter until the completion of the appeals process
for all whistleblower award claims has been exhausted.
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Finally, the proposed rule would clarify that Rule 21F-12,\229\
which governs the items that may be considered when the Commission
entertains an award application under Rule 21F-10 or Rule 21F-11,
applies in the context of summary dispositions. Specifically, the
proposed rule would state that ``[i]n considering an award
determination pursuant to this rule, the Office of the Whistleblower
and the Commission may rely upon the items specified in [Rule 21F-
12(a)]. Further, [Rule 21F-12(b)] applies to summary dispositions.''
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\229\ 17 CFR 240.21F-12.
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Request for Comment
35. We seek comments about the proposed summary disposition
process, including whether the categories of award applications that
would be eligible for summary disposition are appropriate, whether the
proposal would afford claimants sufficient process, and whether there
are any specific modifications that we should consider making to the
proposed process.
L. Technical Amendment to Rule 21F-4(c)(2) \230\
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\230\ The Commission anticipates this proposed rule change, if
adopted, would apply to all new whistleblower award applications
filed after the effective date of the amended final rules, as well
as all whistleblower award applications that are pending and have
not yet been the subject of a final order of the Commission by the
effective date.
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We propose to amend Rule 21F-4(c)(2) \231\ concerning the
definition of information that led to a successful enforcement action
because it contains an erroneous cross-reference. The reference is
intended to be to Rule 21F-4(b)(5) regarding the definition of original
source. The rule currently refers to paragraph (b)(4) of the section.
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\231\ 17 CFR 240.21F-4(c)(2).
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III. Proposed Interpretive Guidance Regarding the Meaning and
Application of ``independent analysis'' as Defined in Exchange Act Rule
21F-4(b)(3) \232\
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\232\ 17 CFR 240.21F-4(b)(3). Although we are proposing this
interpretive guidance for public comment, the Commission may
determine to rely on the principles articulated therein for any
whistleblower claims that are currently pending because we believe
that this guidance clarifies the existing rules that define and
apply the term ``independent analysis.''
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Two core requirements of the whistleblower award program are: (1)
That the whistleblower must have provided ``original information'' to
the Commission; and (2) that such information must have ``led to'' the
successful enforcement of an action. Congress defined ``original
information'' in relevant part as information that is derived from
either a whistleblower's ``independent knowledge'' or the
whistleblower's independent ``analysis.'' This guidance addresses the
potential availability of a whistleblower award in cases where
information provided by a whistleblower is not based on the
whistleblower's
[[Page 34728]]
``independent knowledge'' but, instead, is premised on information
derived from the whistleblower's ``independent analysis'' of publicly
available information. Such cases implicate both the scope of the
independent analysis prong of the ``original information'' requirement
and what is necessary for independent analysis to ``lead to'' the
successful enforcement of an action.
In formulating our views on how a whistleblower may satisfy the
requirement of ``original information'' through the alternative of
``independent analysis,'' we have considered Congress's and the
Commission's determinations to substantially restrict any role for
publicly available information in potential whistleblower awards. When
the Commission in 2011 adopted the rules implementing the whistleblower
program, it explained that paying awards for publicly available
information was not consistent with Congress's purpose in establishing
the program. Specifically, the Commission stated that ``Congress
primarily intended our program `to motivate those with inside knowledge
to come forward and assist the Government to identify and prosecute
persons who have violated the securities laws[.]' '' \233\ The
Commission further acknowledged that Congress sought to make awards
available in cases where ``highly-probative, expert analysis of data .
. . suggest[s] an important new avenue of inquiry, or otherwise
materially advance[s] an existing investigation.'' \234\ But
critically, the Commission made clear that, in its view, Congress did
not intend to base awards ``on information that is available to the
general public.'' \235\
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\233\ 76 FR 34300, 34311/3.
\234\ Id. at 34312/3.
\235\ Id. at 34311/3. We note that although publicly available
information may not serve as the basis for an award, the provision
of such information to the Commission can be an important public
service.
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Independent Analysis Standard. Consistent with these understandings
of congressional intent and consistent with the Commission's views when
it adopted the definition of ``original information'' in the original
whistleblower rulemaking, we are proposing the following standard: In
order to qualify as ``independent analysis,'' a whistleblower's
submission must provide evaluation, assessment, or insight beyond what
would be reasonably apparent to the Commission from publicly available
information. In assessing whether this requirement is met, the
Commission would determine based on its own review of the relevant
facts during the award adjudication process whether the violations
could have been inferred from the facts available in public sources.
While we recognize that this standard does not constitute a bright
line, we believe that it should provide a solid foundation for the
Commission to apply when assessing awards involving potential
independent analysis.
The Independent Analysis Must ``Lead to'' the Success of the
Enforcement Action. Even when this standard is met, however, a
whistleblower's independent analysis must still have ``led to'' a
successful covered enforcement action. This standard requires an
assessment of whether the whistleblower's analysis--as distinct from
the publicly available information on which the analysis was based--
either (1) was a principal motivating factor in the staff's decision to
open its investigation, or (2) made a substantial and important
contribution to the success of an existing investigation.
In the sections that follow, we explain the relevant background and
reasoning for the standards that we have set forth above.
A. Background: ``Original Information'' and Publicly Available
Information
In formulating this guidance, we have considered the qui tam
provisions of the False Claims Act,\236\ the federal government's
principal bounty statute and an important forerunner of the
Commission's whistleblower award authority.\237\ The False Claims Act
requires that qui tam relators must provide their own, independent
information--and not publicly available information--in order to avoid
the so-called ``public disclosure bar.'' \238\ Specifically, in its
present form (and excluding one exception that is not relevant here
\239\), the public disclosure bar requires a court to dismiss a qui tam
action ``if substantially the same allegations or transactions as
alleged in the action or claim were publicly disclosed'' in certain
designated sources.\240\
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\236\ 31 U.S.C. 3730.
\237\ See Proposed Rules for Implementing the Whistleblower
Provisions of Section 21F of the Securities Exchange Act of 1934,
Release No. 34-63237, 75 FR 70488, 70491 n.14 (Nov. 3, 2010) (noting
that cases interpreting the qui tam provisions of the False Claims
Act can provide helpful guidance in the interpretation of Section
21F, though not necessarily controlling or authoritative in all
circumstances).
\238\ See Graham County Soil and Water Conservation Dist. v.
United States ex rel. Wilson, 559 U.S. 280, 294 (2010) (explaining
that, through the public disclosure bar, Congress sought ``the
golden mean between adequate incentives for whistle-blowing insiders
with genuinely valuable information and discouragement of
opportunistic plaintiffs who have no significant information to
contribute of their own'') (quoting, United States ex rel.
Springfield Terminal Railway v. Quinn, 14 F.3d 645, 649 (D.C. Cir.
1994)).
\239\ 31 U.S.C. 3730(4)(A).
\240\ Not all public sources of information implicate the public
disclosure bar. The sources specified in the statute are a Federal
criminal, civil, or administrative hearing in which the Government
or its agent is a party; a congressional, Government Accountability
Office, or other Federal report, hearing, audit, or investigation;
or the news media. There is a limited exception for situations where
the qui tam relator was an original source of the information. 31
U.S.C. 3730(e)(4)(A).
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In Section 21F, Congress similarly limited awards to ``original
information''--defining the term to require a whistleblower's own,
independent information rather than publicly available
information.\241\ While not taking precisely the same approach as in
the False Claims Act, Congress nonetheless required that ``original
information'' for purposes of the Commission's award program must not
be exclusively derived from the news media or certain other public
sources.\242\ Further, Congress affirmatively required that ``original
information'' be derived from a whistleblower's ``independent knowledge
or analysis.'' \243\ The Senate report issued in connection with Dodd-
[[Page 34729]]
Frank, which enacted Section 21F,\244\ explained Congress's expectation
that in order to obtain an award a whistleblower would be required to
provide the ``critical components'' of information that supported an
enforcement action beyond any information about the matter that was
publicly available.\245\
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\241\ Although the term ``original information'' does not appear
in the False Claims Act, courts have used the term to differentiate
a qui tam relator's own, independent information upon which an award
may be based from information that is available in the designated
public sources. See, e.g., United States ex rel. Colquitt v. Abbott
Labs, 858 F.3d 365, 374-75 (5th Cir. 2017); United States v. Walker,
438 F. A'ppx 885, 888 (11th Cir. 2011); United States ex rel. JDJ
and Associates LLP v. Natixis, 2017 U.S. Dist. Lexis 164106, *33
(S.D.N.Y. 2017). In United States ex rel. Marcus v. Hess, 317 U.S.
537 (1943), a seminal False Claims Act case that prompted Congress
to enact a forerunner of the public disclosure bar, the Court
permitted a qui tam suit to proceed where the same defendants had
been criminally indicted for the same conduct alleged in the qui tam
action. In dissent, Justice Jackson termed it a ``misuse of the
statute'' to permit an action where the averments in the complaint
substantially copied the indictment and it was not shown that the
petitioner ``had any original information, that he added anything by
investigations of his own, . . . .'' 317 U.S. at 558 (Jackson, J.,
dissenting). ``Original information'' as a term to describe
information upon which an award may be based has been a part of
various federal bounty statutes for more than 100 years. See, e.g.,
United States v. Simons, 7 F. 709 (E.D. Mich. 1881) (discussing
statute that permitted awards for ``original information concerning
any fraud upon the customs revenue'').
\242\ 15 U.S.C. 78u-6(a)(3)(C). These other sources are
allegations made in a judicial or administrative hearing, or in a
governmental report, hearing, audit, or investigation (unless the
whistleblower is a source of the information). Further, we note that
both the False Claims Act and the Internal Revenue Service
whistleblower statute permit discretionary awards of up to 10% in
the event that the government proceeds with a case based principally
on public disclosures. See 31 U.S.C. 3730(d)(1); 26 U.S.C.
7623(b)(2)(A). Congress did not include any similar discretionary
award authority in Section 21F.
\243\ 15 U.S.C. 78u-6(a)(3)(A).
\244\ Public Law 111-203, section 922(a), 124 Stat. 1376, 1841
(July 21, 2010).
\245\ See S. Rep. No. 111-176 at 111 (2010). The Senate Report
stated: `` `Original information' is defined as information that is
derived from the independent analysis or knowledge of the
whistleblower, and is not derived from an allegation in court or
government reports, and is not exclusively from news media. In
circumstances when bits and pieces of the whistleblower's
information were known to the media prior to the emergence of the
whistleblower, and that for the purposes of the SEC enforcement the
critical components of the information was supplied by the
whistleblower, the intent of the Committee is to require the SEC to
reward such person(s) in accordance with the degree of assistance
that was provided.''
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In promulgating rules to implement the whistleblower program, the
Commission further restricted any role for publicly available
information in a potential whistleblower award. While Congress had
defined ``original information'' as that which is derived from a
whistleblower's ``independent knowledge'' or ``independent analysis,''
Congress did not define either of these terms. The Commission's
definitional rules, however, effectively preclude awards merely for the
submission of publicly available information.
First, the Commission excluded publicly available information as a
source of a whistleblower's ``independent knowledge,'' which the
Commission defined as ``factual information in [the whistleblower's
possession] that is not derived from publicly available sources.''
\246\ At the adopting stage for the whistleblower rules, the Commission
considered comments that were critical of this blanket exclusion and
that recommended some allowance for particular kinds of public
information.\247\ The Commission rejected such an approach and chose to
adopt the broad exclusion of any publicly available information that
had been proposed.\248\ Moreover, the Commission interpreted ``publicly
available sources'' expansively to include not only sources that are
widely disseminated (such as corporate press releases and filings,
media reports, and information on the internet), but also sources that,
though not widely disseminated, are generally available to the public
(such as court filings and documents obtained through Freedom of
Information Act requests).\249\
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\246\ 17 CFR 240.21F-4(b)(2) (emphasis added).
\247\ For example, one commenter suggested that the Commission
should exclude only information from sources such as news media and
governmental reports that are specifically set forth in the statute.
See Securities Whistleblower Incentives and Protections, Release No.
34-64545, 76 FR 34300, 34311/3 (June 13, 2011) (citing comment
letter from Taxpayers Against Fraud).
\248\ Id.
\249\ 76 FR 34300, 34311/1.
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Second, in defining the term ``independent analysis,'' the
Commission permitted a whistleblower to employ publicly available
information, but required that the whistleblower produce insights that
are non-public, providing that independent analysis means an
individual's own analysis, whether done alone or in combination with
others and analysis means an individual's examination and evaluation of
information that may be publicly available, but which reveals
information that is not generally known or available to the
public.\250\
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\250\ 17 CFR 240.21F-4(b)(3).
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Significantly, the Commission considered--and rejected--a
suggestion that the proposed definition of ``independent analysis'' be
revised to permit an award to a whistleblower whose tip brings publicly
available information to the staff's attention:
We believe that ``independent analysis'' requires that the
whistleblower do more than merely point the staff to disparate
publicly available information that the whistleblower has assembled,
whether or not the staff was previously ``aware of'' the
information. ``Independent analysis'' requires that the
whistleblower bring to the public information some additional
evaluation, assessment, or insight.\251\
\251\ 76 FR 34300, 34305, 34312/3.
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In setting forth the standard for ``independent analysis'' in this
guidance, we are particularly mindful that the appropriate standard
should be sufficiently demanding that it would not undermine the clear
exclusion of public information from the definition of ``independent
knowledge.'' Any other approach would, in our view, undermine the
overall framework that was established by the Commission in 2011 when
it adopted the definitions of ``independent knowledge'' and
``independent analysis.''
B. ``Independent Analysis''
As noted, the Commission defined ``analysis'' as the
whistleblower's ``examination and evaluation of information that may be
publicly available, but which reveals information that is not generally
known or available to the public.'' \252\ Thus, if a whistleblower
submits publicly available information in a TCR and alleges a fraud or
other securities violations on the basis of that information, the
Commission must determine whether the whistleblower's ``examination and
evaluation'' of the publicly available information ``reveal[ed]'' the
possible violations.
---------------------------------------------------------------------------
\252\ 17 CFR 240.21F-4(b)(3).
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To ``reveal'' means to make something known that was previously
secret or hidden, or to open something up to view.\253\ Accordingly, to
be considered ``analysis,'' the whistleblower's submission must include
some insight--beyond the existence of the publicly available
information--that is revelatory; that is, the whistleblower's
evaluation of the publicly available information should do the work of
making known and opening up to view for the Commission the possible
securities violations.
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\253\ See Merriam-Webster Dictionary, available at https://www.merriam-webster.com/dictionary/reveal; Oxford English
Dictionary, available at https://en.oxforddictionaries.com/definition/reveal; Cambridge Dictionary, available at https://dictionary.cambridge.org/us/dictionary/english/reveal; Black's Law
Dictionary (10th ed. 2014) (citing ``to reveal'' as one definition
of ``disclose''); see also 15 U.S.C. 78u-6(h)(2)(A) (prohibiting the
Commission or staff from disclosing information ``which could
reasonably be expected to reveal the identity of a whistleblower. .
. .'') (emphasis added).
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As a principal illustration of how to apply our rule on
``independent analysis,'' we look to the model that Congress had before
it at the time it enacted the whistleblower program; the work of Harry
Markopolos in his efforts to expose Bernard Madoff's Ponzi scheme.\254\
Among other things, Markopolos brought to bear his expertise as a
certified fraud examiner and his knowledge of the options markets to
demonstrate that Madoff's purported investment strategy could not have
produced his claimed investment returns.\255\ For example, in a 2000
submission, beginning from the premise that Madoff purported to manage
between $3 billion and $7 billion in assets pursuant to his ``split-
strike conversion'' strategy, Markopolos explained that the strategy as
described
[[Page 34730]]
in public materials ``would require lots of options trading and lots of
options in open interest'' \256\ for hedging purposes. Based upon his
calculations of the total value of call option open interest on the
Chicago Board Option Exchange and of OEX put option open interest,
Markopolos revealed that ```hedging cannot be taking place as
described. . . . [I]f only $3 billion are allocated to this strategy
then there still aren't enough options in open interest for this type
of hedging to occur, since Madoff would be at least \1/3\ of the open
interest and we know that is not the case.' '' \257\ Similarly, in a
2005 submission, Markopolos offered a specific mathematical
illustration of how he believed the income and protection parts of
Madoff's strategy would be expected to function under real-world market
conditions, arguing that the income that might be expected from stock
dividends and the sale of equity call options offset by the cost of
purchasing put options, made Madoff's claimed returns ``way too good to
be true.'' \258\ In the same submission, Markopolos also calculated
that Madoff would have had to account for more than 100% of the total
OEX put option open interest in order to hedge his stock holdings as
depicted in certain marketing literature.\259\
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\254\ See S. Rep. No. 111-176 at 110 (2010) (citing to
Markopolos's testimony).
\255\ Markopolos also submitted a large amount of information
that likely would have satisfied the ``independent knowledge'' prong
of ``original information'' under Rule 21F-4(b)(2), 17 CFR 240.21F-
4(b)(2). For example, he described his own firm's inability to
duplicate Madoff's returns using the same strategy and provided
information about Madoff's claims and purported operations that he
obtained from speaking with third parties who invested with Madoff.
See Investigation of Failure of the SEC to Uncover Bernard Madoff's
Ponzi Scheme, Report No. OIG-509 (Aug. 31, 2009) (``OIG Report''),
Exh. 137, available at https://www.sec.gov/news/studies/2009/oig-509/oig-509_exhibits.htm.
\256\ OIG Report, Exh. 134.
\257\ OIG Report at 62, quoting Markopolos 2000 submission, Exh.
134.
\258\ OIG Report, Exh. 268.
\259\ OIG Report, Exh. 268.
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Markopolos's submissions included information that would qualify as
``independent analysis'' as defined in our whistleblower rules (and
explained further in this guidance) if submitted today. Markopolos's
information was ``highly-probative,'' \260\ going beyond the publicly
available information itself to ``reveal'' that Madoff's claimed
returns were unachievable under real market conditions. We anticipate
that we may find a requisite level of ``analysis'' in analogous cases
where an individual with a high level of specialized training or
expertise reviews publicly available information and illuminates for
the Commission possible violations that are obscured because of the
technical nature of the source material.\261\
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\260\ 76 FR 34300, 34312/3.
\261\ However, we caution that we expect this standard may be
particularly demanding for attorneys and accountants who seek
whistleblower awards based on their review of publicly available
information. As the Enforcement staff is substantially comprised of
experienced attorneys and accountants, an outside attorney or
accountant would generally be expected to contribute insights or
revelations that would not be reasonably evident to an accountant or
attorney on the Enforcement staff who reviewed the same publicly
available information.
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Importantly, this is not to suggest that ``independent analysis''
is limited to persons with technical expertise or other specialized
training. In each case, the touchstone is whether the whistleblower's
submission is revelatory in utilizing publicly available information in
a way that goes beyond the information itself and affords the
Commission with important insights or information about possible
violations.
While ``independent analysis'' is evident in Markopolos's tips,
other submissions that utilize publicly available information may not
be so clear. However, we believe that case law interpreting the False
Claims Act's public disclosure bar generally suggests a helpful
framework for distinguishing tips in which the whistleblower's
``independent analysis'' of publicly available information reveals
important information about possible violations beyond the public
sources themselves. The public disclosure bar precludes recovery when
``substantially the same allegations or transactions'' as alleged by
the qui tam relator were previously disclosed publicly in one of the
designated sources. The D.C. Circuit and other federal courts of
appeals have held that fraudulent transactions are publicly disclosed--
and a qui tam suit thus barred--when essential facts that are
sufficient to give rise to an inference of fraud are in the public
domain.\262\ This rule bars qui tam suits when publicly disclosed
information provides ``the government . . . [with] enough information
`to investigate the case and to make a decision whether to prosecute'
or . . . `could at least have alerted law-enforcement authorities to
the likelihood of wrongdoing.' '' \263\ Conversely, where a qui tam
relator ``supplie[s] the missing link between the public information
and the alleged fraud,'' and thereby `` `bridge[s] the gap by [his] own
efforts and experience,' the public disclosure bar does not apply.''
\264\ In this way, qui tam awards are reserved for relators who ``
`contributed significant independent information' about a possible
fraud.'' \265\
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\262\ See, e.g., United States ex rel. Oliver v. Philip Morris
USA Inc., 826 F.3d 466, 471-73 (D.C. Cir. 2016), reh. en banc
denied, 2016 U.S. App. Lexis 17161 (D.C. Cir. 2016); Amphastar
Pharmaceuticals Inc. v. Aventis Pharma SA, 856 F.3d 696, 703 (9th
Cir. 2017); Cause of Action v. Chicago Transit Authority, 815 F.3d
267, 278 (7th Cir. 2016), cert. denied, 137 S. Ct. 205 (2016).
\263\ Phillip Morris USA, 826 F.3d at 472; see also United
States ex rel. Solis v. Millennium Pharms., Inc., 885 F.3d 623, 626
(9th Cir. 2018) (``A prior disclosure and an allegation may be
substantially similar when the prior public disclosure put the
government `on notice to investigate the fraud before the relator
filed his complaint.''').
\264\ United States ex rel. Shea v. Cellco Partnership, 863 F.3d
923, 935 (DC Cir. 2017).
\265\ Id. at 933 (quoting United States ex rel. Springfield
Terminal Railway v. Quinn, 14 F.3d 645, 653 (D.C. Cir. 1994)).
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Relying in part on the False Claims Act framework to assist us in
formulating a proposed standard for interpreting Exchange Act Rule 21F-
4(b)(3), we believe the following is appropriate: A whistleblower's
examination and evaluation of publicly available information does not
constitute ``analysis'' if the facts disclosed in the public materials
on which the whistleblower relies and in other publicly available
information are sufficient to raise an inference of the possible
violations alleged in the whistleblower's tip. This is because, where
the violations that the whistleblower alleges can be inferred by the
Commission from the face of public materials, those violations are not
``reveal[ed]'' to the Commission by the whistleblower's tip or any
purported analysis that the whistleblower has submitted. Rather, in
order for a whistleblower to be credited with providing ``independent
analysis,'' the whistleblower's examination and evaluation should
contribute ``significant independent information'' that ``bridges the
gap'' between the publicly available information and the possible
securities violations.
As noted, ``significant independent information'' that ``bridges
the gap'' in revealing violations may be found in the application of
technical expertise, but this is not required.\266\ However, we have
received tips in which a whistleblower merely offers observations drawn
from publicly available information. In these cases, the whistleblower
typically directs the staff to publicly available information and
states that the information itself suggests a fraud or other
violations. Examples would be where the whistleblower points to common
hallmarks of fraud on the face of the public materials (e.g.,
impossibly high, guaranteed investment returns or extravagant claims in
press releases) or to public discourse (e.g., discussions on a public
message board) in which investors or others are alleging a fraudulent
scheme. Further, it would not matter whether the individual relied on
only one source (e.g., a single website) to collect the publicly
available information that demonstrates the
[[Page 34731]]
hallmarks of the fraud, or whether the individual relied on a multitude
of different publicly available sources to collect the information.
These tips generally would not qualify as ``independent analysis''
under our interpretation because the whistleblower's essential
contribution is merely that he or she directed the staff to publicly
available information that gives rise to an inference of violations;
the whistleblower's tip has not ``bridged the gap'' between public
information that does not itself provide a basis for inferring a
possible violation and a conclusion that a violation may have occurred.
Further, we believe that this same result would generally obtain
whether the whistleblower directs the staff to a single piece of
publicly available information or the whistleblower aggregates
information from multiple different sources.\267\ If the violations can
be inferred by the Commission from the available and/or assembled
publicly available information, without more, then the whistleblower
has not contributed significant independent information that reveals
the violations.\268\
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\266\ For example, non-experts may configure publicly available
information in a non-obvious way that reveals patterns indicating
possible violations that would not be otherwise inferable from the
public information or may engage in highly probative calculations or
some other meaningful exercise with the information that may
demonstrate the possibility of securities violations.
\267\ As noted above, we explained in the adopting release for
our whistleblower rules that a whistleblower would need to do more
than point us to disparate public information in order to provide
``independent analysis'' within the meaning of our rule. 76 FR
34300, 34305, 34312/3.
\268\ The Commission, in its adjudicatory capacity, routinely
draws reasonable inferences from facts in the record. See, e.g., SEC
Rule of Practice 250, 17 CFR 201.250 (drawing reasonable inferences
from factual allegations in deciding dispositive motions). ``Drawing
inferences from direct and circumstantial evidence is a routine and
necessary task of any factfinder. `The very essence of [the
factfinder's] function is to select from among conflicting
inferences and conclusions that which it considers most reasonable.'
'' Siewe v. Gonzalez, 480 F.3d 160, 166 (2d Cir. 2007) (quoting
Tennant v. Peoria and Pekin Union Railway, 321 U.S. 29 (1944)).
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Thus, in each case the Commission should consider whether publicly
available information (both that supplied by the whistleblower and
other public sources) was sufficient to give rise to an inference of
the violations alleged by the whistleblower, or whether the
whistleblower's examination and evaluation of public source material
revealed new, significant, and independent information that ``bridged
the gap'' for the staff in demonstrating the possibility of violations.
Moreover, under our rules the whistleblower will be notified of any
preliminary determination that his or her tip did not constitute
``independent analysis,'' and will have an opportunity to contest that
determination in a written submission to the Commission.\269\
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\269\ See 17 CFR 240.21F-10(e).
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C. Leads to Successful Enforcement
Assuming that a whistleblower's submission meets the threshold
requirement that it constitute ``independent analysis,'' for the
whistleblower to be eligible for an award the ``information that . . .
is derived from the . . . [whistleblower's] analysis'' must also lead
to a successful enforcement action. This determination turns ``on an
evaluation of whether the analysis is of such high quality that it
either causes the staff to open an investigation, or significantly
contributes to a successful enforcement action, as set forth in Rule
21F-4(c).'' \270\ Further, if the staff looks to other information as
well in determining to open an investigation, the Commission will only
find that the independent analysis ``led to'' the success of the
enforcement action if the Commission determines that the
whistleblower's analysis was a ``principal motivating factor'' in the
staff's decision to open the investigation.\271\
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\270\ 76 FR 34300, 34312/3. This would require that the
whistleblower's analysis made a substantial and important
contribution to the action. See Whistleblower Award Proceeding 2016-
9, Release No. 34-77833 (May 13, 2016).
\271\ 75 FR 70488, 70497/2.
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Thus, even an otherwise compelling analysis may not satisfy the
``leads to'' requirement depending on the nature of other information
already in the staff's possession. For example, if the staff has
already obtained testimony from insiders describing the facts of a
violation, a subsequent whistleblower submission that demonstrates the
possibility of the violation through independent analysis of publicly
available information would not likely qualify for an award because,
against the backdrop of the facts already known to the staff, the
whistleblower's analysis would not significantly contribute to the
staff's investigation.
Request for Comment
30. We seek comment on the interpretation of ``independent
analysis'' in light of the background set forth above. Are there
additional considerations that the Commission should factor into the
interpretation? For example, should the interpretation address more
explicitly cases in which an individual selects, compiles, and presents
publicly available information in a new way for the staff? If so, how?
31. Should any aspect of the interpretation be codified in rule
text? For example, should the Commission adopt rule text that would
make clear that for a whistleblower to be credited with providing
``original information'' through ``independent analysis,'' the
whistleblower's examination and evaluation should contribute
``significant independent information'' that ``bridges the gap''
between the publicly available information and the possible securities
violations?
IV. Request for Comment Regarding a Potential Discretionary Award
Mechanism for Commission Actions That Do Not Qualify as Covered
Actions, Involve Only a De Minimis Collection of Monetary Sanctions, or
Are Based on Publicly Available Information
Beyond the specific rule proposals and interpretations expressly
advanced above, we invite public comment on whether the Commission
could at a future point propose a rule that would permit the Commission
on a discretionary basis to pay awards to whistleblowers in Commission
enforcement actions that do not result in an order for monetary
sanctions that exceeds $1,000,000 \272\ or enforcement actions where
the whistleblower's tip consisted of publicly available
information.\273\ Similarly, do we have the statutory authority to
propose and adopt a rule that would permit the Commission on a
discretionary basis to make award payments that are not tied to the
monetary payments collected where a meritorious whistleblower has
received an award determination in a covered action, but the ordered
monetary sanctions cannot be collected or the amount collected would
result in a de minimis payment? Alternatively, would a legislative
change be required for the Commission to establish the type of
discretionary award mechanisms described in this section? Moreover,
whether by rule or legislative change, would such discretion to make
awards in these instances be in the public interest? Please explain the
grounds for your views.
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\272\ For example, could we propose and adopt a rule that would
authorize the Commission on a discretionary basis to utilize the IPF
to pay awards to whistleblowers who make significant contributions
in Commission Enforcement actions that do not qualify as covered
actions for which we can currently pay awards?
\273\ These would be situations where, under the existing
statute and our current rules, the information provided by the
whistleblower would not qualify as information that was derived from
the whistleblower's ``independent knowledge'' or independent
analysis,'' see Exchange Act Rule 21F-4(b)(2) & (3), 17 CFR 240.21F-
4(b)(2) & (3), and thus would not be ``original information'' upon
which the Commission could base an award, see Exchange Act Rule 21F-
4(b)(1)(i), 17 CFR 240.21F-4(b)(1)(i).
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V. General Request for Public Comment
We request and encourage any interested person to submit comments
[[Page 34732]]
on any aspect of the proposed rule amendments, interpretations, or
other items specified above. With respect to any comments on the
economic analysis contained below, we note that such comments would be
of greatest assistance to our rulemaking initiative if accompanied by
supporting data and analysis of the issues addressed therein and by
alternatives to our proposals where appropriate.
Finally, other than the items specifically identified in this
release, persons wishing to comment are expressly advised that the
Commission is not proposing any other changes to the whistleblower
program rules (i.e., Exchange Act Rules 21F-1 through 21F-17), nor is
the Commission otherwise reopening any of those rules for comment.
VI. Paperwork Reduction Act
A. Background
The proposed amendments would affect certain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\274\ The Commission is submitting the
proposal to the Office of Management and Budget (``OMB'') for review in
accordance with the PRA.\275\ The titles for the affected collections
of information are:
``Electronic Data Base Collection System--TCR'' (OMB Control No.
3235-0672); and ``Form TCR'' and
``Form WB-APP'' (OMB Control No. 3235-0686).
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\274\ 44 U.S.C. 3501 et seq.
\275\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------
Currently an applicant seeking to submit information to the
Commission in order to qualify as a whistleblower must submit this
information by using one of two methods: (1) By providing the
information through an online portal on the Commission's website that
is designed for receiving electronic submissions, or (2) by submitting
the paper Form TCR that was initially adopted by the Commission as part
of the original whistleblower rulemaking in 2011.\276\ In addition to
the paper Form TCR, the Commission also adopted a paper Form WB-APP
when it adopted the existing rules for the whistleblower program.
Individuals seeking awards must make their award request using Form WB-
APP. The hours and costs associated with preparing and submitting
information through the online portal and affected forms constitute
reporting and cost burdens imposed by each collection of information.
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information requirement unless it displays
a currently valid OMB control number.
---------------------------------------------------------------------------
\276\ See Exchange Act Rule 21F-9, 17 CFR 240-21F-9(a).
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B. Summary of the Proposed Amendments
As described in more detail above, to provide the Commission with
the ability to make timely corresponding adjustments to the paper Form
TCR when it determines to modify the online portal, the Commission
proposes to modify Exchange Act Rule 21F-8 \277\ by adding a new
paragraph (d)(1) providing that the Commission will periodically
designate a Form TCR (Tip, Complaint, or Referral) that individuals
seeking be eligible for an award through the process identified in
Sec. 240.21F-9(a)(2) shall use. In addition, to provide the Commission
with greater administrative flexibility to modify Form WB-APP, the
Commission proposes to modify Exchange Act Rule 21F-8 by adding a new
paragraph (d)(2) providing that the Commission will also periodically
designate a Form WB-APP for use by individuals seeking to apply for an
award under either Sec. 240.21F-10 or Sec. 240.21F-11.
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\277\ 17 CFR 240.21F-8.
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In connection with these proposed amendments, we propose to
reorganize the OMB control numbers and associated burden estimates for
the collections of information contained in the Commission's online
portal, Form TCR and Form WB-APP. Although the online portal and Form
TCR collect substantially the same type of information--information
alleging potential securities law violations--they currently have
separate OMB control numbers. In addition, although Form TCR and Form
WB-APP collect different types of information, the latter of which
collects information from individuals applying for whistleblower
awards, these collections of information are currently gathered
pursuant to the same OMB control number.
Pursuant to the proposed reorganization, both the online portal and
Form TCR would fall under the same OMB control number (No. 3235-0672).
The title for this collection of information and the associated burden
estimate would be adjusted accordingly to reflect the submission of
relevant information through both the online portal and the paper Form
TCR (see Table 2 of section VI(C)). Form WB-APP would this have its own
OMB control number (No. 3235-0686) and the collection of information
would be retitled accordingly (see Table 2 of section VI(C)).
C. Burden and Cost Estimates Related to the Proposed Amendments
We do not anticipate that the proposed amendments would increase
the burden or cost to individuals preparing and submitting the required
information through the online portal and affected forms. Although we
intend to make certain modifications to Form TCR so that the
information elicited by the form is consistent with the information
collected through the online portal, we do not believe that these
conforming modifications will increase appreciably the burden for
individuals completing the form.
We estimate that the combined burden associated with both paper
Form TCR and the online complaint form is 9,050 hours annually. We
anticipate that the burdens imposed by the online complaint form will
vary depending on the complexity of the alleged violations that are the
subject of the tip and the amount of information possessed by the
individual submitting the tip. We estimate that it takes a complainant,
on average, 30 minutes to complete the online complaint form. Based on
an estimate of 16,000 annual responses, we estimate that the annual PRA
burden for the online complaint form is 8,000 hours. Although the
completion time will depend on the complexity of the alleged violation
and the amount of information the whistleblower possesses in support of
the allegations, we estimate that it takes a whistleblower, on average,
one and one-half hours to complete and submit Form TCR. We estimate
that it may take individuals more time to complete Form TCR than the
online complaint form because a person will have to hand write in the
required information and spend time mailing and faxing the form to the
Commission. Based on the receipt of an average of approximately 700
annual Form TCR submissions for the past three fiscal years, the
Commission estimates that the annual reporting burden of Form TCR is
1,050 hours.
We estimate that it takes a whistleblower, on average, one hour to
complete Form WB-APP, though the completion time depends largely on the
complexity of the alleged violation and the amount of information the
whistleblower possesses in support of his or her application for an
award. Based on the receipt of an average of approximately 110 annual
properly filed Form WB-APP submissions for the past
[[Page 34733]]
six fiscal years,\278\ the Commission estimates that the annual
reporting burden of Form WB-APP is 110 hours.
---------------------------------------------------------------------------
\278\ This figure does not include Form WB-APP submissions which
were facially deficient, subsequently withdrawn or submitted by
individuals who have been barred by the Commission from
participation in the whistleblower program.
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We do not believe that the proposed amendments would increase the
professional costs associated with preparing and submitting the
affected forms. Under the whistleblower rules, an anonymous
whistleblower who is seeking an award is required, and a whistleblower
whose identity is known may elect, to retain counsel to represent the
whistleblower in the whistleblower program. We expect that in most
instances the whistleblower's counsel will complete, or assist in the
completion, of some or all of the required forms on behalf of the
whistleblower. However, we expect that in the vast majority of cases in
which a whistleblower is represented by counsel, the whistleblower will
enter into a contingency fee arrangement with counsel, providing that
counsel be paid for the representation through a fixed percentage of
any recovery by the whistleblower under the program. Thus, we expect
most whistleblowers will not incur any direct out of pocket expenses
for attorneys' fees for the completion of the affected forms.
We expect that a very small number of whistleblowers (no more than
5%) enter into hourly fee arrangements with counsel.\279\ In those
cases, a whistleblower will incur direct expenses for attorneys' fees
for the completion of the required forms. To estimate those
expenses,\280\ we make the following assumptions:
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\279\ This estimate is based, in part, on the Commission's
belief that most whistleblowers likely will not retain counsel on an
hourly basis to assist them in preparing the forms.
\280\ Individuals submitting their information in writing who
are not seeking to be eligible for the Commission's whistleblower
award program are not required to retain an attorney, even if they
choose to submit their information anonymously, and thus are not
required to use either the Form TCR or the Form WB-APP. As such, for
purposes of calculating the estimated costs of the forms, we have
only included the potential costs associated with completing and
submitting the Form TCR and Form WB-APP.
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(i) The Commission will continue to receive on average
approximately 700 Forms TCR and 110 Forms WB-APP annually;
(ii) Individuals will pay hourly fees to counsel for the submission
of approximately 35 Forms TCR and 6 Forms WB-APP annually; \281\
---------------------------------------------------------------------------
\281\ These amounts are based on the assumption, as noted above,
that no more than 5% of all whistleblowers will be represented by
counsel pursuant to an hourly fee arrangement.
---------------------------------------------------------------------------
(iii) Counsel retained by whistleblowers pursuant to an hourly fee
arrangement will charge on average $400 per hour; \282\ and
---------------------------------------------------------------------------
\282\ The Commission uses this hourly billing rate for purposes
of estimating the professional costs of other rules, and we believe
it is an appropriate billing rate to use in this context,
recognizing that some attorneys representing whistleblowers may not
be securities lawyers and may charge different average hourly rates.
---------------------------------------------------------------------------
(iv) Counsel will bill on average: (i) Three hours to complete a
Form TCR, and (ii) two hours to complete a Form WB-APP.\283\
---------------------------------------------------------------------------
\283\ The Commission expects that counsel will likely charge a
whistleblower for additional time required to gather from the
whistleblower or other sources relevant information needed to
complete Forms TCR and WB-APP. Accordingly, we estimate that, on
average, counsel will bill a whistleblower three hours for the
completion of Form TCR and two hours for completion of Form WB-APP
(even though we estimate that a whistleblower acting without counsel
will be able to complete the Form TCR in 1.5 hours and Form WB-APP
in 1 hour).
---------------------------------------------------------------------------
For purposes of the PRA, we estimate that each year whistleblowers
will incur the following total amounts of attorneys' fees in connection
with completing Forms TCR and WB-APP: (i) $42,000 \284\ for the
reporting burden of Form TCR; and (ii) $4,800 \285\ for the reporting
burden of Form WB-APP.
---------------------------------------------------------------------------
\284\ 35 x ($400 x 3) = $42,000.
\285\ 6 x ($400 x 2) = $4,800.
---------------------------------------------------------------------------
The tables below summarize the burden and cost estimates associated
with the online portal and affected forms both currently and after the
proposed reorganization of the relevant control numbers:
Table 1 of Section VI(C)--Current Burden Estimates
----------------------------------------------------------------------------------------------------------------
OMB control
Title No. Burden hours Costs
----------------------------------------------------------------------------------------------------------------
``Electronic Data Base Collection System--TCR''................. 3235-0672 8,000 $0
``Form TCR'' and ``Form WB-APP''................................ 3235-0686 1,160 46,800
----------------------------------------------------------------------------------------------------------------
Table 2 of Section VI(C)--Revised Burden Estimates Under the Proposed Reorganization
----------------------------------------------------------------------------------------------------------------
OMB control
Title No. Burden hours Costs
----------------------------------------------------------------------------------------------------------------
``Tips, Complaints and Referrals (TCR)''........................ 3235-0672 9,050 $42,000
``Form WB-APP''................................................. 3235-0686 110 4,800
----------------------------------------------------------------------------------------------------------------
D. Mandatory Collection of Information
A whistleblower is required to complete either a hardcopy Form TCR
or submit his or her information electronically through the online
portal and to complete Form WB-APP to qualify for a whistleblower
award.
E. Confidentiality
As explained above, the statute provides that the Commission must
maintain the confidentiality of the identity of each whistleblower,
subject to certain exceptions. Section 21F(h)(2) states that, except as
expressly provided the Commission and any officer or employee of the
Commission shall not disclose any information, including information
provided by a whistleblower to the Commission, which could reasonably
be expected to reveal the identity of a whistleblower, except in
accordance with the provisions of section 552a of title 5, United
States Code, unless and until required to be disclosed to a defendant
or respondent in connection with a public proceeding instituted by the
Commission or certain specific entities listed in paragraph (C) of
Section 21F(h)(2).
Further, as discussed above, we are proposing Rule 21F-2(c) to
require that an individual who is seeking this heightened
confidentiality protection must submit his or her information to the
Commission using the online portal or by completing a hardcopy Form
TCR. If an individual fails to do so, then
[[Page 34734]]
under our proposed rule he or she would be ineligible for the
heightened confidentiality protections.
Section 21F(h)(2) also permits the Commission to share information
received from whistleblowers with certain domestic and foreign
regulatory and law enforcement agencies. However, the statute requires
the domestic entities to maintain such information as confidential, and
requires foreign entities to maintain such information in accordance
with such assurances of confidentiality as the Commission deems
appropriate.
In addition, Section 21F(d)(2) provides that a whistleblower may
submit information to the Commission anonymously and still be eligible
for an award, so long as the whistleblower is represented by counsel.
However, the statute provides that a whistleblower must disclose his or
her identity prior to receiving payment of an award.
F. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order
to:
Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
Commission, including whether the information will have practical
utility;
Evaluate the accuracy of our assumptions and estimates of
the burden of the proposed collection of information;
Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
Evaluate whether there are ways to minimize the burden of
the collection of information on those who respond, including through
the use of automated collection techniques or other forms of
information technology; and
Evaluate whether the proposed amendments would have any
effects on any other collection of information not previously
identified in this section.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct their comments to the Office of
Management and Budget, Attention: Desk Officer for the U.S. Securities
and Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and send a copy to, Brent J. Fields, Secretary,
U.S. Securities and Exchange Commission, 100 F Street NE, Washington,
DC 20549, with reference to File No. S7-08-17. Requests for materials
submitted to OMB by the Commission with regard to the collection of
information should be in writing, refer to File No. S7-08-17 and be
submitted to the U.S. Securities and Exchange Commission, Office of
FOIA Services, 100 F Street NE, Washington, DC 20549. OMB is required
to make a decision concerning the collection of information between 30
and 60 days after publication of this proposed rule. Consequently, a
comment to OMB is best assured of having its full effect if the OMB
receives it within 30 days of publication.
VII. Economic Analysis
The Commission is sensitive to the economic consequences of its
rules, including the benefits, costs, and effects on efficiency,
competition, and capital formation. Section 23(a)(2) \286\ of the
Securities Exchange Act of 1934 requires the Commission, in
promulgating rules under the Exchange Act, to consider the impact that
any rule may have on competition and prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act. Further, Section 3(f) of the Exchange Act \287\ requires the
Commission, when engaging in rulemaking where it is required to
consider or determine whether an action is necessary or appropriate in
the public interest, to consider, in addition to the protection of
investors, whether the action will promote efficiency, competition, and
capital formation.
---------------------------------------------------------------------------
\286\ 15 U.S.C. 78w(a)(2).
\287\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
The economic analysis in this part focuses on the proposed
amendments to Rule 21F-2, Rule 21F-4(d)(3), Rule 21F-6, Rule 21F-
3(b)(4), Rule 21F-8, newly proposed Exchange Act Rule 21F-18, and the
proposed interpretive guidance. As discussed above, the proposed
amendments to Rule 21F-2 are in response to the Supreme Court's recent
decision in Digital Realty Trust, Inc. v. Somers; \288\ proposed Rule
21F-4(d)(3) would allow awards based on non-prosecution agreements or
deferred prosecution agreements entered into by the DOJ or state
attorneys general, and settlement agreements entered into by the
Commission; proposed Rule 21F-3(b)(4) would eliminate potential double
recovery under the current definition of related action; proposed
amendments to Rule 21F-6 would allow additional considerations for
small and large awards; proposed Rule 21F-8(e) would provide authority
to bar applicants from future award applications in certain limited
situations; proposed Rule 21F-18 would provide a streamlined award
consideration process for certain limited categories of non-meritorious
applications; and the proposed interpretive guidance would help clarify
the meaning of ``independent analysis'' as that term is defined in
Exchange Act Rule 21F-4 and utilized in the definition of ``original
information.'' The other proposed amendments in this release are either
procedural, technical in nature or codify existing practice, and
therefore we do not expect them to significantly impact efficiency,
competition, and capital formation.
---------------------------------------------------------------------------
\288\ 138 S. Ct. 767 (2018).
---------------------------------------------------------------------------
Many of the benefits and costs discussed below are difficult to
quantify. For example, although the analysis that follows details the
specific ways in which we expect the proposed rules to affect
whistleblower incentives, we lack the data necessary to estimate the
magnitudes of these effects separately or in the aggregate. Similarly,
we do not know the precise cost--in terms of awards paid out of the
IPF--of defining a non-prosecution agreement or deferred prosecution
agreement entered into by the DOJ or a state attorney general or a
settlement agreement entered into by the Commission as an
``administrative action'' and any money required to be paid thereunder
as a ``monetary sanction.'' Moreover, we do not know the funds that
might be conserved in the IPF by the avoidance of double recoveries for
the same action and the avoidance of large awards that are not
reasonably necessary to achieve the goals of the whistleblower program.
Therefore, while we have attempted to quantify economic impacts where
possible, much of the discussion of economic effects is qualitative in
nature.
A. Economic Baseline
To examine the potential economic effects of the amendments, we
employ as a baseline the comprehensive set of rules that the Commission
adopted in May 2011 to implement the whistleblower program. The
baseline also includes: The Supreme Court's recent decision in Digital
Realty Trust, Inc. v. Somers; a description of whistleblower programs
administered by other regulatory authorities; and a discussion of the
IPF (including its replenishment mechanism), summary statistics that
describe the distribution of awards paid by the whistleblower program
under the 2011 rules, and estimates of wages and salaries obtained from
a number of surveys.
[[Page 34735]]
1. Whistleblower Programs
In this section, we discuss a non-exhaustive list of the various
federal and state whistleblower programs that are currently
administered by other agencies or authorities and which might be
implicated by the proposed rules.\289\ The CFTC administers its own
whistleblower award program under section 23 of the Commodity Exchange
Act.\290\ Both the SEC and CFTC programs were established by the Dodd-
Frank Act and are substantially identical in their substantive
terms.\291\ As discussed above, since the adoption of our whistleblower
program rules, two states have adopted their own whistleblower award
programs in connection with state securities-law enforcement actions.
In 2011, Utah established a whistleblower-award scheme to provide
rewards of up to thirty percent of the money collected in state
securities-law enforcement actions.\292\ The following year, Indiana
enacted a whistleblower award scheme to provide rewards up to ten
percent of the money collected in a state securities-law enforcement
action.\293\ We are also aware that DOJ might pursue law-enforcement
actions that potentially implicate both the Commission's whistleblower
program and the whistleblower award program that the IRS
administers.\294\ Further, Congress in 2015 established a new motor-
vehicle-safety whistleblower award program that allows employees or
contractors of a motor-vehicle manufacturer, parts supplier, or
dealership who report serious violations of federal vehicle-safety laws
to obtain awards of 10 percent to 30 percent of any monetary sanction
over $1 million that the Federal Government collects based on that
information.\295\
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\289\ Although we discuss several federal whistleblower programs
that we believe are more likely to be implicated by the proposed
rules, there are other federal whistleblower programs that are not
discussed but which could potentially be implicated.
\290\ 7 U.S.C. 26.
\291\ See Securities Whistleblower Incentives and Protections
Proposing Release, 75 FR at 70490.
\292\ Utah Code Annotated 61-1-101 et seq.
\293\ Indiana Code 23-19-7-1 et seq.
\294\ 26 U.S.C. 7623.
\295\ 49 U.S.C. 30172 (enacted by Section 24352 of the Fixing
America's Surface Transportation Act of 2015 (FAST Act), Pub. L.
114-94).
---------------------------------------------------------------------------
2. Supreme Court Decision in Digital Realty Trust, Inc. v. Somers
The Supreme Court recently held in Digital Realty Trust, Inc. v.
Somers,\296\ that Section 21F(h)(1) of the Exchange Act unambiguously
requires that a person report a possible securities law violation to
the Commission in order to qualify for employment retaliation
protection, and that the Commission's rule interpreting the retaliation
protections in Section 21F more broadly was therefore not entitled to
deference.\297\ The Court reasoned that the definition of
``whistleblower'' codified in Section 21F(a)(6) requires such a report
to the Commission as a prerequisite for employment retaliation
protection, and that this definition is ``clear and conclusive.'' \298\
The Court also determined that strict application of the definition's
reporting requirement in the employment anti-retaliation context is
consistent with Congress's core objective of `` `motivat[ing] people
who know of securities law violations to tell the SEC.' '' \299\
---------------------------------------------------------------------------
\296\ 138 S. Ct. 767 (2018).
\297\ Id. at 781-82.
\298\ Id.
\299\ Id. at 777 (quoting S. Rep. No. 111-176, at 38 (2010)).
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3. IPF and Awards Issued by the SEC Whistleblower Program
In Section 21F(g) of the Exchange Act, Congress established the IPF
to provide funding for the payment of whistleblower awards. The IPF has
a permanent indefinite appropriation that is available without further
appropriation or fiscal year limitation for the purpose of funding
awards to whistleblowers (and to fund the Office of Inspector General's
Employee Suggestion Program).\300\
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\300\ However, the Commission is required to request and obtain
an annual apportionment from the Office of Management and Budget to
use these funds. See SEC Agency Financial Report for 2017 (Nov. 14,
2017), available at https://www.sec.gov/files/sec-2017-agency-financial-report.pdf.
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As of the end of Fiscal Year 2017, the balance of the IPF was
approximately $322 million.\301\ Whenever the reserve in the IPF falls
below $300 million, Section 21F(g)(3) requires the Commission to
replenish the IPF.\302\ In May 2018, the balance of the IPF for the
first time fell below the $300 million threshold that triggers the
statutory replenishment mechanism; \303\ this occurred when the
Commission paid $83 million--its largest payout to date on an
enforcement action--to three individuals.
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\301\ See Section II.D, above.
\302\ See 15 U.S.C. 78u-6(g)(3).
\303\ For a description of the IPF's statutory replenishment
mechanisms, see Section 21F(g)(3) of the Exchange Act, 15 U.S.C.
78u-6(g)(3).
---------------------------------------------------------------------------
From August 2012 through April 2018, the Commission's whistleblower
program issued 50 whistleblower awards to 55 individuals (including, as
explained above, individuals who acted as joint whistleblowers).\304\
Table 1 of Section VII(A)(3) reports the frequency distribution of
these awards by award size. Forty-two of these awards were less than $5
million, of which thirty-one awards were less than $2 million. Of the
remaining eight awards, five were at least $5 million but less than $30
million and three exceeded $30 million.\305\ According to the Office of
the Whistleblower, of the 55 individuals who have received awards,
approximately 10 percent are high-ranking corporate executives at
companies of varying sizes and a large majority of these executives
received awards that were under $5 million.
---------------------------------------------------------------------------
\304\ These totals treat as single awards several cases where
whistleblowers' original information led to multiple covered actions
that were processed together in one award order recognizing the
total contributions of the whistleblower. Similarly, consistent with
the approach proposed above governing cases where we grant an award
for both a Commission enforcement action and a related action by
another agency based on the same information provided by the
whistleblower (see 17 CFR 240.21F-3(b)), we consider covered-action
awards together with their corresponding related-action awards as
single whistleblower awards.
\305\ One of the three awards that exceeded $30 million was
issued in September 2014 in a Commission action and related actions.
See Order Determining Whistleblower Award Claim, Exchange Act
Release No. 34-73174 (Sept. 22, 2014), available at https://www.sec.gov/rules/other/2014/34-73174.pdf. The other two awards were
issued in March 2018 for $49 and $33 million, respectively, to three
individuals (two of whom were acting as joint whistleblowers). See
Order Determining Whistleblower Award Claim, Exchange Act Release
No. 34-82897 (March 19, 2018), available at, https://www.sec.gov/rules/other/2018/34-82897.pdf. We note that these three awards alone
reduced the balance of the IPF by approximately $112 million.
Table 1 of Section VII(A)(3)--Frequency Distribution of Whistleblower
Awards
[We use awards issued to whistleblowers by the SEC Whistleblower Program
from August 2012 through April 2018. Number is the number of awards that
fall within an award size category. Percent is the number of awards in
an award size category as a fraction of the total number of awards.]
------------------------------------------------------------------------
Award size category Number Percent
------------------------------------------------------------------------
Less than $2 million.................... 31 62
At least $2 million but less than $5 11 22
million................................
[[Page 34736]]
At least $5 million but less than $10 2 4
million................................
At least $10 million but less than $15 1 2
million................................
At least $15 million but less than $20 1 2
million................................
At least $20 million but less than $30 1 2
million................................
At least $30 million.................... 3 6
-------------------------------
Total............................... 50 100
------------------------------------------------------------------------
In addition to summarizing the distribution of awards to
whistleblowers, we also summarize the distribution of awards by
enforcement action. For each enforcement action, we identify all
whistleblowers who receive an award for that enforcement action and sum
up their awards to arrive at the aggregate award for that enforcement
action. Table 2 of section VII(A)(3) indicates that between August 2012
and April 2018, there were 45 enforcement actions for which the
Commission issued whistleblower awards.\306\ Thirty-seven enforcement
actions had awards of less than $5 million, of which twenty-eight
awards were less than $2 million. Of the remaining eight actions, six
had aggregate awards of at least $5 million but less than $30 million
and only two had an aggregate award that exceeded $30 million.
---------------------------------------------------------------------------
\306\ As noted, we aggregate related actions with their
corresponding Commission actions for purposes of this analysis.
Table 2 of Section VII(A)(3)--Frequency Distribution of Awards by
Enforcement Action
[We use awards issued to whistleblowers by the SEC Whistleblower Program
from August 2012 through April 2018. For each enforcement action, we
identify all whistleblowers who receive an award for that enforcement
action and sum up their awards to arrive at the aggregate award for that
enforcement action. We then plot the distribution of aggregate awards by
enforcement action. Number is the number of aggregate awards that fall
within an award size category. Percent is the number of aggregate awards
in an award size category as a fraction of the total number of awards.]
------------------------------------------------------------------------
Award size category Number Percent
------------------------------------------------------------------------
Less than $2 million.................... 28 62
At least $2 million but less than $5 9 20
million................................
At least $5 million but less than $10 3 7
million................................
At least $10 million but less than $15 2 4
million................................
At least $15 million but less than $20 0 0
million................................
At least $20 million but less than $30 1 2
million................................
At least $30 million.................... 2 4
-------------------------------
Total............................... 45 100
------------------------------------------------------------------------
4. Estimates of Current Annual Wages
Prospective whistleblowers' annual wages are potentially relevant
to various aspects of the proposed rules. Table 3 of Section VII(A)(3)
presents, by industry, the pre-tax annual wages per employee (``average
wages'') estimated by the Bureau of Labor Statistics for 2016.\307\
Average wages vary from a low of $22,445 in the leisure and hospitality
industry to a high of $98,458 in the information industry.
---------------------------------------------------------------------------
\307\ Wage data used for calculating the annual wages per
employee are derived from the quarterly tax reports submitted to
state government workforce agencies by employers, subject to state
unemployment insurance laws, and from Federal agencies subject to
the Unemployment Compensation for Federal Employees program. Further
information is available at https://www.bls.gov/cew/cewbultn16.htm.
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These averages do not reflect the substantial degree of within-
industry wage variation. For example, more senior employees involved in
financial activities likely earn higher wages than their more junior
counterparts, and staff that supply significant expertise may earn more
than those that do not. A survey of 2,499 firms registered with the
Commission and included in the Russell 3000 Index as of May 2017
revealed median total CEO compensation at approximately $3.8
million.\308\ A study of the 200 largest pay packages awarded to CEOs
at U.S. public companies in fiscal year 2016 revealed that the median
pay for this group of CEOs was $16.9 million, while the average pay was
$19.7 million.\309\ A 2017 report documenting survey responses from 377
financial professionals included average base salaries for senior-level
financial executives of between $133,859 and $342,154, depending on
title and whether companies are public or private.\310\ Notwithstanding
the foregoing, we think it is relevant to observe that although the
compensation of CEOs and other senior ranking officials provides
insights into the wage variation within a particular industry, in our
experience a company's workforce typically consists of far more lower-
[[Page 34737]]
paying positions, relatively speaking. For example, the average base
salary for securities professionals working in New York City in 2015
(the last year for which such data is available) was $388,000 and the
nominal value of the average annual bonus for that year was
approximately $146,200.
---------------------------------------------------------------------------
\308\ See ``CEO and Executive Compensation Practices: 2017
Edition'' (available at: https://www.conference-board.org/publications/publicationdetail.cfm?publicationid=7584).
\309\ See ``Equilar 200: Ranking the Largest CEO Pay Packages''
(available at https://www.equilar.com/reports/49-equilar-200-ranking-the-largest-ceo-pay-pakages-2017.html) for a summary of the study
and its findings. See ``Equilar 200: The Largest CEO Pay Packages of
2016'' (available at https://www.equilar.com/reports/49-table-equilar-200-ranking-largest-ceo-pay-packages.html) for the ranking
of CEOs by their pay packages. See ``How the C.E.O. Rankings Were
Done'' (https://www.nytimes.com/2017/05/26/business/how-the-ceo-rankings-were-done.html) for a discussion of the study's
methodology.
\310\ See ``Financial Executive Compensation Report 2017'' Grant
Thornton, 2017 (available at: https://www.grantthornton.com/~/media/
content-page-files/tax/pdfs/FEI-financial-exec-comp-survey-2017/FEI-
survey-results-2017.ashx).
Table 3 of Section VII(A)(3)--2016 Annual Wages per Employee by Industry
[This table presents the pre-tax annual wages per employee at privately
owned establishments aggregated by industry as reported by the Bureau of
Labor Statistics]
------------------------------------------------------------------------
Annual wages
Industry per employee
($)
------------------------------------------------------------------------
Natural resources and mining............................ $56,115
Construction............................................ 58,647
Manufacturing........................................... 64,870
Trade, transportation, and utilities.................... 44,764
Information............................................. 98,458
Financial activities.................................... 88,841
Professional and business services...................... 69,992
Education and health services........................... 48,058
Leisure and hospitality................................. 22,445
Other services.......................................... 35,921
Unclassified............................................ 51,837
------------------------------------------------------------------------
B. Analysis of Benefits, Costs, and Economic Effects of the Proposed
Rules
In this section, we discuss the potential benefits, costs, and
economic effects of the proposed rules. For proposed Rule 21F-6(c), we
also discuss alternatives to the approach contemplated in the proposed
rule as well as reasons for rejecting those alternatives.
1. Proposed Amendments to Rule 21F-2
Most of the proposed amendments to Rule 21F-2 are either in
response to the Supreme Court's decision in Digital Realty Trust, Inc.
v. Somers \311\ or do not differ substantively from current rules and
practice. Two proposed amendments, however, do represent changes
relative to the economic baseline, and their potential benefits, costs,
and economic effects are discussed here. Proposed Rule 21F-2(a)(1)
would extend employment retaliation protection only to an individual
who provides the Commission with information ``in writing.'' Proposed
Rule 21F-2(d)(1)(iii) would, among other things, limit employment
retaliation protection to lawful acts that ``relate to the subject
matter'' of the person's submission to the Commission under proposed
Rule 21F-2(a).
---------------------------------------------------------------------------
\311\ 138 S. Ct. 767 (2018).
---------------------------------------------------------------------------
a. Proposed Rule 21F-2(a)(1)
Proposed Rule 21F-2(a)(1) could potentially impose a burden on
those individuals who want to report potential violations to the
Commission and wish to qualify as a ``whistleblower'' solely for
employment retaliation protection. Such individuals might decide not to
report to the Commission if the reporting burden is perceived to
outweigh the benefits associated with retaliation protection. Our
experience to date in the awards context suggests that requiring that
information be provided in writing presents, at most, a minimal burden
to individuals who want to report violations to the Commission. To the
extent that this experience is informative about the reporting burden
in the retaliation context, such a burden would also be, at most,
minimal. Accordingly, the proposed rule would likely not have an
adverse impact on the whistleblowing incentives of those individuals
who wish to qualify as a ``whistleblower'' solely for employment
retaliation protection.
We have considered several alternatives to the approach
contemplated in proposed Rule 21F-2(a). The first alternative is to
require information to be provided to the Commission through the online
portal at https://www.sec.gov, or mailing or faxing a Form TCR to the
Office of the Whistleblower. The second alternative is to permit
additional manners of reporting for anti-retaliation purposes (such as
placing a telephone call).
We rejected the first alternative because it would, in our view,
unnecessarily limit the means of reporting to the Commission by
individuals who are merely seeking employment retaliation protection.
Limiting whistleblower status to those individuals who follow the first
alternative could result in the unnecessary exclusion of individuals
from the benefits of Section 21F(h)(2)'s employment retaliation
protections without providing any accompanying benefit to the
Commission, whistleblowers, or the public generally. Further, requiring
individuals to report ``in writing'' could potentially impose lower
costs (including time spent) on these individuals than the costs they
would have borne under the first alternative.
We rejected the second alternative because of potential costs that
could arise if the Commission's staff became ensnared by disputes in
private anti-retaliation lawsuits over what information was provided to
whom on what dates. Requiring that any reporting be done in writing
obviates these potential costs.
b. Proposed Rule 21F-2(d)(1)(iii)
Proposed Rule 21F-2(d)(1)(iii) helps avoid the result that an
individual could qualify just once as a whistleblower and then receive
lifetime protection for any non-Commission reports described in clause
(iii) of Section 21F(h)(1)(A). For individuals who want to make non-
Commission reports about potential violations to their employers and
desire employment retaliation protection for such lawful acts, the
proposed rule could increase the incentives of these individuals to
instead report directly to the Commission. These individuals would only
qualify for employment retaliation protection if they report to the
Commission under the proposed rule. Reporting to the Commission ``in
writing'' as contemplated under proposed Rule 21F-2(a) could
potentially impose a burden on these individuals. In light of the
analysis of proposed Rule 21F-2(a)(1) supra, we believe that such a
reporting burden would, at most, be minimal and would
[[Page 34738]]
likely not limit the reporting incentives afforded by proposed Rule
21F-2(d)(1)(iii).
2. Proposed Rule 21F-3(b)(4)
Proposed Rule 21F-3(b)(4) would provide that a law-enforcement
action will not qualify as a related action if the Commission
determines that there is a separate whistleblower award scheme that
more appropriately applies to the enforcement action. Further, proposed
Rule 21F-3(b)(4) would provide that the Commission will not make an
award to the whistleblower for the related action if the whistleblower
has already been granted an award by the authority responsible for
administering the more applicable whistleblower award program. Further,
under proposed Rule 21F-3(b)(4), if the whistleblower was denied an
award by the other award program, the whistleblower would not be
permitted to readjudicate any issues before the Commission that the
authority responsible for administering the other whistleblower award
program resolved as part of the award denial.
The proposed rule would prevent a whistleblower from adjudicating
his or her contributions in separate forums and potentially obtaining
two separate awards on the same enforcement action. While the existing
rules preclude this result when an action is applicable to both the
Commission's whistleblower program and the CFTC's whistleblower
program,\312\ the existing rules do not expressly preclude this result
when the non-SEC whistleblower program is administered by an authority
other than the CFTC. Thus, the proposed rule would help the Commission
avoid paying awards that are not reasonably necessary in light of the
whistleblower program's goals in cases where an action is applicable to
the Commission's whistleblower program and the whistleblower program of
an authority other than the CFTC.
---------------------------------------------------------------------------
\312\ See 17 CFR 240.21F-3(b)(3).
---------------------------------------------------------------------------
The proposed rule would likely not have an adverse impact on the
incentives of individuals who may report violations that result in
enforcement actions potentially implicating both the Commission's
whistleblower program and the whistleblower program of another
authority other than the CFTC. As discussed earlier in Section II(C),
to date, the Commission has never paid an award on a matter where a
second whistleblower program also potentially applied to the same
matter, nor has the Commission ever indicated that it would do so.
Given that the proposed rule codifies the Commission's current
practice, we believe that these potential whistleblowers would have
already taken such current practice into account when deliberating on
whether to report.
3. Proposed Rule 21F-4(d)(3)
Proposed Rule 21F-4(d)(3) would provide that, for purposes of
making a whistleblower award, a non-prosecution agreement or deferred
prosecution agreement entered into by the DOJ or a state attorney
general in a criminal case, or a settlement agreement entered into by
the Commission outside of the context of a judicial or administrative
proceeding to address violations of the securities laws will be deemed
to be an ``administrative action'' and any money required to be paid
thereunder will be deemed a ``monetary sanction.'' The proposed rule
will result in more awards being paid from the IPF because awards would
be paid for non-prosecution and deferred prosecution agreements entered
into by the U.S. Department of Justice or a state attorney general as
well as settlement agreements entered into by the Commission in
addition to judicial or administrative proceedings covered by the
existing rules. While potentially increasing payouts from the IPF, the
proposed rule should enhance the incentives for whistleblowers to come
forward in a timely manner to the extent that it signals to prospective
whistleblowers that a wider array of enforcement resolutions may result
in awards.
4. Proposed Rule 21F-6(c)
Proposed Rule 21F-6(c) would provide a mechanism for the Commission
to adjust upwards any awards that would potentially be below $2 million
to a single whistleblower. However, this new authority would come with
important limitations. Specifically, the Commission will not adjust an
award upward if any of the negative award factors that are identified
in Exchange Act Rule 21F-6(b) \313\ were found to be present with
respect to the whistleblower's award claim, or if the award claim
triggers Exchange Act Rule 21F-16 (concerning awards to whistleblowers
who engage in culpable conduct).\314\
---------------------------------------------------------------------------
\313\ 17 CFR 240.21F-6(b).
\314\ 17 CFR 240.21F-16.
---------------------------------------------------------------------------
The proposed rule could enhance the whistleblowing incentives of
those individuals who anticipate receiving awards below $2 million and
do not expect to be subject to any of the above conditions that would
preclude an application of the award enhancement mechanism. The
prospect of a larger award could encourage these individuals to report
violations to the Commission. By withholding the upward adjustment if a
whistleblower unreasonably delayed reporting to the Commission after
learning the relevant facts, the proposed rule could increase
whistleblowing incentives by encouraging individuals to report
violations promptly and thereby facilitate the Commission's ability to
protect investors.
The proposed rule could have a deterrent effect on potential
violators because these individuals understand that they would lose the
opportunity for an award enhancement if they engage in securities law
violations and subsequently act as whistleblowers of those violations.
Similarly, the proposed rule could have a deterrent effect on potential
whistleblowers who contemplated interfering with an internal compliance
and reporting system by denying award enhancements to such potential
whistleblowers.
From a cost perspective, the proposed rule could potentially result
in larger awards being paid from the IPF because an award that would
yield a potential payout to a single whistleblower below $2 million may
be adjusted upward. As indicated in Table 1 of Section VII(A)(3), the
Commission has granted 31 whistleblower awards (i.e., 62% of awards)
that were below $2 million. To the extent that the distribution of past
awards provides a reasonable estimate of the distribution of likely
future awards, smaller awards are likely in the future, some of which
could be subject to the proposed rule.
5. Proposed Rule 21F-6(d)
a. Consideration of Proposed Rule
Proposed Rule 21F-6(d) would provide a mechanism for the Commission
to conduct an enhanced review of awards where the total monetary
sanctions collected in the Commission or related actions would equal at
least $100 million and where the potential payout to a single
whistleblower in connection with those actions would exceed $30
million. Where these two conditions are met, the proposed rule would
afford the Commission the discretion to determine if it is appropriate
to adjust the award downward. The goal of any downward adjustment is to
ensure that the likely total award payout to the whistleblower does not
exceed an amount that the Commission determines is appropriate to
achieve the program's objectives of rewarding meritorious
whistleblowers and sufficiently incentivizing future whistleblowers.
However, consistent with the statutory mandate, in no event
[[Page 34739]]
would the total amount awarded to all whistleblowers in the aggregate
be less than 10 percent of the monetary sanctions collected from the
action. Further, an application of the proposed rule would not result
in a reduction of an award below $30 million. We believe that the
proposed rule could foster a more efficient use of the IPF by reducing
the likelihood of awards that are excessive in light of the
whistleblower program's goals and the interests of investors and the
broad public interest. As indicated in Table 1 of Section VII(A)(3), we
have granted three whistleblower awards that exceeded $30 million.
These three awards alone reduced the balance of the IPF by
approximately $112 million. To the extent that the distribution of past
awards provides a reasonable estimate of the distribution of likely
future awards, large awards are likely in the future, some of which
could be subject to the proposed rule. Absent the proposed rule, the
Commission may find itself faced with the possibility of paying out
significantly large awards that are in excess of the amounts
appropriate to advance the goals of the whistleblower program, the
interests of investors and the broad public interest. These awards
could also substantially diminish the IPF, requiring the Commission to
direct more funds to replenish the IPF rather than directing those
funds to the United States Treasury where they could be used for other
important public purposes.\315\
---------------------------------------------------------------------------
\315\ See Section VII(A)(3) for a discussion of the IPF and its
replenishment mechanism.
---------------------------------------------------------------------------
As whistleblowers consider their reporting decisions, they weigh,
among other things, the expected size of the award and the expected
costs associated with their whistleblowing. We acknowledge that
proposed paragraph 6(d) could shift the upper end of the distribution
of expected awards. However, we recognize that realized awards to date
are typically substantially smaller in magnitude. In addition,
according to the Office of the Whistleblower, of the 55 individuals who
have received awards, approximately 10 percent are high-ranking
corporate executives at companies of varying sizes and a large majority
of these executives received awards that were under $5 million. This
indicates to us that, as a practical matter, even those whistleblowers
with the most to lose in terms of potential income have been willing to
come forward for a recovery below the proposed $30 million floor. Thus,
the data available does not indicate that proposed paragraph 6(d) would
discourage whistleblowers from coming forward.
Additional factors further support the view that potential
whistleblowers will not be discouraged from coming forward as a result
of proposed paragraph 6(d). As discussed earlier, $30 million would be
a floor, not a ceiling on large awards. Rather, $30 million is the
point above which we would begin to consider whether the likely award
is consistent with the program's objectives; we may choose not to
reduce the award.
Further, the operation of proposed paragraph 6(d) would likely
affect only a small subset of potential whistleblowers. As discussed in
Section VII(A)(3) above, to date we have issued 50 whistleblower awards
to 55 individuals (including, as explained above, individuals who acted
as joint whistleblowers) and only three awards (i.e., 6% of awards)
have exceeded $30 million.\316\ To the extent that the distribution of
past awards provides a reasonable estimate of the distribution of
likely future awards, and potential whistleblowers do not
systematically over- or underestimate the size of recoveries,\317\ only
a minority of potential whistleblowers would be potentially affected by
the proposed rule.\318\
---------------------------------------------------------------------------
\316\ One award that exceeded $30 million was issued in
September 2014 in a Commission action and related actions. See Order
Determining Whistleblower Award Claim, Exchange Act Release No. 34-
73174 (Sept. 22, 2014), available at https://www.sec.gov/rules/other/2014/34-73174.pdf. The second and third awards that exceeded
$30 million were issued in March 2018 in a Commission action. See
Order Determining Whistleblower Award Claim, Exchange Act Release
No. 34-82897 (March 19, 2018), available at https://www.sec.gov/rules/other/2018/34-82897.pdf.
\317\ The proposed rule could affect a larger subset of
potential whistleblowers if potential whistleblowers systematically
overestimate the size of the recovery; conversely, the proposed rule
could affect a smaller subset of potential whistleblowers if
potential whistleblowers systematically underestimate the size of
the recovery.
\318\ We acknowledge that there are other pending awards that
could exceed the $30 million floor. We do not discuss those matters
here because they have not been finalized, but we note that such
awards would still constitute a relatively small proportion of the
overall future potential awards that the Commission is likely to
make.
---------------------------------------------------------------------------
Additionally, our review of the academic literature relevant to
whistleblower incentives indicates that whistleblowers are often
willing to report notwithstanding the absence of financial incentives.
Non-monetary incentives that can motivate individuals to report
include: (i) A desire to see wrongdoers punished, (ii) an interest in
``doing the right thing'' for the sake of investors or others who might
be harmed by the wrongdoing, or (iii) a desire to protect one's own
self-interests.\319\
---------------------------------------------------------------------------
\319\ See Anthony Heyes & Sandeep Kapur, An Economic Model of
Whistleblower Policy, 25 J. L. Econ. & Org. 164-166 (2009)
(providing a short review of academic literature on sociology and
psychology and listing non-monetary motives for whistleblowing); see
also Aaron S. Kesselheim et al., Whistle-Blower's Experience in
Fraud Litigation Against Pharmaceutical Companies, 362 New England
J. Med. 1834, 1835 (2010) (listing self-preservation, justice,
integrity, altruism or public safety as primary motivations for qui
tam lawsuits). See Securities Whistleblower Incentives and
Protections, Exchange Act Release No. 64545, 76 FR at 34360, note
453 (June 13, 2011).
---------------------------------------------------------------------------
Moreover, even at the $30 million floor that we are proposing, it
appears to us that a $30 million award could yield a lump sum that, if
invested in an annuity, could generate an annual return that is
attractive in light of the wage and salary data presented in Section
VII(A)(4).\320\ A number of non-mutually exclusive factors can
contribute to making the lump sum smaller than the whistleblower award.
First, to the extent that the whistleblower wishes to remain anonymous
through the course of an investigation and resulting enforcement
action, that whistleblower must have an attorney represent him or her
in connection with a submission of information and claim for an
award.\321\ The payment of attorney fees out of the whistleblower award
would likely reduce the lump sum that could be invested in an annuity.
Second, if the whistleblower award is awarded to two or more
individuals who acted together as a joint whistleblower, then the award
would likely be divided among the individual whistleblowers. Such a
division of the award among the individual whistleblowers would reduce
the lump sum that each individual could invest in an annuity.
---------------------------------------------------------------------------
\320\ We note that the annual incomes presented below are pre-
tax numbers, as are the wage and salary data presented in Section
VII(A)(4).
\321\ See 17 CFR 240.21F-7(b)(1).
---------------------------------------------------------------------------
To illustrate the annual income that a whistleblower could
potentially receive by investing the lump sum residual award that
remains after accounting for the factors discussed above, we annuitize
a range of possible lump sums to generate different streams of
payments. Such payments could potentially replace the stream of wage
payments that a whistleblower would lose by leaving his or her
employer. Alternatively, if the whistleblower experiences no change in
his or her employment situation, the payments could be interpreted as
additional income.
In Table 4 in Section VII(B)(5)(a), we report the annual income
that could be generated over twenty years by
[[Page 34740]]
investing a lump sum upfront payment in a twenty-year annuity.\322\ To
capture the potential effects associated with taxes, attorneys' fees,
and award division among individuals acting as a joint whistleblower,
we calculate different annual incomes by varying the upfront payment
from $5 million to $50 million in $5 million increments, and by varying
the rate of return on the annuity from 2% per annum to 10% per annum in
2% increments. As an example, investing an upfront amount of $20
million in the annuity at 2% per annum generates an annual income of
approximately $1.2 million.\323\ Table 4 indicates that increasing the
upfront payment while holding the rate of return constant increases the
annual income; in addition, increasing the rate of return while holding
the upfront payment constant also increases the annual income. To
illustrate the effects of lengthening the duration of income
generation, we repeat the calculations assuming a lump sum investment
in a forty-year annuity (Table 5 in Section VII(B)(5)(a)), a sixty-year
annuity (Table 6 in Section VII(B)(5)(a)), and a perpetuity \324\
(Table 7 in Section VII(B)(5)(a)). In Tables 5, 6, and 7, we continue
to calculate different annual incomes by varying the upfront payment
from $5 million to $50 million in $5 million increments, and by varying
the rate of return on the annuity from 2% per annum to 10% per annum in
2% increments.\325\
---------------------------------------------------------------------------
\322\ The other assumptions used in the calculations are: A
fixed income is paid at the end of every month; monthly compounding
of interest; there is no residual income at the end of the annuity;
the annuity has 12 x 20 = 240 monthly payments; income is pre-tax;
annual income is 12 multiplied by the monthly income generated by
the annuity (e.g., for an upfront payment of $20 million and a 2%
rate of return per annum, the annuity generates a monthly income of
$101,176.67. Multiplying $101,176.67 by 12 yields the $1,214,120
figure reported in the table.) These assumptions notwithstanding, we
note that only a portion of the fixed income generated by a
purchased commercial annuity is taxable under IRS rules. See
Internal Revenue Service Publication 939, General Rule for Pensions
and Annuities available at https://www.irs.gov/pub/irs-pdf/p939.pdf.
\323\ Id.
\324\ A perpetuity is a stream of fixed, periodic payments that
go on indefinitely.
\325\ The other assumptions used in Table 6-8 are: A fixed
income is paid at the end of every month; monthly compounding of
interest; there is no residual income at the end of the annuity; the
annuity has monthly payments; income is pre-tax; annual income is 12
multiplied by the monthly income generated by the annuity. These
assumptions notwithstanding, we note that only a portion of the
fixed income generated by a purchased commercial annuity is taxable
under IRS rules. See Internal Revenue Service Publication 939,
General Rule for Pensions and Annuities available at https://www.irs.gov/pub/irs-pdf/p939.pdf.
Table 4 in Section VII(B)(5)(a)--Annual Income Generated by a Twenty Year Annuity
[We assume that a lump sum upfront payment is invested in a twenty-year annuity to generate annual income over
twenty years. We calculate different annual incomes by varying the upfront payment from $5 million to $50
million in $5 million increments, and by varying the rate of return on the annuity from 2% per annum to 10% per
annum in 2% increments]
----------------------------------------------------------------------------------------------------------------
Rate of return
Upfront payment -------------------------------------------------------------------------------
2% 4% 6% 8% 10%
----------------------------------------------------------------------------------------------------------------
$5,000,000...................... $303,530 $363,588 $429,859 $501,864 $579,013
10,000,000...................... 607,060 727,176 859,717 1,003,728 1,158,026
15,000,000...................... 910,590 1,090,765 1,289,576 1,505,592 1,737,039
20,000,000...................... 1,214,120 1,454,353 1,719,435 2,007,456 2,316,052
25,000,000...................... 1,517,650 1,817,941 2,149,293 2,509,320 2,895,065
30,000,000...................... 1,821,180 2,181,529 2,579,152 3,011,184 3,474,078
35,000,000...................... 2,124,710 2,545,117 3,009,010 3,513,048 4,053,091
40,000,000...................... 2,428,240 2,908,706 3,438,869 4,014,912 4,632,104
45,000,000...................... 2,731,770 3,272,294 3,868,728 4,516,776 5,211,117
50,000,000...................... 3,035,300 3,635,882 4,298,586 5,018,640 5,790,130
----------------------------------------------------------------------------------------------------------------
Table 5 in Section VII(B)(5)(a)--Annual Income Generated by a Forty Year Annuity
[We assume that a lump sum upfront payment is invested in a forty-year annuity to generate annual income over
forty years. We calculate different annual incomes by varying the upfront payment from $5 million to $50 million
in $5 million increments, and by varying the rate of return on the annuity from 2% per annum to 10% per annum in
2% increments]
----------------------------------------------------------------------------------------------------------------
Rate of return
Upfront payment -------------------------------------------------------------------------------------
2% 4% 6% 8% 10% 10%
------------------------------------------------------------------------------------------------------------- -----
$5,000,000................... $181,695 $250,763 $330,128 $417,187 $509,488
10,000,000................... 363,391 501,526 660,256 834,374 1,018,975
15,000,000................... 545,086 752,289 990,385 1,251,561 1,528,463
20,000,000................... 726,782 1,003,052 1,320,513 1,668,748 2,037,950
25,000,000................... 908,477 1,253,815 1,650,641 2,085,935 2,547,438
30,000,000................... 1,090,172 1,504,578 1,980,769 2,503,122 3,056,925
35,000,000................... 1,271,868 1,755,342 2,310,897 2,920,309 3,566,413
40,000,000................... 1,453,563 2,006,105 2,641,025 3,337,496 4,075,900
45,000,000................... 1,635,258 2,256,868 2,971,154 3,754,683 4,585,388
50,000,000................... 1,816,954 2,507,631 3,301,282 4,171,870 5,094,875
----------------------------------------------------------------------------------------------------------------
[[Page 34741]]
Table 6 in Section VII(B)(5)(a)--Annual Income Generated by a Sixty Year Annuity
[We assume that a lump sum upfront payment is invested in a sixty-year annuity to generate annual income over
sixty years. We calculate different annual incomes by varying the upfront payment from $5 million to $50 million
in $5 million increments, and by varying the rate of return on the annuity from 2% per annum to 10% per annum in
2% increments]
----------------------------------------------------------------------------------------------------------------
Rate of return
Upfront payment -------------------------------------------------------------------------------
2% 4% 6% 8% 10%
----------------------------------------------------------------------------------------------------------------
5,000,000....................... $143,163 $220,042 $308,505 $403,373 $501,274
10,000,000...................... 286,326 440,083 617,011 806,746 1,002,548
15,000,000...................... 429,489 660,125 925,516 1,210,119 1,503,821
20,000,000...................... 572,652 880,166 1,234,022 1,613,492 2,005,095
25,000,000...................... 715,815 1,100,208 1,542,527 2,016,865 2,506,369
30,000,000...................... 858,978 1,320,249 1,851,033 2,420,238 3,007,643
35,000,000...................... 1,002,141 1,540,291 2,159,538 2,823,611 3,508,917
40,000,000...................... 1,145,304 1,760,332 2,468,044 3,226,984 4,010,191
45,000,000...................... 1,288,466 1,980,374 2,776,549 3,630,357 4,511,464
50,000,000...................... 1,431,629 2,200,415 3,085,055 4,033,730 5,012,738
----------------------------------------------------------------------------------------------------------------
Table 7 in Section VII(B)(5)(a)--Annual Income Generated From a Perpetuity
[We assume that a lump sum upfront payment is invested in a perpetuity to generate annual income in perpetuity.
We calculate different annual incomes by varying the upfront payment from $5 million to $50 million in $5
million increments, and by varying the rate of return on the annuity from 2% per annum to 10% per annum in 2%
increments]
----------------------------------------------------------------------------------------------------------------
Rate of return
Upfront payment -------------------------------------------------------------------------------
2% 4% 6% 8% 10%
----------------------------------------------------------------------------------------------------------------
5,000,000....................... $100,000 $200,000 $300,000 $400,000 $500,000
10,000,000...................... 200,000 400,000 600,000 800,000 1,000,000
15,000,000...................... 300,000 600,000 900,000 1,200,000 1,500,000
20,000,000...................... 400,000 800,000 1,200,000 1,600,000 2,000,000
25,000,000...................... 500,000 1,000,000 1,500,000 2,000,000 2,500,000
30,000,000...................... 600,000 1,200,000 1,800,000 2,400,000 3,000,000
35,000,000...................... 700,000 1,400,000 2,100,000 2,800,000 3,500,000
40,000,000...................... 800,000 1,600,000 2,400,000 3,200,000 4,000,000
45,000,000...................... 900,000 1,800,000 2,700,000 3,600,000 4,500,000
50,000,000...................... 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000
----------------------------------------------------------------------------------------------------------------
The annuity figures in Tables 4 through 7 in Section VII(B)(5)(a)
are consistent with our belief that the proposed $30 million floor
should not negatively impact the overall pecuniary incentives faced by
most potential whistleblowers considering whether to come forward to
the Commission to report potential misconduct.\326\
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\326\ It is possible that the proposed rule could introduce
uncertainty or ambiguity about the likely size of the whistleblower
award, which may affect the incentives of individuals to report
potential violations. See e.g., Itzhak Gilboa & David Schmeidler,
Maxmin Expected Utility with Non-Unique Prior, 18 J. Mathematical
Econ. 141 (1989) (proposing an axiomatic foundation of a decision
rule based on maximizing expected minimum payoff of a strategy). See
also infra note 330.
---------------------------------------------------------------------------
In addition, to the extent that the costs associated with
whistleblowing include social stigma and a possible job loss for the
whistleblower, the employment anti-retaliation protections and
confidentiality requirements (including, critically, the ability of
whistleblowers to remain anonymous) can serve to reduce the costs
associated with whistleblowing to some extent.\327\ Indeed, our
experience to date has been that many company insiders have submitted
their tips to the Commission anonymously.
---------------------------------------------------------------------------
\327\ See 15 U.S.C. 78u-6(d) and (h); 17 CFR 240.21F-9(c).
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b. Estimating Incentives To Provide Information
The Commission has sought to provide a quantitative estimate of the
incentives to provide information via the whistleblower program. We
acknowledge that a rigorous approach to analyzing the potential impact
of the proposed changes on whistleblower incentives, would be to
compare the number of whistleblower tips that resulted in successful
enforcement actions before and after the establishment of the
Commission's whistleblower program. Such a comparison could elucidate
changes in behavior due to the whistleblower program, including
potentially those due to the provision of monetary awards. However,
data on whistleblower tips that led to successful enforcement actions
prior to the establishment of the Commission's whistleblower program is
not available, thus rendering such a comparison infeasible. Even absent
such data, the Commission has engaged in a limited comparison of a pre-
2011 awards program with the current whistleblower program. Section
21A(e) of the Exchange Act, added in 1988, authorized the Commission to
award a bounty to a person who provides information leading to the
recovery of a civil penalty from an insider trader, from a person who
tipped information to an insider traders, or from a person who directly
or indirectly controlled an insider trader. Section 21A(e) also
established a limit on bounties of 10% of the amount recovered.
A March 2010 report by the SEC's Office of the Inspector General
documented bounty applications and awards under the Commission's bounty
program since its inception in 1989.\328\ Between 1989 and 2010, the
program had paid a total of $159,537 to five claimants in seven insider
trading cases, at the statutory limit of 10% of
[[Page 34742]]
recoveries.\329\ In contrast, since the inception of the whistleblower
program in 2011 the Commission has ordered a single whistleblower
payout related to an insider trading case, and that payout was less
than $500,000.
---------------------------------------------------------------------------
\328\ See U.S. Securities and Exchange Commission, Office of the
Inspector General, Assessment of the SEC's Bounty Program, March 29,
2010.
\329\ Id at 5.
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Any comparison of the bounty program and the whistleblower program
is limited by substantial differences between the bounty program and
the whistleblower program in scope and process. Although the number of
payments in insider trading cases has declined under the current
program, the larger scope and breadth of the whistleblower program has
resulted in a substantial increase in the number and magnitude of
payments overall. Differences in measures of whistleblower incentives
before and after the establishment of the whistleblower program likely
will reflect a combination of changes to Commission processes that
occurred simultaneously or very close in time, limiting our ability to
identify the impact of any single change on whistleblower incentives.
For example, while the 2011 rules implemented an increase in the
maximum award percentage to 30% from the previous 10% maximum, they
also established a 10% minimum award percentage.\330\ Further, the 2011
rules also increased the scope of potential claims to include actions
beyond insider trading and established an Office of the Whistleblower,
actions that likely served to increase the prominence of the
whistleblower program relative to the bounty program that preceded it.
The implementing rules also set forth an updated process for the
submission and evaluation of claims following criticisms that the
bounty program was opaque and difficult for whistleblowers to navigate.
Further, the statutory changes to the Exchange Act that established the
whistleblower program also included explicit whistleblower protections.
As we acknowledge that these factors limit the degree to which we can
assess the potential impact on incentives of the proposed changes to
the whistleblower program based on the transition from the bounty
program to the whistleblower program, the Commission welcomes comment
on changes to other whistleblower programs or alternative analytical
methods that would permit more precise identification and
quantification of the proposal's potential impacts.
---------------------------------------------------------------------------
\330\ See S. Rep. No. 111-176 at 110-12 (2010) at 111 (noting
the majority view that ``the critical component of the Whistleblower
Program is the minimum that any individual could look towards in
determining whether to take the enormous risk of blowing the whistle
in calling attention to fraud'').
---------------------------------------------------------------------------
c. Alternatives
The Commission has considered several alternatives to proposed Rule
21F-6(d). We discuss each of those alternatives below.
The first alternative is to set the floor at $5 million, and the
second alternative is to set the floor at $50 million.
We believe that a $5 million floor could potentially apply to
awards that are not the focus of the proposed amendment. As indicated
in Table 1 of Section VII(A)(3), approximately 16% of past
whistleblower awards are at least $5 million. To the extent that the
distribution of past awards is a reasonable estimate of the
distribution of likely future awards, this floor could result in the
enhanced review of awards that are aligned with the program's goals.
Because the focus of the proposed rule is on large awards that are not
reasonably necessary to achieve the program's goals and that could
disproportionately diminish the IPF, the $5 million floor is not
preferable to the proposed approach.
A $50 million floor is not preferable to the proposed approach. We
have not granted awards that are at least $50 million. Even if there
were some cases where the proposed rule might be triggered, our
discretion to make a meaningful and appropriate downward adjustment
would be substantially reduced. Thus, the $50 million floor would
likely not support the proposed rule's goal of ensuring that the likely
total award payout to the whistleblower does not exceed an amount that
the Commission determines is appropriate to further the goals of the
whistleblower program. Because of this concern, we believe that the $50
million floor is not preferable to the proposed approach.
6. Proposed Rule 21F-8(e)
Under proposed Rule 21F-8(e), if an applicant submits three or more
award applications that the Commission finds to be frivolous or lacking
a colorable connection between the tip and the Commission action, the
Commission may permanently bar the applicant from submitting any
additional award applications (either for Commission actions or related
actions) and the Commission would not consider any other award
applications that the claimant has submitted or may seek to submit in
the future.
The proposed rule would expressly provide, however, that the Office
of the Whistleblower shall as a preliminary matter advise any claimant
of the Office's assessment that the claimant's award application for a
Commission action is frivolous or lacking a colorable connection
between the tip and the action for which the applicant has sought an
award. If the applicant withdraws the application at that time, it
would not be considered by the Commission in determining whether to
exercise its authority to impose a bar.
In addition, the proposed rule would generally codify the
Commission's current practice with respect to applicants who violate
Rule 21F-8(c)(7).\331\ That rule provides that an applicant shall be
ineligible for an award if, in his or her whistleblower submission, his
or her other dealings with the Commission, or his or her dealings with
another authority in connection with a related action, the individual
knowingly and willfully makes any false, fictitious, or fraudulent
statement or representation, or uses any false writing or document
knowing that it contains any false, fictitious, or fraudulent statement
or entry with intent to mislead or otherwise hinder the Commission or
another authority. The Commission has issued two final orders that have
permanently barred the applicants from submitting any further
whistleblower award applications based on violations of Rule 21F-
8(c)(7). The proposed rule would clarify and codify the Commission's
authority to bar applicants by providing that if the Commission finds
that a claimant has violated paragraph (c)(7) of Rule 21F-8, the
Commission may permanently bar the applicant from making any future
award applications, and shall decline to process any other award
applications that the claimant has already submitted.
---------------------------------------------------------------------------
\331\ 17 CFR 240.21F-8(c)(7).
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The proposed rule could increase the speed and efficiency of the
award determination process.\332\ By permanently barring applicants
that make three or more frivolous award applications, as well as not
processing any future applications from these barred applicants, the
proposed rule could help free up staff resources that could then be
devoted to processing potentially meritorious award applications. In
the Commission's experience to date, two individuals have submitted
approximately 24% of all award applications in connection with
Commission covered actions. All but one of the applications submitted
by
[[Page 34743]]
these two individuals have been found by the Office of the
Whistleblower to be entirely frivolous. To the extent that the agency's
historical experience is informative about the likely behavior of
applicants that submit multiple frivolous award applications in the
future, the proposed rule would have a meaningful impact in terms of
freeing up staff resources that could then be devoted to processing
potentially meritorious award applications. This redeployment of staff
resources in turn could expedite the processing of potentially
meritorious award applications. More broadly, staff resources that are
freed up as a result of the proposed rule could be devoted to other
work related to the whistleblower program including, but not limited
to, the posting of Notices of Covered Actions, determining potential
payouts, and manning the whistleblower hotline.\333\ Further, as
discussed in Section II(F), above, we have found that the repeat
applicants that would be covered by proposed Rule 21F-8(e)(1) can
significantly delay the processing of meritorious award applications
and the eventual payment of awards by utilizing the procedural
opportunities to object to an award. By barring such applicants, the
proposed rule could reduce the delay in processing meritorious award
applications and the eventual payment of awards.
---------------------------------------------------------------------------
\332\ We acknowledge that this potential benefit rests, in part,
on the premise that the applicants covered by the proposed rule
would likely not change their behavior with respect to the overall
award determination process. For example, an applicant that has been
found to submit multiple frivolous award applications in the past
would likely continue to do so in the future.
\333\ To help promote the SEC's whistleblower program and
establish a line of communication with the public, the Office of the
Whistleblower operates a hotline where whistleblowers, their
attorneys, or other members of the public with questions about the
program may call to speak to the Office of the Whistleblower's
staff. During FY 2017, the Office of the Whistleblower returned
nearly 3,200 calls from members of the public, exceeding the number
of calls returned the prior fiscal year. Since May 2011 when the
hotline was established, the Office of the Whistleblower has
returned over 18,600 calls from the public. See SEC Whistleblower
Program 2017 Annual Report to Congress (Nov. 15, 2017), available at
https://www.sec.gov/files/sec-2017-annual-report-whistleblower-program.pdf.
---------------------------------------------------------------------------
The abovementioned benefit would also potentially arise from the
proposed rule's deterrent effect to the extent that the proposed rule
discourages individuals from submitting frivolous award applications
because they recognize that the submission of frivolous award
applications may ultimately permanently disqualify them from obtaining
a whistleblower award.
Overall, the proposed rule could increase the speed and efficiency
of the award determination process by expediting the processing of
potentially meritorious award applications, as well as the payment of
awards. To the extent that faster award application processing and
award payment motivate whistleblowing, individuals are more likely to
come forward and report potential violations as a result of the
proposed rule.
The proposed rule could help protect investors and the public from
potential harm (particularly where the misconduct concerns ongoing
Commission actions) that may flow from the provision of false,
fictitious, or fraudulent statement or representation, or false writing
or document with intent of misleading or otherwise hindering the
Commission or another authority. This benefit would potentially arise
because the proposed rule would grant the Commission discretion to
permanently bar applicants that violated Rule 21F-8(c)(7) from
submitting any future award applications.\334\ This benefit would also
potentially arise from the proposed rule's deterrent effect to the
extent that the proposed rule discourages individuals from engaging in
the conduct prohibited by Rule 21F-8(c)(7), particularly when they are
submitting their award applications, because they should recognize that
it may not only lead to a denial of their current award claim but may
also permanently disqualify them from obtaining a whistleblower award.
---------------------------------------------------------------------------
\334\ See supra text accompanying notes 184-189, 331.
---------------------------------------------------------------------------
Individuals who are permanently barred under the proposed rule
might subsequently have information about possible securities law
violations that could be provided to the Commission. To the extent that
these barred individuals' decision to report is based solely on the
pecuniary motivation of obtaining a whistleblowing award, these
individuals may decide not to report even if they have information
about possible violations because they can no longer obtain a
whistleblower award as a result of the proposed rule. We believe that
this potential cost of the proposed rule could be mitigated by a number
of factors.
First, the number of individuals who may be permanently barred by
the proposed rule for submitting three or more frivolous applications
and who might subsequently have information about possible securities
law violations that could be provided to the Commission is likely to be
a small fraction of the population of award applicants. Based on our
experience to date, we have found that individuals that submitted three
or more award applications make up 6.6% of the population of covered
action award applicants. This estimate constitutes an upper bound of
the actual fraction of applicants that submitted three or more
frivolous applications and subsequently had information about possible
securities law violations that could be provided to the
Commission.\335\ To the extent that our estimate is informative of the
likely fraction of award applicants who may be permanently barred by
the proposed rule, the potential cost associated with the proposed rule
would be limited.
---------------------------------------------------------------------------
\335\ To date, four applicants submitted three or more
applications that were determined to be potentially meritorious and
not frivolous.
---------------------------------------------------------------------------
Second, as discussed above, the Commission has issued two final
orders that have permanently barred the applicants from submitting any
further whistleblower award applications based on violations of Rule
21F-8(c)(7). The proposed rule would clarify and codify the
Commission's authority to bar applicants by providing that if the
Commission finds that a claimant has violated paragraph (c)(7) of Rule
21F-8, the Commission may permanently bar the applicant from making any
future award applications, and shall decline to process any other award
applications that the claimant has already submitted. Given that the
proposed rule codifies the Commission's current practice, we believe
that individuals who have been barred on the basis of Rule 21F-8(c)(7)
would have already taken such current practice into account when
deliberating on whether to report, even in the absence of the proposed
rule.
Finally, as discussed in the adopting release that accompanied the
original whistleblower rules, whistleblowing is an individual decision
that is generally guided by a complex mix of pecuniary elements and
non-pecuniary elements.\336\ Individuals that are permanently barred
from applying for whistleblower awards may still come forward and
provide information about possible violations if they are sufficiently
motivated by non-pecuniary elements.\337\
---------------------------------------------------------------------------
\336\ See Securities Whistleblower Incentives and Protections
Adopting Release, 76 FR at 34355, note 433.
\337\ Id. An example of a non-pecuniary element is a sense of
``doing the right thing.''
---------------------------------------------------------------------------
We also acknowledge the possibility that individuals who have made
fewer than three frivolous award applications \338\ might be
discouraged from reporting possible securities law violations because
their next award application could be determined to be frivolous, which
would increase the likelihood of a permanent bar from making any future
award applications.
[[Page 34744]]
We believe that this potential cost of the proposed rule could be
mitigated by a number of factors.
---------------------------------------------------------------------------
\338\ These individuals include those who are considering
reporting a possible violation for the first time, those who have
made one frivolous claim, and those who have made two frivolous
claims.
---------------------------------------------------------------------------
First, as discussed above, the proposed rule would expressly
provide that the Office of the Whistleblower shall as a preliminary
matter advise any claimant of the Office's assessment that the
claimant's award application for a Commission action is frivolous or
lacking a colorable connection between the tip and the action for which
the applicant has sought an award. If the applicant withdraws the
application at that time, it would not be considered by the Commission
in determining whether to exercise its authority to impose a bar. We
believe that this aspect of the proposed rule should alleviate the
concerns among those individuals who have made fewer than three
frivolous award applications that their next award application could be
determined to be frivolous, which would increase the likelihood of a
permanent bar from making any future award applications. Second, the
claims adjudication processes that are specified in Rule 21F-10 and
Rule 21F-11 afford a whistleblower the opportunity to demonstrate the
meritorious nature of her claim should her claim be preliminarily
denied on the grounds of being frivolous. Thus, the claims adjudication
processes should help ensure that potentially meritorious claims will
be considered as such by the Commission. Third, as discussed above,
whistleblowing is an individual decision that is generally guided by a
complex mix of pecuniary elements and non-pecuniary elements.\339\
Individuals who are concerned about being permanently barred from
applying for whistleblower awards may still come forward and provide
information about possible violations if they are sufficiently
motivated by non-pecuniary elements.\340\
---------------------------------------------------------------------------
\339\ See Securities Whistleblower Incentives and Protections
Adopting Release, 76 FR at 34355, note 433.
\340\ Id. An example of a non-pecuniary element is a sense of
``doing the right thing.''
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7. Proposed Rule 21F-18
Proposed Rule 21F-18(a) provides that the Office of the
Whistleblower may use a summary disposition process to deny any award
application that falls within any of the following categories: (1)
Untimely award application; \341\ (2) noncompliance with the
requirements of Rule 21F-9,\342\ which concerns the manner for
submitting a tip to qualify as a whistleblower and to be eligible for
an award; (3) claimant's information was never provided to or used by
the staff handling the covered action or the underlying investigation
(or examination), and those staff members otherwise had no contact with
the claimant; (4) noncompliance with Rule 21F-8(b),\343\ which requires
an applicant to submit supplemental information that the Commission may
require \344\ and to enter into a confidentiality agreement; or (5)
failure to specify in the award application the submission that the
claimant made pursuant to Rule 21F-9(a) \345\ upon which the claim to
an award is based. In addition, the proposed rule would provide that
other defective or non-meritorious award applications could be subject
to the summary disposition process under appropriate circumstances.
Proposed Rule 21F-18(b) specifies the procedures that shall apply to
any award application designated for summary disposition.
---------------------------------------------------------------------------
\341\ The time periods for submitting an award application are
specified in Rule 21F-10(b) and Rule 21F-11(b). See 17 CFR 240.21F-
10(b) & 11(b).
\342\ 17 CFR 240.21F-9.
\343\ 17 CFR 240.21F-8(b).
\344\ The authority to require additional information of an
applicant is delegated to the Office of the Whistleblower. See 17
CFR 240.21F-10(d).
\345\ 17 CFR 240.21F-9(a).
---------------------------------------------------------------------------
The proposed rule could reduce the diversion of staff resources and
time that it might otherwise take to process claims that may be
rejected on straightforward grounds. An award application that is
processed by the proposed summary disposition process would not require
the Claims Review Staff to review the record, issue a Preliminary
Determination, consider any written response filed by the claimant, or
issue the Proposed Final Determination; these functions would be
assumed by the Office of the Whistleblower. The summary disposition
process incorporates two other modifications. First, the 30-day period
for replying to a Preliminary Summary Disposition is shorter than the
time period for replying to a Preliminary Determination provided for in
Rules 21F-10(e)(2) \346\ and 21F-11(e)(2).\347\ This shorter period
should be sufficient for a claimant to reply and that it is appropriate
given that the matters subject to summary disposition should be
relatively straightforward. Second, a claimant would not have the
opportunity to receive the full administrative record upon which the
Preliminary Denial was based. Instead, the Office of the Whistleblower
would (to the extent appropriate given the nature of the denial)
provide the claimant with a staff declaration that contains the
pertinent facts upon which the Preliminary Summary Disposition is
based. This modification from the record-review process specified in
Rules 21F-10 and 21F-11 should still afford any claimant a sufficient
opportunity to provide a meaningful reply to a Preliminary Summary
Disposition. This should eliminate the delay that can arise when a
claimant does not expeditiously request the record (which in turn
delays the start of the 60-day period for a claimant to submit a
response to a preliminary determination); elimination of these delays
should help further expedite the summary adjudication process that we
are proposing.
---------------------------------------------------------------------------
\346\ 17 CFR 240.21F-10(e)(2).
\347\ 17 CFR 240.21F-11(e)(2).
---------------------------------------------------------------------------
As with Proposed Rule 21F-8(e), staff resources that are freed up
as a result of the proposed rule could be devoted to processing
potentially meritorious award applications. This, in turn, could
expedite the processing of potentially meritorious award applications.
To the extent that faster processing of potentially meritorious award
applications motivates whistleblowing, individuals may be more likely
to come forward and report potential violations as a result of the
proposed rule. Further, as noted in the discussion of proposed Rule
21F-8(e) above, staff resources that are freed up as a result of the
proposed rule could be devoted to other work related to the
whistleblower program.
We acknowledge the potential that certain aspects of the proposed
rule might make it more difficult for whistleblowers to respond to the
denial of award applications. The proposed rule might reduce the
whistleblowing incentives of those individuals who consider the ease of
responding to award application denials when deciding whether to come
forward and report potential violations.
However, certain factors limit this potential for increased
difficulties for whistleblowers. First, given that the matters subject
to summary disposition should be relatively straightforward, we believe
that the 30-day period for replying to a Preliminary Summary
Disposition and the provision of a staff declaration (where applicable)
should afford any claimant a sufficient opportunity to provide a
meaningful reply to a Preliminary Summary Disposition. Second, as
discussed above, the proposed rule may only be used to deny award
applications that fall under certain restricted categories. Third, as
discussed in the adopting release that accompanied the original
whistleblower rules, whistleblowing is an individual decision that is
generally guided by a complex mix of pecuniary elements and non-
pecuniary
[[Page 34745]]
elements.\348\ Individuals who may be concerned with the ease of
responding to award application denials may still come forward and
provide information about possible violations if they are sufficiently
motivated by non-pecuniary elements.
---------------------------------------------------------------------------
\348\ See Securities Whistleblower Incentives and Protections
Adopting Release, 76 FR at 34355, note 433.
---------------------------------------------------------------------------
8. Proposed Interpretive Guidance Regarding the Meaning and Application
of ``independent analysis'' as Defined in Exchange Act Rule 21F-4(b)(3)
\349\
---------------------------------------------------------------------------
\349\ 17 CFR 240.21F-4(b)(3).
---------------------------------------------------------------------------
The proposed interpretive guidance helps to clarify the meaning of
``independent analysis'' as that term is defined in Exchange Act Rule
21F-4 and utilized in the definition of ``original information.'' As
discussed earlier, a whistleblower's examination and evaluation of
publicly available information does not constitute ``analysis'' if the
facts disclosed in the public materials on which the whistleblower
relies and in other publicly available information are sufficient to
raise an inference of the possible violations alleged in the
whistleblower's tip. In order for a whistleblower to be credited with
``analysis,'' the whistleblower's examination and evaluation should
contribute ``significant independent information'' that ``bridges the
gap'' between the publicly available information and the possible
securities violations. Assuming that a whistleblower's submission meets
the threshold requirement that it constitutes ``independent analysis,''
for the whistleblower to be eligible for an award the ``information
that . . . is derived from the . . . [whistleblower's] analysis'' must
also be of such high quality that it leads to a successful enforcement
action.
The interpretive guidance could potentially reduce the
whistleblowing incentives of those individuals who wish to satisfy the
``independent analysis'' prong of the ``original information''
requirement by examining publicly available information and providing
observations that do not go beyond the information itself and
reasonable inferences to be drawn therefrom. In light of the
interpretive guidance, these individuals may decide not to provide such
public information knowing that such information would not be credited
as ``independent analysis'' and therefore not eligible for a
whistleblower award. To the extent that the provision of public
information improves Commission enforcement or otherwise provides a
benefit, any potential reduction in such provision would be a cost
associated with the interpretive guidance. Nevertheless, individuals
who are aware that public information would not be credited with
``independent analysis'' may still come forward and provide public
information to the Commission if they are sufficiently motivated by
non-pecuniary elements.
The interpretive guidance could increase the whistleblowing
incentives of those individuals who possess ``significant independent
information'' that ``bridges the gap'' between the publicly available
information (and reasonable inferences therefrom) and the conclusion
that possible securities violations are indicated, but may decide
against reporting to the Commission because they do not fully
understand the meaning of ``independent analysis'' in the absence of
the interpretive guidance. To the extent that these individuals come
forward and report such significant independent information to the
Commission in light of the interpretive guidance, the quantity and
quality of reported information might increase, which in turn might
improve the Commission's ability to enforce Federal securities laws,
detect violations and deter potential future violations. Further, the
clarification afforded by the interpretive guidance might also reduce
the number of award applications that are made solely on the basis of
the provision of public information and do not meet the ``independent
analysis'' threshold. To the extent that the number of such claims
declines as a result of the interpretive guidance, staff resources
could be freed up and devoted to processing potentially meritorious
award applications and other work related to the whistleblower program
as discussed earlier.\350\
---------------------------------------------------------------------------
\350\ See supra Sections VII(B)(6) and VII(B)(7).
---------------------------------------------------------------------------
C. Effects of the Proposed Rules on Efficiency, Competition, and
Capital Formation
As discussed earlier, the Commission is sensitive to the economic
consequences of its rules, including the benefits, costs, and effects
on efficiency, competition, and capital formation. The Commission
believes that the proposed amendments will make incremental changes to
its whistleblower program. Thus, the Commission does not anticipate the
effects on efficiency, competition, and capital formation to be
significant.
The proposed rules could have a positive indirect impact on
investment efficiency and capital formation by increasing the
incentives of potential whistleblowers to provide information on
possible violations.\351\ Providing such information could increase the
effectiveness of the Commission's enforcement activities More effective
enforcement could lead to earlier detection of violations and increased
deterrence of potential future violations, which should assist in a
more efficient allocation of investment funds. Serious securities
frauds, for example, can cause inefficiencies in the economy by
diverting investment funds from more legitimate, productive uses.\352\
---------------------------------------------------------------------------
\351\ See supra Section VII(B) for a discussion of how proposed
Rules 21F-2(d)(1)(iii), 21F-4(d)(3), 21F-6(c), 21F-8(e), 21F-18, and
the interpretive guidance could increase whistleblowing incentives.
\352\ See Securities Whistleblower Incentives and Protections
Adopting Release, 76 FR at 34362.
---------------------------------------------------------------------------
Additionally, to the extent that the proposed rules increase
deterrence of potential future violations, investors' trust in the
securities markets would also increase. This increased investor trust
will promote lower capital costs as more investment funds enter the
market, and as investors generally demand a lower risk premium due to a
reduced likelihood of securities fraud.\353\ This, too, should promote
the efficient allocation of capital formation.
---------------------------------------------------------------------------
\353\ See id. note 466, which explains the link between investor
trust in the fairness of the market and capital cost (``If investors
fear theft, fraud, manipulation, insider trading, or conflicted
investment advice, their trust in the markets will be low, both in
the primary market for issuance or in the secondary market for
trading. This would increase the cost of raising capital, which
would impair capital formation--in the sense that it will be less
than it would or should be if rules against such abuses were in
effect and properly enforced and obeyed.''). See also Ko, K. Jeremy,
``Economics Note: Investor Confidence'', October 2017, available at
https://www.sec.gov/files/investor_confidence_noteOct2017.pdf.
---------------------------------------------------------------------------
At the same time, some proposed rules could reduce whistleblowing
incentives in certain cases, although any such reduction in
whistleblowing incentives--to the extent that it occurs--is justified
in light of the positive indirect impact on investment efficiency and
capital formation discussed earlier. Proposed Rule 21F-6(d) could
reduce the whistleblowing incentives of those potential whistleblowers
who anticipate receiving awards in excess of $30 million and make their
reporting decision by trading off the expected size of the award
against the expected costs associated with whistleblowing.\354\
Proposed Rule 21F-8(e) might reduce the whistleblowing incentives of
(i) those individuals who are permanently barred under the proposed
rule from submitting award applications and (ii)
[[Page 34746]]
those individuals who have made fewer than three frivolous award
applications. Proposed Rule 21F-18 might reduce the whistleblowing
incentives of those individuals who consider the ease of responding to
award application denials when deciding whether to come forward and
report potential violations. The interpretive guidance might reduce the
whistleblowing incentives of those individuals who wish to rely on the
provision of solely public information to satisfy the ``independent
analysis'' prong of the ``original information'' requirement for a
whistleblower award. These potential reductions in whistleblowing
incentives may be limited for reasons discussed earlier.\355\ Further,
we reiterate our belief that any such reduction in whistleblowing
incentives--to the extent that is occurs--is justified in light of the
positive impact on investment efficiency and capital formation
discussed earlier.
---------------------------------------------------------------------------
\354\ See supra SectionVII(B)(4).
\355\ See supra Sections VII(B)(4), VII(B)(6), VII(B)(7), and
VII(B)(8).
---------------------------------------------------------------------------
The proposed rules that provide the Commission with additional
considerations for awards may have opposite, albeit indirect, impacts
on investment efficiency and capital formation by potentially altering
the level of monetary incentives that whistleblower would expect at
different recovery levels. On one hand, proposed Rule 21F-6(d) could
reduce the whistleblowing incentives of those individuals who
anticipate receiving awards in excess of $30 million by reducing their
anticipated award to an amount of $30 million or greater; on the other
hand proposed Rule 21F-6(c) could enhance the whistleblowing incentives
of those individuals who anticipate receiving awards below $2 million
by increasing their anticipated award to an amount of up to $2 million.
The proposed rules could also improve other forms of efficiency.
Proposed Rule 21F-3(b)(4) and proposed Rule 21F-6(d) could foster a
more efficient use of the IPF by avoiding awards that are not
reasonably necessary in light of the whistleblower program's goals and
the interests of investors and the broad public interest. Further,
certain proposed rules could promote efficiency in the processing of
award applications. By permanently barring applicants that make
frivolous or fraudulent award applications, proposed Rule 21F-8(e)
could help free up staff resources that could be used to expedite the
processing of potentially meritorious award applications as well as the
payment of awards. Staff resources that are freed up as a result of
proposed Rule 21F-18 could also expedite the processing of potentially
meritorious award applications. As discussed in Sections VII(B)(6) and
VII(B)(7) above, to the extent that faster award application processing
and award payment motivate whistleblowing, individuals are more likely
to come forward and report potential violations as a result of proposed
Rule 21F-8(e) and proposed Rule 21F-18. To the extent that the proposed
rules promote the timely reporting of possible violations by increasing
whistleblowing incentives and prevent the provision of false,
fictitious, or fraudulent statement or representation, or a false
writing or document with intent of misleading or otherwise hindering
the Commission or another authority,\356\ the efficiency in detecting
violations would be enhanced in the sense that violations could be
detected sooner, reducing losses associated with the misuse of
resources. Greater efficiency in detecting violations could also speed
up the public disclosure of such violations to securities markets.
Price efficiency could be improved if earlier public disclosure of
violations speeds up the incorporation of such news into security
prices.
---------------------------------------------------------------------------
\356\ See supra Section VII(B)(6).
---------------------------------------------------------------------------
Similar to the effects on capital formation, the effects of the
proposed rules on competition would be indirect, and would flow from
their effects on whistleblowing incentives. To the extent that the
proposed rules increase the likelihood of detecting misconduct by
increasing whistleblowing incentives, the proposed rules could reduce
the unfair competitive advantages that some companies can achieve by
engaging in undetected violations.\357\ Conversely, to the extent that
the proposed rules decrease the likelihood of detecting misconduct by
reducing whistleblowing incentives, the proposed rules could increase
the unfair competitive advantages that some companies can achieve by
engaging in undetected violations.
---------------------------------------------------------------------------
\357\ See 76 FR at 34362.
---------------------------------------------------------------------------
Request for Comment
The Commission seeks commenters' views on all aspects of its
economic analysis of the proposed amendments. In particular, the
Commission asks commenters to consider the following questions:
1. Are there costs and benefits associated with the proposed
amendments that the Commission has not identified? If so, please
identify them and if possible, offer ways of estimating these costs and
benefits.
2. Do, and if so at what point, awards become unreasonably large in
light of the goals of the whistleblower program? Please explain and
provide details.
3. Are there effects on efficiency, competition, and capital
formation stemming from the proposed amendments that the Commission has
not identified? If so, please identify them and explain how the
identified effects result from one or more amendments.
4. How will lowering award amounts based on dollar figures impact
the incentives of whistleblowers to provide the Commission with
information on misconduct? Will potential whistleblowers view the $30
million floor as a cap? Why or why not?
5. Are there data sources or data sets that can help the Commission
refine its estimates of the lost wages earned by whistleblowers from
their previous jobs? Besides lost wages, are there other ways to
determine the effectiveness of whistleblower awards?
6. Are there alternatives to the proposed rules that the Commission
has not identified? If so, please identify and describe them.
IX. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\358\ the Commission solicits data to
determine whether the proposed rule amendments constitute a ``major''
rule. Under SBREFA, a rule is considered ``major'' where, if adopted,
it results or is likely to result in:
---------------------------------------------------------------------------
\358\ Public Law 104-121, tit. II, 110 Stat 857 (1996).
---------------------------------------------------------------------------
An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
Commenters should provide empirical data on (a) the potential
annual effect on the economy; (b) any increase in costs or prices for
consumers or individual industries; and (c) any potential effect on
competition, investment or innovation.
X. Regulatory Flexibility Act Certification
Section 603(a) of the Regulatory Flexibility Act \359\ requires the
Commission to undertake an initial regulatory flexibility analysis of
the proposed rules unless the Commission certifies that the proposed
rules, if
[[Page 34747]]
adopted, would not have a significant economic impact on a substantial
number of small entities.\360\
---------------------------------------------------------------------------
\359\ 5 U.S.C. 603(a).
\360\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
Small entity is defined in 5 U.S.C. 601(6) to mean ``small
business,'' ``small organization,'' and ``small governmental
jurisdiction'' as defined in 5 U.S.C. 601(3)-(5). The definition of
``small entity'' does not include individuals. The proposed rules apply
only to an individual, or individuals acting jointly, who provide
information to the Commission relating to the violation of the
securities laws. Companies and other entities are not eligible to
participate in the whistleblower program as whistleblowers.
Consequently, the persons that would be subject to the proposed rule
are not ``small entities'' for purposes of the Regulatory Flexibility
Act.
For the reasons stated above, the Commission certifies, pursuant to
5 U.S.C. 605(b) of the Regulatory Flexibility Act, that the proposed
rules would not have a significant economic impact on a substantial
number of small entities.
Solicitation of Comments: We encourage the submission of comments
with respect to any aspect of this Regulatory Flexibility Act
Certification. To the extent that commenters believe that the proposed
rules might have a covered impact, we ask they describe the nature of
any impact and provide empirical data supporting the extent of the
impact. We will place any such comments in the same public file as
comments on the proposed amendments themselves.
XI. Statutory Basis
The Commission proposes the rule amendments, as well as the removal
of references to various forms, contained in this document under the
authority set forth in Sections 3(b), 21F, and 23(a) of the Exchange
Act.
List of Subjects in 17 CFR Parts 240 and 249
Securities, Whistleblowing.
Text of the Proposed Amendments
For the reasons set out in the preamble, title 17, chapter II of
the Code of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq.; and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and
Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602,
Pub. L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
Section 240.21F is also issued under Pub. L. 111-203, Sec.
922(a), 124 Stat. 1841 (2010).
* * * * *
0
2. Section 240.21F-2 is revised to read as follows:
Sec. 240.21F-2 Whistleblower status, award eligibility, and
confidentiality and retaliation protections.
(a) Whistleblower status. (1) You are a whistleblower for purposes
of Section 21F of the Exchange Act (15 U.S.C. 78u-6) as of the time
that, alone or jointly with others, you provide the Commission with
information in writing that relates to a possible violation of the
federal securities laws (including any law, rule, or regulation subject
to the jurisdiction of the Commission) that has occurred, is ongoing,
or is about to occur.
(2) A whistleblower must be an individual. A company or other
entity is not eligible to be a whistleblower.
(b) Award eligibility. To be eligible for an award under Section
21F(b) of the Exchange Act (15 U.S.C. 78u-6(b)) based on any
information you provide that relates to a possible violation of the
federal securities laws, you must comply with the procedures and the
conditions described in Sec. Sec. 240.21F-4, 240.21F-8, and 240.21F-9.
You should carefully review those rules before you submit any
information that you may later wish to rely upon to claim an award.
(c) Confidentiality protections. To qualify for the confidentiality
protections afforded by Section 21F(h)(2) of the Exchange Act (15
U.S.C. 78u-6(h)(2)) based on any information you provide that relates
to a possible violation of the federal securities laws, you must comply
with the procedures and the conditions described in Sec. 240.21F-9(a).
(d) Retaliation protections. (1) To qualify for the retaliation
protections afforded by Section 21F(h)(1) of the Exchange Act (15
U.S.C. 78u-6(h)(1)), you must satisfy all of the following criteria:
(i) You must qualify as a whistleblower under paragraph (a) of this
section before experiencing the retaliation for which you seek redress;
(ii) You must reasonably believe that the information you provide
to the Commission under paragraph (a) of this section relates to a
possible violation of the federal securities laws; and
(iii) You must perform a lawful act that meets the following two
criteria:
(A) First, the lawful act must be performed in connection with any
of the activities described in Section 21F(h)(1)(A)(i) through (iii) of
the Exchange Act (15 U.S.C. 78u-6(h)(1)(A)(i) through (iii)); and
(B) Second, the lawful act must relate to the subject matter of
your submission to the Commission under paragraph (a) of this section.
(2) To receive retaliation protection for a lawful act described in
paragraph (d)(1)(iii) of this section, you do not need to qualify as a
whistleblower under paragraph (a) of this section before performing the
lawful act, but you must qualify as a whistleblower under paragraph (a)
of this section before experiencing retaliation for the lawful act.
(3) To qualify for retaliation protection, you do not need to
satisfy the procedures and conditions for award eligibility in
Sec. Sec. 240.21F-4, 240.21F-8, and 240.21F-9.
(4) Section 21F(h)(1) of the Exchange Act (15 U.S.C. 78u-6(h)(1)),
including any rules promulgated thereunder, shall be enforceable in an
action or proceeding brought by the Commission.
0
3. Section 240.21F-3 is amended by:
0
a. Revising paragraph (b)(1); and
0
b. Adding paragraph (b)(4).
The revision and addition read as follows:
Sec. 240.21F-3 Payment of awards.
* * * * *
(b) * * *
(1)(i) A related action is a judicial or administrative action that
is brought by one of the entities listed in paragraphs (b)(1)(i)(A)
through (D) of this section, that is based upon information that either
the whistleblower provided directly to the entity or the Commission
itself passed along to the other entity pursuant to the Commission's
procedures for sharing information, and which is the same original
information that the whistleblower voluntarily provided to the
Commission and that led the Commission to obtain monetary sanctions
totaling more than $1,000,000.
(A) The Attorney General of the United States;
(B) An appropriate regulatory authority;
(C) A self-regulatory organization; or
(D) A state attorney general in a criminal case.
[[Page 34748]]
(ii) The terms appropriate regulatory authority and self-regulatory
organization are defined in Sec. 240.21F-4.
* * * * *
(4)(i) Notwithstanding paragraph (b)(1) of this section, if a
judicial or administrative action is subject to a separate monetary
award program established by the Federal Government, a state
government, or a self-regulatory organization, the Commission will deem
the action a related action only if the Commission finds (based on the
unique facts and circumstances of the action) that its whistleblower
program has the more direct or relevant connection to the action.
(ii) In determining whether a potential related action has a more
direct or relevant connection to the Commission's whistleblower program
than another award program, the Commission will consider the nature,
scope, and impact of the misconduct charged in the potential related
action, and its relationship to the federal securities laws. This
inquiry may include consideration of, among other things:
(A) The relative extent to which the misconduct charged in the
potential related action implicates the public policy interests
underlying the federal securities laws (such as investor protection)
versus other law-enforcement or regulatory interests (such as tax
collection or fraud against the Federal Government);
(B) The degree to which the monetary sanctions imposed in the
potential related action are attributable to conduct that also
underlies the federal securities law violations that were the subject
of the Commission's enforcement action; and
(C) Whether the potential related action involves state-law claims
and the extent to which the state may have a whistleblower award scheme
that potentially applies to that type of law-enforcement action.
(iii) If the Commission does determine to deem the action a related
action, the Commission will not make an award to you for the related
action if you have already been granted an award by the authority
responsible for administering the other whistleblower award program.
Further, if you were denied an award by the other award program, you
will not be permitted to readjudicate any issues before the Commission
that the authority responsible for administering the other
whistleblower award program resolved against you as part of the award
denial. Additionally, if the Commission makes an award before an award
determination is finalized by the authority responsible for
administering the other award scheme, the Commission shall condition
its award on the meritorious whistleblower making a prompt, irrevocable
waiver of any claim to an award from the other award scheme.
0
4. Section 240.21F-4 is amended by:
0
a. Revising paragraph (c)(2);
0
b. In paragraph (d)(2), removing the period from the end of the
paragraph and adding in its place ``; and'';
0
c. Adding paragraph (d)(3); and
0
d. Revising paragraph (e).
The revisions and addition read as follows:
Sec. 240.21F-4 Other definitions.
* * * * *
(c) * * *
(2) You gave the Commission original information about conduct that
was already under examination or investigation by the Commission, the
Congress, any other authority of the federal government, a state
Attorney General or securities regulatory authority, any self-
regulatory organization, or the PCAOB (except in cases where you were
an original source of this information as defined in paragraph (b)(5)
of this section), and your submission significantly contributed to the
success of the action.
* * * * *
(d) * * *
(3) For purposes of making an award under Sec. Sec. 240.21F-10 and
240.21F-11, the following will be deemed to be an administrative action
and any money required to be paid thereunder will be deemed a monetary
sanction under paragraph (e) of this section:
(i) A non-prosecution agreement or deferred prosecution agreement
entered into by the U.S. Department of Justice or a state attorney
general in a criminal case; or
(ii) A settlement agreement entered into by the Commission outside
of the context of a judicial or administrative proceeding to address
violations of the securities laws.
(e) Monetary sanctions means:
(1) A required payment that results from a Commission action or
related action and which is either:
(i) Expressly designated as disgorgement, a penalty, or interest
thereon; or
(ii) Otherwise required as relief for the violations that are the
subject of the covered action or related action; or
(2) Any money deposited into a disgorgement fund or other fund
pursuant to section 308(b) of the Sarbanes-Oxley Act of 2002 (15 U.S.C.
7246(b)), as a result of such action or any settlement of such action.
0
5. Section 240.21F-6 is amended by adding paragraphs (c), (d) and (e)
to read as follows:
Sec. 240.21F-6 Criteria for determining amount of award.
* * * * *
(c) Additional considerations in connection with certain smaller
awards. When considering any meritorious whistleblower award
application where the Commission--after applying the award factors
specified in paragraphs (a) and (b) of this section--determines that
the resulting payout to that whistleblower for the original information
that he or she provided that led to one or more successful covered or
related action(s), collectively, would be below $2 million (or any such
greater amount that the Commission may periodically establish through
publication of an order in the Federal Register), the Commission may
adjust the award upward as provided for in this paragraph (c).
(1) The Commission may make an upward adjustment that it determines
is appropriate to ensure that the total payout to the whistleblower
more appropriately achieves the program's objectives of rewarding
meritorious whistleblowers and sufficiently incentivizing future
whistleblowers who might otherwise be concerned about the low dollar
amount of a potential award;
(2) The Commission shall not adjust an award upward under this
paragraph (c) if any of the negative award factors specified in
paragraph (b) of this section were found present with respect to the
whistleblower's award claim, or if the award claim triggers Sec.
240.21F-16 (concerning awards to whistleblowers who engage in culpable
conduct);
(3) In no event shall the Commission make an upward adjustment
under this section to raise a potential payout (as assessed by the
Commission at the time it makes the award determination) above $2
million (or by such other amount as the Commission may designate by
order); and
(4) The total amount awarded to all whistleblowers in the aggregate
may not be greater than 30 percent of the total monetary sanctions
collected, or likely to be collected, in any action (as assessed by the
Commission at the time it makes the award determination).
(d) Additional considerations in connection with certain large
awards where the monetary sanctions collected would equal or exceed
$100 million. When considering any meritorious whistleblower award
application where the whistleblower's original information led to one
or more successful covered or related action(s), collectively, that
[[Page 34749]]
resulted in the collection of $100 million or more in monetary
sanctions or will likely result in such collections (as assessed by the
Commission at the time it considers the award application(s)), the
Commission shall determine the award amount as specified in paragraphs
(d)(1) through (4) of this section. (For purposes of this rule, the
Commission may adjust the $100 million threshold upward through
publication of an order in the Federal Register.)
(1) When applying the award factors in paragraphs (a) and (b) of
this section, the Commission shall make any upward or downward
adjustments by considering the impact of the adjustments on both the
award percentage and the approximate corresponding dollar amount of the
award. If the resulting payout would be below $30 million (or such
greater alternative amount that the Commission may periodically
establish through publication of an order in the Federal Register),
then the downward adjustment provided for in paragraph (d)(2) of this
section shall not be applicable.
(2) After completing the award analysis required by paragraph
(d)(1) of this section and determining the total dollar amount of the
potential award for any action(s) based upon the whistleblower's
original information, the Commission shall consider whether that amount
exceeds what is reasonably necessary to reward the whistleblower and to
incentivize similarly situated whistleblowers. If the Commission finds
that the total payout for any action(s) based upon the whistleblower's
original information would exceed an amount that is reasonably
necessary, it may adjust the total payout for the action(s) downward to
an amount that it finds is sufficient to achieve those goals. As is the
case with every aspect of any award determination under this section,
the Commission shall not consider the balance of the Investor
Protection Fund (``IPF'') when determining whether to make an
adjustment to an award under this paragraph (c).
(3) Any downward adjustment to a whistleblower's award for any
actions based upon the whistleblower's original information under
paragraph (d)(2) of this section shall under no circumstances yield a
potential total payout on all the actions, collectively, (as assessed
by the Commission at the time that it makes the award determination) of
less than either $30 million or such greater alternative amount that
the Commission may periodically establish through publication of an
order in the Federal Register.
(4) Further, any adjustments under paragraph (d)(2) of this section
shall in no event result in the total amount awarded to all meritorious
whistleblowers, collectively, for each covered or related action
constituting less than 10 percent of the monetary sanctions collected
in that action.
(e) Future adjustments. Finally, in any order that adjusts any of
the dollar amounts specified under paragraph (c) or (d) of this
section, the Commission shall consider (among other factors that it
deems relevant) whether the adjustment is necessary or appropriate to
encourage whistleblowers to come forward and the potential impact any
adjustment might have on the IPF.
0
6. Section 240.21F-7 is amended by revising the introductory text of
paragraph (a) to read as follows:
Sec. 240.21F-7 Confidentiality of submissions.
(a) Pursuant to Section 21F(h)(2) of the Exchange Act (15 U.S.C.
78u-6(h)(2)) and Sec. 240.21F-2(c), the Commission will not disclose
information that could reasonably be expected to reveal the identity of
a whistleblower provided that the whistleblower has submitted
information utilizing the processes specified in Sec. 240.21F-9(a),
except that the Commission may disclose such information in the
following circumstances:
* * * * *
0
7. Section 240.21F-8 is amended by:
0
a. Revising the section heading.
0
b. Adding paragraphs (d) and (e).
The revision and addition read as follows:
Sec. 240.21F-8 Eligibility and forms.
* * * * *
(d)(1) The Commission will periodically designate on the
Commission's web page a Form TCR (Tip, Complaint, or Referral) that
individuals seeking to be eligible for an award through the process
identified in Sec. 240.21F-9(a)(2) shall use.
(2) The Commission will also periodically designate on the
Commission's web page a Form WB-APP for use by individuals seeking to
apply for an award in connection with a Commission-covered judicial or
administrative action (15 U.S.C. 21F(a)(1)), or a related action (Sec.
240.21F-3(b)(1)).
(e) Submissions or applications that are frivolous or fraudulent,
or that would otherwise hinder the effective and efficient operation of
the Whistleblower Program may result in the Commission issuing a
permanent bar as part of a final order in the course of considering a
whistleblower award application from you. If such a bar is issued, the
Office of the Whistleblower will not accept or act on any other
applications from you, in the following circumstances:
(1) If you make three or more award applications for Commission
actions that the Commission finds to be frivolous or lacking a
colorable connection between the tip (or tips) and the Commission
actions for which you are seeking awards; or
(2) If the Commission finds that you have violated paragraph (c)(7)
of this section. Before any Preliminary Determination or Preliminary
Summary Disposition is issued, the Office of the Whistleblower shall
advise you of any assessment by that Office that your award application
is frivolous or lacking a colorable connection between the tip and the
action for which you have sought an award. If you withdrawal your
application at that time, it will not be considered by the Commission
in determining whether to exercise its authority under paragraph (e)(1)
of this section. The Commission will consider whether to issue a
permanent bar in connection with an award application that would
trigger such a bar; the Preliminary Determination or Preliminary
Disposition must state that a bar is being recommended and the
applicant would thereafter have an opportunity to submit a response in
accordance with the award processing procedures specified in Sec. Sec.
240.21F-10(e)(2) and 240.21F-18(b)(3).
0
8. Section 240.21F-9 is amended by:
0
a. Revising paragraphs (a) and (b);
0
b. In paragraphs (c) and (d), removing the parenthetical phrase
``(referenced in Sec. 249.1800 of this chapter)'' wherever it appears;
and
0
c. Adding paragraph (e).
The revisions and addition read as follows:
Sec. 240.21F-9 Procedures for submitting original information.
(a) To submit information in a manner that satisfies Sec. 240.21F-
2(b) and (c) you must submit your information to the Commission by any
of these methods:
(1) Online, through the Commission's website located at
www.sec.gov, using the Commission's electronic TCR portal (Tip,
Complaint or Referral);
(2) Mailing or faxing a Form TCR to the SEC Office of the
Whistleblower at the mailing address or fax number designated on the
SEC's web page for making such submissions; or
(3) By any other such method that the Commission may expressly
designate on
[[Page 34750]]
its website as a mechanism that satisfies Sec. 240.21F-2(b) and (c).
(b) Further, to be eligible for an award, you must declare under
penalty of perjury at the time you submit your information pursuant to
paragraph (a)(1), (2), or (3) of this section that your information is
true and correct to the best of your knowledge and belief.
* * * * *
(e) You must follow the procedures specified in paragraphs (a) and
(b) of this section the first time you provide the Commission with
information that you rely upon as a basis for claiming an award. If you
fail to do so, then you will be deemed ineligible for an award in
connection with that information (even if you later resubmit that
information in accordance with paragraphs (a) and (b) of this section).
Notwithstanding the foregoing, the Commission, in its sole discretion,
may waive your noncompliance with paragraphs (a) and (b) of this
section if the Commission determines that the administrative record
clearly and convincingly demonstrates that you would otherwise qualify
for an award and you demonstrate that you complied with the
requirements of paragraphs (a) and (b) of this section within 30 days
of the first communication with the staff about the information that
you provided.
0
9. Section 240.21F-10 is amended by revising paragraphs (b), (c), and
(d) to read as follows:
Sec. 240.21F-10 Procedures for making a claim for a whistleblower
award in SEC actions that result in monetary sanctions in excess of
$1,000,000.
* * * * *
(b) To file a claim for a whistleblower award, you must file Form
WB-APP, Application for Award for Original Information Provided
Pursuant to Section 21F of the Securities Exchange Act of 1934. You
must sign this form as the claimant and submit it to the Office of the
Whistleblower by mail or fax (or any other manner that the Office
permits). All claim forms, including any attachments, must be received
by the Office of the Whistleblower within ninety (90) calendar days of
the date of the Notice of Covered Action in order to be considered for
an award.
(c) If you provided your original information to the Commission
anonymously, you must disclose your identity on the Form WB-APP, and
your identity must be verified in a form and manner that is acceptable
to the Office of the Whistleblower prior to the payment of any award.
(d) Once the time for filing any appeals of the Commission's
judicial or administrative action has expired, or where an appeal has
been filed, after all appeals in the action have been concluded, the
staff designated by the Director of the Division of Enforcement
(``Claims Review Staff'') will evaluate all timely whistleblower award
claims submitted on Form WB-APP in accordance with the criteria set
forth in these rules. In connection with this process, the Office of
the Whistleblower may require that you provide additional information
relating to your eligibility for an award or satisfaction of any of the
conditions for an award, as set forth in Sec. 240.21F-8(b). Following
that evaluation, 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 percentage amount.
* * * * *
0
10. Section 240.21F-11 is amended by revising paragraphs (b) and (d) to
read as follows:
Sec. 240.21F-11 Procedures for determining awards based upon a
related action.
* * * * *
(b) You must also use Form WB-APP to submit a claim for an award in
a potential related action. You must sign this form as the claimant and
submit it to the Office of the Whistleblower by mail or fax (or any
other manner that the Office permits) as follows:
(1) If a final order imposing monetary sanctions has been entered
in a potential related action at the time you submit your claim for an
award in connection with a Commission action, you must submit your
claim for an award in that related action on the same Form WB-APP that
you use for the Commission action. For purposes of this paragraph
(b)(1) and paragraph (b)(2) of this section, a final order imposing
monetary sanctions is entered on the date of a court or administrative
order imposing the monetary sanctions; however, with respect to any
agreement covered by Sec. 240.21F-4(d) (such as a deferred prosecution
agreement or a nonprosecution agreement entered by the Department of
Justice), the Commission will deem the date of the entry of the final
order to be the date of the earliest public availability of the
instrument reflecting the arrangement if evidenced by a press release
or similar dated publication notice; otherwise, the date of the last
signature necessary for the agreement.
(2) If a final order imposing monetary sanctions in a potential
related action has not been entered at the time you submit your claim
for an award in connection with a Commission action, you must submit
your claim on Form WB-APP within ninety (90) days of the issuance of a
final order imposing sanctions in the potential related action.
* * * * *
(d) Once the time for filing any appeals of the final judgment or
order in a potential related action has expired, or if an appeal has
been filed, after all appeals in the action have been concluded, the
Claims Review Staff will evaluate all timely whistleblower award claims
submitted on Form WB-APP in connection with the related action. The
evaluation will be undertaken pursuant to the criteria set forth in
these rules. In connection with this process, the Office of the
Whistleblower may require that you provide additional information
relating to your eligibility for an award or satisfaction of any of the
conditions for an award, as set forth in Sec. 240.21F-8(b). Following
this evaluation, 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 percentage amount.
* * * * *
0
11. Section 240.21F-12 is amended by:
0
a. Revising the introductory text of paragraph (a);
0
b. In paragraph (a)(2), removing the parenthetical phrase ``(referenced
in Sec. 249.1800 of this chapter)''; and
0
c. Revising paragraphs (a)(3) and (6).
The revisions read as follows:
Sec. 240.21F-12 Materials that may form the basis of an award
determination and that may comprise the record on appeal.
(a) The following items constitute the materials that the
Commission, the Claims Review Staff, and the Office of the
Whistleblower may rely upon to make an award determination pursuant to
Sec. Sec. 240.21F-21F-10, 240.21F-11, and 240.21F-18:
* * * * *
(3) The whistleblower's Form WB-APP, including attachments, any
supplemental materials submitted by the whistleblower before the
deadline to file a claim for a whistleblower award for the relevant
Notice of Covered Action, and any other materials timely submitted by
the whistleblower in response either:
(i) To a request from the Office of the Whistleblower or the
Commission; or
(ii) To the Preliminary Determination or Preliminary Summary
Disposition;
* * * * *
(6) Any other documents or materials from third parties (including
sworn declarations) that are received or
[[Page 34751]]
obtained by the Office of the Whistleblower to resolve the claimant's
award application, including information related to the claimant's
eligibility. (Neither the Commission, the Claims Review Staff, nor the
Office of the Whistleblower may rely upon information that the third
party has not authorized the Commission to share with the claimant.)
* * * * *
0
12. Section 240.21F-13 is amended by revising paragraph (b) to read as
follows:
Sec. 240.21F-13 Appeals.
* * * * *
(b) The record on appeal shall consist of the Final Order, any
materials that were considered by the Commission in issuing the Final
Order, and any materials that were part of the claims process leading
from the Notice of Covered Action to the Final Order (including, but
not limited to, the Notice of Covered Action, whistleblower award
applications filed by the claimant, the Preliminary Determination or
Preliminary Summary Disposition, materials that were considered by the
Claims Review Staff in issuing the Preliminary Determination or that
were provided to the claimant by the Office of the Whistleblower in
connection with a Preliminary Summary Disposition, and materials that
were timely submitted by the claimant in response to the Preliminary
Determination or Preliminary Summary Disposition). The record on appeal
shall not include any pre-decisional or internal deliberative process
materials that are prepared exclusively to assist the Commission and
the Claims Review Staff in deciding the claim (including the staff's
Draft Final Determination in the event that the Commissioners reviewed
the claim and issued the Final Order). When more than one claimant has
sought an award based on a single Notice of Covered Action, the
Commission may exclude from the record on appeal any materials that do
not relate directly to the claimant who is seeking judicial review.
0
13. Add Sec. 240.21F-18 to read as follows:
Sec. 240.21F-18 Summary disposition.
(a) Notwithstanding the procedures specified in Sec. Sec. 240.21F-
10(d) through (g) and in 240.21F-11(d) through (g), the Office of the
Whistleblower may determine that an award application that meets any of
the following conditions for denial shall be resolved through the
summary disposition process described further in paragraph (b) of this
section:
(1) You submitted an untimely award application;
(2) You did not comply with the requirements of Sec. 240.21F-9
when submitting the tip upon which your award claim is based;
(3) The information that you submitted was never provided to or
used by the staff handling the covered action or the underlying
investigation (or examination), and those staff members otherwise had
no contact with you;
(4) You did not comply with Sec. 240.21F-8(b);
(5) You failed to specify in the award application the submission
pursuant to Sec. 240.21F-9(a) upon which your claim to an award is
based; and
(6) Your application does not raise any novel or important legal or
policy questions and the Office of the General Counsel concurs that the
matter is appropriate for summary disposition.
(b) The following procedures shall apply to any award application
designated for summary disposition:
(1) The Office of the Whistleblower shall issue a Preliminary
Summary Disposition that notifies you that your award application has
been designated for resolution through the summary disposition process.
The Preliminary Summary Disposition shall also state that the Office
has preliminarily determined to recommend that the Commission deny the
award application and identify the basis for the denial.
(2) Prior to issuing the Preliminary Summary Disposition, the
Office of the Whistleblower shall prepare a staff declaration that sets
forth any pertinent facts regarding the Office's recommendation to deny
your application. At the same time that it provides you with the
Preliminary Summary Disposition, the Office of the Whistleblower shall,
in its sole discretion, either:
(i) Provide you with the staff declaration; or
(ii) Notify you that a staff declaration has been prepared and
advise you that you may obtain the declaration only if within fifteen
(15) calendar days you sign and complete a confidentiality agreement in
a form and manner acceptable to the Office of the Whistleblower
pursuant to Sec. 240.21F-8(b)(4). If you fail to return the signed
confidentiality agreement within fifteen (15) calendar days, you will
be deemed to have waived your ability to receive the staff declaration.
(3)(i) You may reply to the Preliminary Summary Disposition by
submitting a response to the Office of the Whistleblower within thirty
(30) calendar days of the later of:
(A) The date of the Preliminary Summary Disposition; or
(B) The date that the Office of the Whistleblower sends the staff
declaration to you following your timely return of a signed
confidentiality agreement.
(ii) The response should identify the grounds for your objection to
the denial (or in the case of paragraph (a)(5) of this section, correct
the defect). The response must be in the form and manner that the
Office of the Whistleblower shall require. You may include
documentation or other evidentiary support for the grounds advanced in
your response.
(4) If you fail to submit a timely response pursuant to paragraph
(b)(3) of this section, the Preliminary Summary Disposition will become
the Final Order of the Commission. Your failure to submit a timely
written response will constitute a failure to exhaust administrative
remedies.
(5) If you submit a timely response pursuant to paragraph (b)(3) of
this section, the Office of the Whistleblower will consider the issues
and grounds advanced in your response, along with any supporting
documentation that you provided, and will prepare a Proposed Final
Summary Disposition. The Office of the Whistleblower may supplement the
administrative record as appropriate. (This paragraph (b)(5) does not
prevent the Office of the Whistleblower from determining that, based on
your written response, the award claim is no longer appropriate for
summary disposition and that it should be resolved through the claims
adjudication procedures specified in either Sec. 240.21F-10 or Sec.
240.21F-11).
(6) The Office of the Whistleblower will then notify the Commission
of the Proposed Final Summary Disposition. Within thirty (30) calendar
days thereafter, any Commissioner may request that the Proposed Final
Summary Disposition be reviewed by the Commission. If no Commissioner
requests such a review within the 30-day period, then the Proposed
Final Summary Disposition will become the Final Order of the
Commission. In the event a Commissioner requests a review, the
Commission will consider the award application and issue a Final Order.
(7) The Office of the Whistleblower will provide you with the Final
Order of the Commission.
(c) In considering an award determination pursuant to this rule,
the Office of the Whistleblower and the Commission may rely upon the
items specified in Sec. 240.21F-12(a). Further, Sec. 240.21F-12(b)
shall apply to summary dispositions.
[[Page 34752]]
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
14. The general authority citation for part 249 continues to read as
follows and sectional authorities for Sec. Sec. 249.1800 and 249.1801
are removed:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012);
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001,
Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.
* * * * *
Subpart S--[Removed and Reserved]
0
15. Remove and reserve subpart S.
By the Commission.
Dated: June 28, 2018.
Brent Fields,
Secretary.
[FR Doc. 2018-14411 Filed 7-19-18; 8:45 am]
BILLING CODE 8011-01-P
