In November 2019, the U.S. Securities and Exchange Commission released two separate annual reports setting forth expected new policies and highlighting recent practices designed to further incentivize individual whistleblowers and cooperating companies to report and address violations of the securities laws.

First, the Commission released its annual report to Congress on its whistleblower program, under which the Commission provides monetary awards to eligible whistleblowers who provide original information leading to successful enforcement actions. See SEC, 2019 Annual Report to Congress, Whistleblower Program (Nov. 15, 2019) (2019 Annual Whistleblower Report). In the report, the Commission stated that it anticipates adopting certain amendments to the program rules this year, which Chairman Jay Clayton expects will further "incentivize whistleblowers to provide valuable information to aid the Commission in protecting investors and markets." SEC Public Statement, Chairman Jay Clayton, Statement on Whistleblower Program 2019 Annual Report to Congress (Nov. 15, 2019). A key amendment would allow the Commission to make award payments to whistleblowers on the basis of deferred prosecution agreements (DPA) and non-prosecution agreements (NPA) entered into by the U.S. Department of Justice or a state attorney general in a criminal case, as well as settlement agreements entered into by the Commission outside the context of a judicial or administrative proceeding. These amendments are a positive enforcement development because they allow whistleblowers to be compensated beyond the narrow category of formal judicial or administrative proceedings. This will ensure that whistleblowers are not disadvantaged by the particular form of an action that is ultimately pursued.

Second, the Commission's Division of Enforcement released its annual report, which extolled the virtues of companies meaningfully cooperating with investigations and emphasized the Division's commitment to rewarding those companies. To illustrate this renewed focus, the Commission described two 2019 settlements where it considered the companies' prompt remedial acts and extensive cooperation in accepting a relatively low penalty in one instance and no penalty in another. See SEC, Division of Enforcement, 2019 Annual Report at 3, 5, 8 (Nov. 6, 2019) (2019 Annual Enforcement Report).

Whistleblower Program and Results. In July 2010, Congress amended the Securities Exchange Act of 1934 by adopting §21F (15 U.S.C. §78u-6), which established the Commission's whistleblower program. Section 21F directs the Commission to make monetary awards to eligible individuals who voluntarily provide original information that results in a judicial or administrative action brought by the Commission resulting in monetary sanctions exceeding $1 million, and certain related actions brought by other regulatory and law enforcement authorities. A whistleblower may receive an award of between 10% and 30% of the monetary sanctions collected. In May 2011, the Commission adopted a comprehensive set of rules to implement the program (17 C.F.R. §§240.21F-1 to 21F-17). In addition, Congress established the Investor Protection Fund at the Treasury Department from which whistleblower awards are paid. The purpose of the program is to incentivize individuals to report information relevant to potential securities violations to the Commission in order to help the agency better protect investors and the marketplace.

Since the program's inception, the Commission has awarded approximately $387 million to 67 individuals, and has ordered wrongdoers in enforcement matters brought with information from whistleblowers to pay over $2 billion in total monetary sanctions, including more than $1 billion in disgorgement of ill-gotten gains and interest. See 2019 Annual Whistleblower Report at 1, 9, 17. In SEC Fiscal Year 2018 (10/17-9/18), the Commission issued $168 million in awards to 13 individuals, more than in all previous years combined. In SEC FY 2019 (10/18-9/19), the Commission received over 5,200 whistleblower tips and issued whistleblower awards of approximately $60 million to 8 individuals. Id. at 1-2, 9.

Most of the successful tips or complaints submitted by whistleblowers to the Commission share similar characteristics. First, whistleblowers provided specific information, including identifying particular individuals involved in the misconduct, providing specific documents that substantiated their allegations, and identifying specific financial transactions that evidenced fraud. Second, the misconduct reported was often relatively recent or ongoing at the time it was reported. Third, nearly all of the reward recipients provided Commission staff with additional assistance and information after they submitted their initial tips, such as by continuing dialogue with the staff or by providing testimony. Finally, while there is no requirement that an individual be an employee or company insider to be eligible for an award, approximately 70% of award recipients to date were current or former insiders of the entity about which they reported information of wrongdoing to the Commission. Id. at 17-18.

Incentivizing Individuals by Broadening the Definition of 'Administrative Action'. Section 21F authorizes the Commission to pay whistleblower awards related to the successful enforcement of "covered judicial or administrative actions" brought by the Commission and certain "related actions" of other authorities, including the DOJ. 15 U.S.C §78u-6(b)(1); id. §78u-6(a)(5). Currently, the rules do not address whether the Commission may pay an award when an eligible whistleblower voluntarily provides original information that leads to a DPA or NPA entered into by the DOJ or a state attorney general in a criminal case, or a settlement agreement entered into by the Commission outside of the context of a judicial or administrative proceeding.

Proposed Rule 21F4(d)(3) broadens the definition by deeming a DPA or NPA to be an "administrative action" and any money required to be paid thereunder a "monetary sanction." Proposed Rule Amendments, Whistleblower Program Rules, Exchange Act Release No. 34-83557, 83 Fed. Reg. 34,702-52, at 34,705-07, 34,738 (July 20, 2018) (2018 Proposed Rules). Similarly, qualifying "administrative" actions would be broadened to include settlement agreements entered into by the Commission. The Commission believes that these agreements "should be considered the successful enforcement of an administrative action" under §21F because they "reward meaningful cooperation, are premised on significant remedial and compliance commitments, and obtain monetary remedies for past violations." Id. at 34,706. In addition, the Commission correctly observed that "Congress did not intend for meritorious whistleblowers to be denied awards simply because of the procedural vehicle that the Commission (or the other authority) has selected to pursue an enforcement matter." Id. at 34,705.

The DOJ and other agencies routinely rely on DPAs and NPAs to resolve corporate criminal investigations. In parallel investigations with the DOJ, the SEC can receive disgorgement remedies pursuant to the DPAs and NPAs. Thus, while whistleblower tips and information provided by cooperators are often crucial to such resolutions, without the proposed amendment, eligibility for whistleblower awards can depend on the particular form of action that law enforcement brings.

Two interesting questions remain outstanding. First, will broadening the definition of "administrative action" and providing whistleblowers with more opportunities to be rewarded lead to even more meritless tips? Considering that there were over 5,000 whistleblower tips and only 8 awards in FY19, it would appear that the whistleblower program has some inefficiencies. The Commission has answered this question indirectly by proposing a separate amendment, which allows the Commission to bar individuals from submitting whistleblower award applications where they are found to have submitted false information, as well as bar individuals who repeatedly make frivolous award claims. Id. at 34,705, 34,722-23, 34,726-27, 34,742-44. Second, are there other types of arrangements that should be included in any rule the Commission adopts? And, if so, how would any such arrangements satisfy the statutory requirements that they constitute a "judicial or administrative action" brought by the Commission or a related-action authority and that they include "monetary sanctions" that are "imposed" in the action? Id. at 34,707; see also 15 U.S.C. §78u-6(a)(1), (4), and (5); 15 U.S.C. §78u-6(b)(1)(A)-(B).

Incentivizing Companies by Rewarding Cooperation. The whistleblower amendments described above are consistent with the Commission's commitment to encouraging meaningful cooperation by providing greater transparency into how the Commission considers and weighs credit for cooperation with law enforcement. See 2019 Annual Enforcement Report at 8. In its 2019 Annual Enforcement Report, the Commission pointed out two 2019 settlements to illustrate its efforts. Id. at 3, 5, 8.

First, the Commission noted its settlement with Comscore, Inc., resolving an investigation into financial accounting and disclosure practices, where the Commission alleged that the company and CEO exaggerated company revenue by about $50 million in financial disclosures and misled investors and the public about their performance. In accepting Comscore's offer to pay a relatively minor $5 million penalty, the Commission considered Comscore's prompt remedial acts and cooperation, including sharing the results of an internal investigation.

Second, the Commission noted its settlement with PPG Industries, Inc., resolving a case involving accounting irregularities at the company. The Commission chose not to impose a monetary penalty because of PPG's ongoing cooperation throughout the investigation, self-reporting, and prompt remedial actions.

Another statistic reflecting and confirming this renewed focus is that, of the 95 new actions the Commission filed against public companies and subsidiaries in FY 2019, 76% of defendants who settled with the Commission had cooperated, while the average of cooperating defendants in FYs 2010 through 2018 was 51%. Sara Gilley and Stephen Choi, SEC Enforcement Activity: Public Companies and Subsidiaries, Fiscal Year 2019 Update, N.Y.U. Pollack Ctr. for Law & Bus. and Cornerstone Research, at 1 (2019).

Conclusion

The whistleblower amendments are an additional step in the right direction for enforcement purposes, and in conjunction with the Commission's renewed focus on cooperation credit, individuals and companies are being given broader incentives to report high-quality tips to and cooperate more meaningfully with the Commission.

Steven M. Witzel is a partner of Fried, Frank, Harris, Shriver & Jacobson and chair of the white-collar defense, regulatory enforcement and investigations practice. Chelsea P. Azrak is a senior associate at the firm.