The SEC's Whistleblower Program and its Influence on Investigations

The whistleblower program, established under Section 21F of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), has significantly propelled enforcement investigations and actions. This program provides financial incentives to individuals who voluntarily provide the Commission with non-public information leading to an enforcement action. When such an action results in monetary sanctions exceeding $1 million, the whistleblower is eligible for an award between 10% and 30% of the total funds received by any U.S. regulator.

As of the end of Fiscal Year 2022, the SEC had awarded over $1.3 billion to 328 whistleblowers. These whistleblowers' information led to sanctions totaling more than $6.3 billion, including more than $4.0 billion in disgorgement of illicit gains and interest. Fiscal Year 2022 alone witnessed payments of approximately $229 million in whistleblower awards to 103 individuals. Despite a decrease in the dollar amount and the number of award recipients from the record-breaking 2021 levels, the Commission paid more in whistleblower awards in 2021 and 2022 individually than all the preceding years combined. Furthermore, in 2022, the Commission received over 12,300 whistleblower tips, marking the highest number of whistleblower tips in a fiscal year.

On September 23, 2020, the Commission introduced Whistleblower Rule Amendments, which became effective on December 7, 2020. These amendments aimed at boosting efficiencies around the review and processing of whistleblower award claims. The changes included:

A presumption setting awards at the maximum 30% of the collected monetary sanctions for awards under $5 million, which accounted for 90% of the awards in FY 2022.

A new summary disposition process for straightforward denials, enabling the Office of the Whistleblower to deliver an initial response to claimants more quickly.

A provision that could permanently bar claimants from the Commission’s whistleblower program if they submit three or more frivolous award claims.

The amendments also endowed the Commission with the authority to reward whistleblowers for their contributions to additional types of successful actions. The Commission can now consider deferred prosecution agreements and nonprosecution agreements entered into by the Department of Justice (DOJ) as "related actions" eligible for a whistleblower award.

In August 2022, the Commission adopted two more amendments to the rules governing its whistleblower program. The first amendment enables the Commission to reward whistleblowers in connection with non-SEC actions under additional circumstances. The second amendment affirms the Commission's authority to consider the dollar amount of a potential award to increase it but not to decrease it.

Employers who retaliate against or impede whistleblowers can face legal action from the Commission. Public companies should note the Commission's broad interpretation of the whistleblower rules' anti-retaliation provisions. As of the end of Fiscal Year 2022, the Commission has instigated 16 enforcement actions or administrative proceedings involving violations of Rule 21F-17. Section 21F also includes an antiretaliation provision, enabling a whistleblower to sue their employer in federal court for any form of harassment resulting from the employee's whistleblowing activity.

Joseph Lucosky

In an ever-changing financial landscape, the SEC adapts its areas of focus accordingly, aiming to preserve market integrity and safeguard investor interests. Public company reporting and disclosure have always been central to the SEC's mandate. However, the ongoing evolution of markets and the introduction of novel financial products have necessitated a shift in priorities.

In line with this, SEC Chair Gary Gensler and his team have pursued a vigorous and forward-looking agenda, emphasizing several new areas of focus.

Establishing Oversight on Climate and ESG Factors

Climate and environmental, social, and governance (ESG) factors have recently received significant attention from the SEC. In March 2021, the Commission announced the establishment of a dedicated task force for these areas. The ESG Task Force underscores the SEC's commitment to scrutinizing these vital aspects, further signaling the agency's intent to adapt its regulatory framework to evolving market realities.

Increasing Focus on Financial Reporting

Further, the SEC has heightened its focus on financial reporting, with special attention to issues such as loss contingencies and the recording of accruals. As financial reporting forms the bedrock of transparent and fair markets, any distortion or manipulation thereof poses severe risks. By prioritizing this area, the SEC strives to maintain the reliability and integrity of financial statements.

Emphasizing Digital Assets and Cybersecurity

Digital assets have emerged as another area under increased SEC scrutiny. The Commission has brought charges against entities and individuals in relation to unregistered or fraudulent offerings of digital asset securities. This is indicative of the SEC's recognition of the growing prevalence and impact of digital currencies in today's financial landscape. In May 2022, the Commission announced plans to nearly double the staff of its Crypto Assets and Cyber Unit with the addition of 20 new positions.

Alongside the increased focus on digital assets, the SEC has also ramped up its attention on cybersecurity. Entities have been charged for deficient cybersecurity procedures, failures in cybersecurity disclosure controls, and misleading investors about cybersecurity breaches. The rising prominence of this area can be attributed to the exponential growth in digital transactions and the corresponding risks.

Joseph Lucosky