How Will The New SEC Whistleblower Rules Shape the Legal Landscape?

SEC whistleblower program golden whistleThe U.S. Congress created the SEC whistleblower program to incentivize individuals to report securities violations to the U.S. Securities and Exchange Commission.  In doing so, Congress intended to assist the SEC in enforcing the federal securities laws and upholding a fair securities marketplace.  

Since the program’s inception, whistleblowers have contributed significantly to the Commission’s law enforcement efforts.  To date, SEC whistleblowers have assisted the Commission in collecting upwards of $2.5 billion in financial remedies. 

As discussed in Part 1 of this article, the SEC recently implemented amendments to the rules governing its whistleblower program.  Here are a few more highlights from the new changes to the SEC whistleblower rules:

1.  New Claims Review Process For Frivolous Award Claims

According to the SEC, some of the new amendments will speed up the claims review process and discourage frivolous filings. 

For example, new Exchange Act Rule 21F-8(e) allows the Commission to bar award applicants who have abused the award process.  The SEC may impose bars on individuals who submit three or more frivolous applications for SEC whistleblower awards.

Supposedly the new rules will also speed up certain other types of “obvious” award denials, such as untimely award applications.

Conceptually, speeding up the processing of frivolous award claims and obvious denials should free up more time for the SEC to determine meritorious award claims. 

2.  New Evaluative Criteria For “Independent Analysis”

New interpretive guidance heightens the requirements to satisfy the “independent analysis” factor based on publicly available information.  Now, when a whistleblower relies on publicly available information, the whistleblower’s conclusions about the securities violations must derive from multiple sources.  

Furthermore, the evidence of fraud must not be “readily identified and accessible by a member of the public without specialized knowledge, unusual effort, or substantial cost”.  Collectively those sources must raise a strong inference of a potential securities law violation.  However, the securities violation must not be “reasonably inferable by the Commission from any of the sources individually”.  

Conceptual image of chess board, with a lineup of black pieces and one white pawn facing off.

Why This Change Concerns Many SEC Whistleblower Lawyers

This change concerns many SEC whistleblower attorneys.  Even if the SEC Staff possesses certain information or documents, it might not understand them. Previously, under these circumstances, whistleblowers who provided analysis and conclusions to the Staff would potentially qualify for awards.

Depending on how strictly the SEC applies its new interpretive guidance, similar whistleblowers might face denials of their award applications in the future despite their valuable assistance. 

Moreover, in many instances where the SEC Staff either did not possess certain information, or had certain information but did not understand its meaning, to then years later classify that information as “reasonably inferable by the Commission” (i.e., for the Commission to say that we would have found it or figured it out on our own anyway without the whistleblower’s assistance) might well constitute hindsight speculation, belied by the very fact that the Staff had not already made such inferences or conclusions on its own at the time.  

Accordingly, this new interpretive guidance may inject more subjectivity and ambiguity into the SEC’s award process rather than less.

As a result of these recent changes to the SEC’s interpretive guidance, before filing an SEC whistleblower tip based on your own independent analysis, you should carefully consider consulting first with a reputable SEC whistleblower law firm like The Pickholz Law Offices.   

3.  Determining Award Amounts 

Under new Exchange Act Rule 21F-6(c), generally speaking, for awards of $5 million or less, the Commission will pay a whistleblower the maximum 30% award amount when no negative award criteria are present. However, the whistleblower must provide more than “limited” assistance to the SEC.  Nor can the whistleblower have delayed unreasonably in reporting to the Commission.  Furthermore, the granting of this presumptive maximum award must not be inconsistent with the public interest under the particular circumstances.

Signage for Securities and Exchange Commission, at front of building.

                                                       The SEC’s shield

According to the SEC, approximately 75% of all of the whistleblower awards that it granted to date have been for $5 million or less.  Therefore, this new amendment could become very significant for many SEC whistleblowers and their whistleblower law firms.   

Given the foregoing, whistleblowers should consider doing as much as they can to try to lessen or eliminate as many negative factors as possible  before reporting a fraud to the SEC

At The Pickholz Law Offices, we have represented clients in SEC enforcement investigations since 1995.  We have also represented SEC whistleblowers since the SEC whistleblower program first began in 2010.  Let us put that experience to work for you! 

Additional Information About The New Amendments 

In summary, the recent amendments to the SEC whistleblower rules are extensive and complicated.  The Pickholz Law Offices has written an informational memo that goes into a lot more detail about these new rules.  If you would like to read that memo, please click here.

<–  For Part 1 of this article, click here.

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About the Pickholz Law Offices LLC

The Pickholz Law Offices LLC is a law firm that focuses on representing clients involved with investigations conducted by the U.S. Securities and Exchange Commission, FINRA, and other securities regulators.

The Pickholz Law Offices has represented employees, officers, and others in SEC whistleblower cases involving financial institutions and public companies listed in the Fortune Top 10, Top 20, Top 50, Top 100, Top 500, and the Forbes Global 2000.  We were the first law firm ever to win an SEC whistleblower award for a client on appeal to the full Commission in Washington.  Inside Counsel magazine named this achievement one of the five key events of the SEC whistleblower program.  Examples of the Firm’s SEC whistleblower cases are available here.

In addition to representing SEC whistleblowers, since 1995 the Firm’s founder, Jason R. Pickholz, has also represented many clients in securities enforcement investigations conducted by the SEC, FINRA, the U.S. Department of Justice and US Attorney’s Offices, State authorities, and more.  Examples of some of the many securities enforcement cases that Mr. Pickholz has been involved with are available here.

You can see what actual clients have had to say about The Pickholz Law Offices by going to the Client Reviews page on our website or by clicking here.

How to Contact the Pickholz Law Offices LLC 

If you would like to speak with a securities lawyer or SEC whistleblower attorney, please feel free to call Jason R. Pickholz at 347-746-1222.

The Pickholz Law Offices remains open and will be fully operational through teleworking while we all grapple with this terrible pandemic.  We hope that all of our clients, colleagues, friends, and their families remain safe and healthy.  Our thoughts and prayers go out to everyone who has been affected by COVID-19.

 

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