Section 21F of the Exchange Act directs the SEC to pay awards to certain whistleblowers who report information about a violation of the federal securities laws and regulations that leads to a successful enforcement action. These awards – which equal 10-30 percent of the monetary sanctions collected – can be significant, with the SEC awarding approximately US$1.2 billion to 245 individuals since the first award was issued in 2012, and a US$110 million award being issued in September 2021, which was the second-highest award in the program’s history. The proposed amendments, available here, specifically revise Rules 21F-3 and 21F-6, which were both last amended in September 2020.
Rule 21F-3 addresses situations in which the SEC’s whistleblower program and at least one other whistleblower program may apply to the same related action. Currently, Rule 21F-3 authorizes the SEC to determine which whistleblower program has a more direct or relevant connection to the underlying action; this determination controls whether the award made to the whistleblower comes from the SEC program or the other applicable program, and can potentially result in the whistleblower receiving a lower award than what is available under the SEC whistleblower program.
The proposed amendment to Rule 21F-3 would, as Chair Gary Gensler put it, “ensure that a whistleblower is not disadvantaged by another whistleblower program that would not give them as high an award as the SEC would offer.” The rule proposes multiple potential approaches to accomplish this goal, but its principal proposal would direct the SEC to first determine whether the other applicable whistleblower award program is comparable to the award available under the SEC program. If it is not comparable – for example, if the other program’s statutory award range is more limited, or its awards are subject to an award cap – then any award made to the whistleblower would come from the SEC program, regardless of which program has a more direct or relevant connection to the underlying action.
Rule 21F-6 concerns the SEC’s discretion to set award amounts. Currently, Rule 21F-6 specifically grants the SEC discretion to consider the dollar amount of a potential award when making an award determination – including increasing or decreasing the potential award amount.
The proposed amendment to Rule 21F-6 would limit the SEC’s discretion to consider the dollar amount of a potential award to only those circumstances where the SEC is considering increasing the award. In other words, the amendment would prohibit the SEC from considering the potential dollar amount of an award for the purpose of decreasing the award.
The public comment period will remain open until April 11, 2022, or 30 days following publication of the proposal in the Federal Register, whichever period is longer. Comments can be submitted through the SEC website.
If you have any questions or would like any additional information regarding this matter, please contact the lawyer at Hogan Lovells with whom you most commonly work, or any of the authors of this article.
Authored by Richard Parrino, George Ingham, Ann Kim, and Heather McAdams.
