Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Regulation and Compliance > Federal Regulation > SEC

SEC's Gensler Sets Stage to Reverse Controversial Whistleblower Rules

Your article was successfully shared with the contacts you provided.

What You Need to Know

  • Two amendments made to whistleblower rules could discourage whistleblowers from coming forward, Gensler said.
  • Problems that were caused in 2020 during an extensive SEC rulemaking process are being fixed, attorney Kohn says.
  • The lawsuit against the SEC whistleblower rule has been stayed until February 2022.

Securities and Exchange Commission Chairman Gary Gensler is seeking to reverse this year changes made to the agency’s whistleblower rules under its former chairman, Jay Clayton.

Last September, the agency, under Clayton, adopted amendments to the SEC’s whistleblower program rules that some complained discourage whistleblowers from coming forward and were a gift to Wall Street.

The agency under Clayton said the changes to the whistleblower rules would enhance claim processing efficiency, and clarify and bring greater transparency to the framework used by the commission in exercising its discretion in determining award amounts.

Gensler noted in an early August statement that members of the whistleblower community, as well as Democratic SEC Commissioners Allison Herren Lee and Caroline Crenshaw, “have expressed concern that two of these amendments could discourage whistleblowers from coming forward.”

One amendment “would preclude the Commission in some instances from making an award in related enforcement actions brought by other law-enforcement and regulatory authorities if a second, alternative whistleblower award program might also apply to the action,” Gensler said.

The second could be used by a future commission to reduce an award because of the size of the award in absolute terms.

Gensler said that he’s directed SEC staff to prepare for the commission’s consideration later this year “potential revisions to these two rules that would address the concerns that these recent amendments would discourage whistleblowers from coming forward.”

In particular, Gensler explained, the staff is considering “whether our rules should be revised to permit the Commission to make awards for related actions that might otherwise be covered by an alternative whistleblower program that is not comparable to the SEC’s own program, and to clarify that the Commission will not lower an award based on its dollar amount.”

Along with those statements, Gensler issued in early August a procedural statement on how the SEC would proceed regarding certain whistleblower rules while the staff is preparing and the commission is considering potential amendments to those rules.

Gensler Move Out of Bounds, GOP Commissioners Say

The two SEC commissioners, Hester Peirce and Elad Roisman, shot back in a joint statement that Gensler’s action is out of bounds.

While the agency is within its authority to engage in a notice and comment rulemaking to amend its whistleblower rules, Peirce and Roisman said, Gensler’s “new procedures designed to ensure that two rule provisions, which are subject to litigation, are substantively ignored while proposed amendments are formulated and considered” effectively nullifies standing commission rules.

Stephen Kohn, chairman of the board of directors of the National Whistleblower Center and founding partner of the whistleblower rights law firm Kohn, Kohn & Colapinto, told ThinkAdvisor in an email, however, that through Gensler’s procedural statement, the SEC is ensuring Congress’ mandate that “related action” awards are paid to whistleblowers.

Related action awards, Kohn explained, “occur when a whistleblower’s original information is used by agencies other than the SEC to hold fraudsters accountable. The provision is a key part of the Dodd-Frank Act as it incentivizes whistleblowers to fully cooperate with law enforcement agencies other than the SEC. In this way wrongdoers who violate multiple laws can be held fully accountable.”

Kohn sees Gensler’s plan as “a home run for whistleblowers. Problems that were caused in 2020 during an extensive SEC rulemaking process are being fixed.”

Under the prior rule, Kohn continued, the SEC “claimed it had the authority to deny related action awards in numerous instances impacting money laundering, bank fraud, foreign bribery, illegal timbering, illegal imports of protected fish and endangered species, among other crimes. This Statement fixes a gaping hole driven into the whistleblower program in September 2020.”

The statement, he added, “also clarifies that the amount of a whistleblower reward should not be considered when the SEC provides compensation to a whistleblower. This is a recognition of the critical deterrent effect large awards have on Wall Street fraudsters.”

Lawsuit Stayed Until February

The prominent whistleblower attorney Jordan Thomas filed a lawsuit on Jan. 13 against the SEC to vacate what he saw as “illegal” changes Clayton made to the agency’s whistleblower rules, which “undermine the integrity and effectiveness” of the program.

The changes to the SEC whistleblower rules, approved by a 3-2 vote last September, “add uncertainty to the cost-benefit analysis” of SEC whistleblowers, Thomas, a partner and chair of the Whistleblower Representation Practice at the law firm Labaton Sucharow, told ThinkAdvisor in a previous interview.

“The new rules turn the commission into a casino that courts high rollers with the promise of large jackpots but reserves the right to lower their winnings if they are too large.”

Thomas was a principal architect of the SEC whistleblower program.

The 48-page lawsuit, filed in U.S. District Court for the District of Columbia, states that despite its incredible success, “the Commission recently amended its whistleblower rules for the express purpose of decreasing the size and number of whistleblower awards it issues.”

After six months of litigation, Thomas announced Monday that he and the SEC filed a motion on Aug. 6 to stay the litigation until Feb. 5, 2022, in light of Gensler’s announcement.

“This is a significant victory for courageous SEC whistleblowers and is an important first step toward ensuring that Wall Street helps to rebuild Main Street, rather than harm it,” Thomas said Monday in a statement. “With new hope, I have directed my litigation team to stand down and work with the Commission to get the two contested rules right, once and for all.”

Gensler, as “the new sheriff on Wall Street,” Thomas said, “is taking concrete steps to remove the poison pills inserted into this critical investor protection program by his predecessor.”


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.