April 13, 2021

Volume XI, Number 103

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April 13, 2021

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April 12, 2021

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Whistleblower Attorney Challenges SEC Final Rule Changing Its Whistleblower Program

On January 13, 2021, a New York whistleblower attorney filed a lawsuit in the U.S. District Court for the District of Columbia challenging a recent final rule adopted by the Securities and Exchange Commission (the “Commission or “SEC”) which made several changes to the SEC’s whistleblower program.

The SEC Final Rule

The final rule was adopted on September 23, 2020 after an extended notice-and-comment period following issuance of the proposed rule on June 28, 2018 (our post on the final rule is here).  Among other changes, the proposed rule had originally included amendments allowing the SEC to conduct a separate review process to reduce “exceedingly large awards” of at least $30 million.  The final rule scrapped this process and instead asserted that the Commission already possessed discretion to reduce large awards with high dollar amounts under the existing statutory award factors.

In addition to modifying Rule 21F-6, the final rule also amended the definition of “related action” to allow the Commission to deny an award based on an action by another regulatory authority if it determines that a different whistleblower award program (such as the CFTC’s whistleblower program) has a “more direct or relevant connection to the action.”

The Complaint

In his complaint, the whistleblower attorney alleged several violations of the Administrative Procedure Act (“APA”).  Plaintiff emphasized that in the proposed rule, the Commission “repeatedly and expressly acknowledged” that it lacked authority under its existing regulations to consider the dollar amount of a potential award, which is why it was forced to propose a “separate review process” in the first place.  The complaint also alleged that the Commission implicitly acknowledged its lack of authority by stating that the separate review process outlined in its proposed rule would only apply to future whistleblower applications.

Plaintiff also asserted that the final rule’s amendment to the definition of “related action” allowing the SEC to deny awards better suited to a different whistleblower program violated the APA.  Plaintiff alleged that the statutes enacting the whistleblower program defined a “related action” as “any judicial or administrative action brought by [the specified government entities],” and did not provide the Commission with discretion to impose additional requirements.  The complaint cited dissenting Commissioners who warned that allowing the SEC to determine, at its discretion, the most relevant whistleblower program would decrease certainty and efficiency for whistleblowers and frustrate the aim of the program—to maximize deterrence.

Finally, Plaintiff noted that whistleblowers often fear being retaliated against or blacklisted due to their actions, and thus prefer to report anonymously.  By diverting whistleblowers to other programs, many of which do not offer anonymous reporting, some individuals will choose not to report at all.  

Takeaways

This lawsuit presents a novel challenge to the Commission’s final rule, which drew criticism by numerous stakeholders in the years prior to its adoption.  It remains to be seen whether plaintiff’s claims under the Administrative Procedure Act will bear fruit.  The true impact, if any, of the final rule on the whistleblower program is unlikely to be revealed until the SEC releases its annual report later this year.

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© 2021 Proskauer Rose LLP. National Law Review, Volume XI, Number 49
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About this Author

Lloyd B Chinn, Financial, Whistleblower Attorney, Proskauer Law Firm
Partner

Lloyd B. Chinn is a Partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative agencies in New York and across the country. Lloyd's practice ranges from litigating compensation disputes to defending whistleblower, discrimination and sexual harassment claims. Although he represents employers in a wide range of industries, including law, insurance, health care, consulting, media,...

212-969-3341
Pinny Goldberg Labor and Employment Lawyer Proskauer Rose Law Firm
Associate

Pinny Goldberg is an associate in the Labor & Employment Law Department. Pinny represents employers in a broad array of matters before federal and state courts, FINRA and other arbitration panels, and administrative agencies, including the EEOC and its state equivalents, and in pre-litigation negotiations. Matters he works on include discrimination and harassment, wage and hour, wrongful discharge, whistleblowing and retaliation, covenants not to compete, breaches of fiduciary duty, unjust enrichment, and tort and contract claims. 

In...

212.969.3074
Scott S. Tan Law Clerk Proskauer  Employment Litigation & Arbitration Group
Law Clerk

Scott Tan is a law clerk in the Labor & Employment Law Department and a member of the Employment Litigation & Arbitration Group.

Scott earned his J.D. from the UCLA School of Law, where he served as a problem developer and member of the Moot Court Honors Board. He also worked as a research assistant for Dean Jennifer Mnookin and Professor Hiroshi Motomura.

212-969-3858
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