Whistleblower & Qui Tam Blog

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October 2019

Proposed Rule Changes Will Undermine SEC Whistleblower Program

The Securities and Exchange Commission’s (SEC or Commission) proposed amendments to the SEC whistleblower program will undermine the program, according to the research of top whistleblower attorneys. This research, conducted by experienced SEC whistleblower attorneys at Kohn, Kohn & Colapinto (KKC), reveals that what appears to be a minor technical amendment will devastate the program.

As explained in a letter to the SEC Commissioners that was officially filed in the Commission rulemaking proceeding, among the most damaging of the SEC’s proposed changes is a new rule, 9(e). This proposed rule would make the filing of a TCR mandatory, before any other form of contact with the Commission. If a whistleblower contacts anyone at the SEC without first having filed a TCR, that whistleblower would automatically be ineligible for an award. 

In this letter the expert qui tam attorneys at Kohn, Kohn & Colapinto stated that the proposed amendments will have a “radical and detrimental impact on the whistleblower program” and “will undermine the entire whistleblower program.” 

The problem with proposed rule 9(e) is very straight forward; If a whistleblower contacts any representative of the SEC and blows the whistle, that individual may be disqualified from obtaining a reward. The proposed rule requires that before anyone provides original information to the SEC about a securities law violation, they must first file a highly technical “TCR” form with the Commission. If you file this technical form after you have provided original information on securities frauds to the Commission, you will be disqualified from an award. 

According to qui tam attorney Stephen M. Kohn, “proposed 9(e) is counter to the basic tenants of whistleblowing. Whistleblower laws are designed to encourage disclosures, not to punish employees who disclose frauds to the SEC, but file them with the wrong office. It makes absolutely no sense to disqualify a whistleblower from a reward because he or she first informed a member of the Commission’s enforcement staff about a violation, prior to filing the technical “TCR” form with the Commission’s Whistleblower Office.”

Consequently, according to Kohn, proposed rule 9(e) “would, if approved, undermine the core purpose of the Dodd-Frank Act. As explained by the U.S. Supreme Court in Digital Realty Trust, Inc. v. Somers , the core purpose of the Dodd-Frank Act was ‘motivat[ing] people who know of securities law violations to tell the SEC.’”

Another harmful proposed change to the SEC whistleblower program places an arbitrary cap on whistleblower rewards that would disincentivize whistleblowers from coming forward. KKC filed its initial public comment to the SEC on July 24, 2018. In that submission, KKC’s whistleblower attorneys highlight the severe flaws in the proposed amendments stating the changes will “result in major setbacks to the advancements made in the use of whistleblower incentives to uncover major corporate fraud in the past few decades.”

The SEC whistleblower program was established by Congress to incentivize whistleblowers with specific, timely, and credible information about federal securities laws violations to report to the SEC. Since the program began in 2011, whistleblowers have helped the SEC recover over $1.7 billion in sanctions from wrongdoers. These sanctions include more than $901 million in disgorgement of ill-gotten gains and interest, of which approximately $452 million has been, or is scheduled to be, returned to harmed investors. In other words, the program is working and working very well. 

“Despite this success, the Commission’s proposed amendments to its program are incredibly detrimental to whistleblowers and undermine the success of the program,” Kohn added. 

Read more:

Kohn, Kohn and Colapinto filed detailed rulemaking comments on the proposed Dodd-Frank Act whistleblower reward program.

Resources for SEC Whistleblowers

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About the Whistleblower Blog

The Whistleblower Blog is an editorially independent news and information source, sponsored by a pro bono public service project by Kohn, Kohn & Colapinto, LLP. The blog highlights important news, legal developments and policy issues critical to whistleblowers and their advocates, both in the United States and internationally. The contributors to this blog are respected leaders in their fields, including the authors of key whistleblower law books, current and former legal professors, spokespersons before Congressional committees and other public bodies, directors of non-profit whistleblower advocacy groups, and prominent attorneys specializing in representing/assisting whistleblowers in the United States and throughout Europe, Asia, Africa and South America.