top of page

The SEC reverses Clayton-era whistleblower rules

The Securities and Exchange Commission (SEC) changed its guidelines to provide further incentives to whistleblowers, particularly where big awards or numerous federal agencies are involved.

According to an SEC information sheet, the final rule, which becomes effective 30 days after publication in the Federal Register, allows the commission to enhance the dollar amount of an award but removes its jurisdiction to decrease it. The present provision rewards whistleblowers with 10-30% of monetary penalty collected in any enforcement action exceeding $1 million in which the whistleblower provided relevant and timely information to assist investigators in making a case.

The Republican-dominated SEC, led by former Chair Jay Clayton, modified its whistleblower guidelines in 2020, potentially limiting huge compensation. Current SEC Chair Gary Gensler indicated in February that the agency under Democratic control would attempt to reverse those moves.

Another provision approved authorises the SEC to consider compensating whistleblowers who disclose relevant and timely information that results in a successful enforcement action by another federal agency (a "related action"). In some circumstances, the SEC's tipper compensation are more generous than those of other agencies. Some federal agencies do not have any kind of whistleblower programme at all.

“The commission will make an award on a potential related action without regard to which program had the more direct or relevant connection to the action if the maximum award that the commission could pay on the action would not exceed $5 million,” according to the fact sheet.

“I think that these rules will strengthen our whistleblower program. That helps protect investors,” Gensler said Friday in a press release.

Whistleblower advocates applauded the improvements.

“The commission ensured that whistleblowers who turn in the biggest frauds will not be penalized by having their rewards reduced. As the commission understood, paying large awards in the biggest fraud cases will have a deterrent effect on Wall Street,” said Stephen Kohn, a whistleblower attorney with the firm Kohn, Kohn & Colapinto and chairman of the board of the National Whistleblower Center.

Better Markets' legal director and securities specialist, Stephen Hall, stated that the changes "will encourage more insiders to blow the whistle on corporate crime, and they will help protect Main Street consumers, investors, and families' investments and retirement savings from crooks, fraudsters, and rip-off artists."

In a dissenting statement, SEC Commissioner Hester Peirce labelled the modifications "solutions in search of a problem" that "further complicate the already byzantine procedures governing our whistleblower programme." She cited the shift as part of a worrying trend of the Gensler-led SEC altering laws that had just been passed.

"The whistleblower rules are joining the proxy adviser rules, shareholder proposal rules, and possibly the resource extraction rules in being reopened despite the fact that the ink on the last set of modifications was barely dry," she said.


9 views0 comments


bottom of page