Who Is an SEC Whistleblower and What Protections Do They Have??

Which Individuals Qualify as SEC Whistleblowers?

Under Rule 21F-2 to the Securities Exchange Act of 1934, an SEC whistleblower is defined as “an individual who, alone or jointly with others, provides the Commission with information in writing that relates to a possible violation of the federal securities laws.” This broad definition encompasses a wide range of individuals. While employees of public companies are frequently SEC whistleblowers, this is not the only way to qualify. For example, a whistleblower does not have to be employed by the organization that is committing an alleged SEC violation, and foreign nationals are eligible to serve as SEC whistleblowers as well.

Do I Need an Attorney to Come Forward?

At Spodek Law Group, we encourage potential whistleblowers to consult with an attorney to ensure that they are providing all relevant information to the SEC. Although individuals are not required to come forward through counsel, Rule 21F-2(b)(1) requires that individuals who wish to remain anonymous throughout the SEC whistleblower process submit their information through an attorney.

What is the SEC Whistleblower Program?

The SEC Whistleblower Program was established by Congress through the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Section 922 of the Dodd-Frank Act added Section 21F to the Securities Exchange Act, which created the SEC Whistleblower Program and the SEC Office of the Whistleblower. The SEC opened the Office of the Whistleblower in August 2011. The Office of the Whistleblower is located within the SEC’s Division of Enforcement, and its staff is responsible for processing whistleblower submissions and facilitating whistleblower-initiated investigations. The SEC Whistleblower Program is governed by the provisions of Exchange Act Rules 21F-1 through 21F-18.

Who Can Qualify as an SEC Whistleblower?

Do Corporate Entities Qualify as SEC Whistleblowers?

While corporate entities are eligible to submit information to the SEC, they do not qualify to receive SEC whistleblower awards. If a corporate entity submits information that leads to an SEC enforcement action, the entity will not be entitled to any whistleblower compensation.

Do SEC Whistleblowers Enjoy Immunity from Prosecution?

An SEC whistleblower’s status does not protect them from civil or criminal prosecution. If the whistleblower is personally involved in the misconduct they expose, the SEC and DOJ can and will still seek charges against them. This is true even in cases where a whistleblower receives an SEC whistleblower award based on the information they provide.

How Does Personal Culpability Affect an SEC Whistleblower’s Compensation?

An individual’s personal culpability can negatively impact their eligibility for an SEC whistleblower award. Under Rule 21F-6(b)(1), the SEC may reduce a whistleblower’s award based on the whistleblower’s culpability or involvement in the underlying misconduct. This includes, but is not limited to, consideration of whether the individual knowingly or recklessly participated in the misconduct. Additionally, if the whistleblower received a criminal conviction relating to the conduct they reported to the SEC, they will be disqualified from receiving an SEC whistleblower award under Rule 21F-8(c)(3).

Are Attorneys, Compliance Personnel, and Auditors Eligible to Serve as SEC Whistleblowers?

Attorneys, compliance personnel, and auditors may serve as SEC whistleblowers in some circumstances. However, these individuals face additional limitations when seeking to recover SEC whistleblower awards. Attorneys can generally only recover SEC whistleblower awards if disclosure of the information would otherwise be permitted under 17 C.F.R. § 205.3(d)(2), the applicable state attorney conduct rules, or otherwise, as provided in Rule 21F-4(b)(4)(i)-(ii). Compliance personnel and auditors must typically report to their employer before reporting to the SEC. There are exceptions in cases where the individual reasonably believes that internal reporting would be futile, jeopardize the success of the SEC’s efforts, or when the violation is imminent and presents a substantial risk of harm.

Can Accountants Qualify as SEC Whistleblowers?

Under Rule 21F-8(c)(4), accountants may be disqualified from receiving SEC whistleblower awards if they obtained the information through an audit of a company’s financial statements and making a whistleblower submission would be contrary to the requirements of Section 10A of the Exchange Act. As a result, accountants who are subject to these restrictions are generally ineligible to qualify as SEC whistleblowers.

Can SEC Whistleblowers Recover Compensation Based on Privileged Information?

SEC whistleblowers are generally prohibited from recovering compensation based on privileged information. Under Rule 21F-4(b)(4), information derived from privileged attorney-client communications or other types of privileged relationships does not qualify as “original information.” If an individual’s SEC whistleblower claim is based on such information, they will be ineligible for an award.

How Do I Report to the SEC Correctly?

Must I Report Voluntarily to the SEC in Order to Qualify as an SEC Whistleblower?

Yes, in order to qualify as an SEC whistleblower, you must provide information voluntarily. This is a fundamental requirement for eligibility for SEC whistleblower awards and whistleblower protections.

In order to be eligible for an SEC whistleblower award, a whistleblower must also provide the SEC with information that qualifies as “original information.” Original information is defined as “information that is derived from your independent knowledge or independent analysis,” that is not already known to the Commission, and that is not exclusively derived from an allegation made in a judicial or administrative hearing, a governmental report, hearing, audit, or investigation, or from the news media. Generally, this means that original information does not include information that was already available to the public. If you have original information in your possession, or the capacity to obtain it, you may be able to qualify as an SEC whistleblower.

Do I Need to Report to My Employer Before contacting the SEC?

No, there is no requirement for an SEC whistleblower to report to their employer before contacting the SEC. In fact, under Rule 21F-6(a)(4), whistleblowers who report to the SEC can become entitled to an increased award by reporting to their employer first. As a result, if you identify misconduct at your company that constitutes a securities law violation, you can become an SEC whistleblower without contacting your company. However, you will need to do so within 120 days of contacting your company in order to be eligible for increased compensation as a result of internal reporting.

How Do I Protect My Identity in an SEC Whistleblower Case?

Individuals who are willing to be identified to the SEC do not need to retain an attorney to contact the SEC. If you choose not to protect your identity during the initial SEC investigation, you can provide a tip to the SEC through its Online Complaint Center or submit a written tip. However, if you choose to remain anonymous, you must hire an SEC whistleblower attorney to submit your information to the SEC on your behalf.

Identified SEC whistleblowers are also entitled to identity protection. However, this protection only applies under certain circumstances, and the SEC can only protect your identity to the extent that it is not prohibited by law. By hiring an SEC whistleblower attorney, you can ensure that the SEC is aware of your request to remain anonymous, and your lawyer can assist in protecting your identity during the SEC’s investigation and enforcement action.

While an SEC whistleblower attorney can help protect your identity, it is important to understand that this protection is not unconditional. If you are the recipient of an SEC whistleblower award, you will be required to reveal your identity to the SEC before receiving the award. This requirement is not optional, and failure to comply can lead to the loss of your award.

What are the Odds of Being an SEC Whistleblower?

Because the SEC receives many tips and complaints, it investigates only a fraction of the submissions it receives. If you have information about an SEC violation, an SEC whistleblower attorney can help determine the likelihood of the SEC pursuing an enforcement action.

If you are facing this situation, Spodek Law Group handles federal criminal defense matters nationwide, from offices in New York and Los Angeles.

How Much Can an SEC Whistleblower Actually Receive?

What are the Eligibility Requirements for an SEC Whistleblower Award?

In order to be eligible for an SEC whistleblower award, the SEC must initiate a “successful SEC enforcement action” as a result of the whistleblower’s submission. As defined in Rule 21F-3(a), a successful SEC enforcement action is an action in which “the SEC’s enforcement action results in monetary sanctions of more than $1,000,000.” If the SEC’s enforcement action does not result in monetary sanctions of more than $1 million, an SEC whistleblower award will not be available to the whistleblower.

How is an SEC Whistleblower’s Award Calculated?

If you are an eligible SEC whistleblower, you can expect to receive between 10% and 30% of the “collected monetary sanctions” that the SEC obtains in its enforcement action. Under Rule 21F-5, the SEC calculates whistleblower awards based on the amount of money it actually collects. This is in contrast to some other whistleblower programs, which calculate the whistleblower’s award based on the amount of money that the agency requires the defendant to pay. For example, if the SEC requires a defendant to pay $10 million in monetary sanctions but only collects $1 million, an SEC whistleblower’s award would be based on the $1 million that the SEC collected rather than the $10 million that the SEC’s enforcement action mandated.

Is an SEC Whistleblower Award Different from a Lawsuit Verdict?

Yes, an SEC whistleblower award is an administrative payment made through the SEC Whistleblower Program, which is separate from a jury verdict in a lawsuit. Consequently, the amount of money a whistleblower can recover is determined by the SEC under the criteria in Rule 21F-6, rather than by a jury. As a result, the SEC whistleblower award process is more focused on the actual results of the SEC’s investigation than on assessing damages.

The financial benefits of coming forward as an SEC whistleblower are substantial, and the financial incentives for SEC whistleblowers are designed to encourage individuals with relevant information to help protect investors and the markets. As a result, the program has been successful, leading to numerous enforcement actions against corporate wrongdoers.

Does the SEC Disclose SEC Whistleblower Award Amounts?

The SEC does not disclose the specific amount of individual SEC whistleblower awards. However, the SEC does publish various summaries of whistleblower awards on its website. For instance, in early 2023, the SEC published a summary estimate indicating that the “average award amount for successful whistleblower submissions is nearly $5 million.” However, this estimate only considered SEC whistleblower awards that had been awarded, but not yet paid. According to the SEC, this included whistleblower awards approved by the SEC, but not processed to payment.

One issue with the SEC’s early 2023 average award estimate is that it did not explain its calculation methodology. While the SEC is authorized to maintain whistleblower anonymity, this makes it difficult to discern what the individual SEC whistleblower awards looked like. However, it is possible that one highly unusual outlier may be materialy inflating the arithmetic average. For example, in FY 2023, one individual SEC whistleblower received an award of nearly $279 million. While this award was record-breaking, it may not be representative of a typical award under the SEC Whistleblower Program.

How Do I Apply for an SEC Whistleblower Award?

Can a Related Enforcement Action be Used to Support an SEC Whistleblower Award?

If a proceeding initiated by a “qualified” authority results in information that supports a “related enforcement action” by the SEC, then an award based on the qualified authority’s proceeding may be available to the SEC whistleblower. See Rule 21F-3(a)(1)-(2).

How do I Apply for an SEC Whistleblower Award if the SEC Conducts a Successful Enforcement Action?

If the SEC conducts a successful enforcement action, a whistleblower is not automatically entitled to an SEC whistleblower award. The SEC will publish a notice to the public stating that a qualifying enforcement action has reached a final order. Eligible whistleblowers will then have 90 days from the publication date to submit a claim for an award using Form WB-APP.

What Happens if the SEC issues an Unfavorable Initial Award Recommendation?

If an SEC whistleblower is an eligible claimant for an award, he or she can seek review of the SEC’s initial award recommendation if the award amount is unfavorable. To do so, the whistleblower must file a request for review with the SEC’s Office of the Whistleblower. An SEC whistleblower’s request for review is considered a “review of an unfavorable initial award recommendation.” If the SEC denies the award or issues an unfavorable award, the SEC whistleblower may have the right to appeal his or her award denial to a federal court of appeals.

What Happens if the SEC Determines That My SEC Whistleblower Tip was Procedurally Defective?

If the SEC determines that an SEC whistleblower’s tip was procedurally defective, it may allow the whistleblower to cure the defect if the whistleblower does so within 30 days after the whistleblower’s tip is identified. For example, if the whistleblower failed to include all of the information required under Rule 21F-9, the SEC may provide the whistleblower an opportunity to provide the information in order to qualify for the SEC whistleblower program.

What Happens if the SEC Conducts a Successful Enforcement Action but Not as a Result of the Whistleblower’s Tip?

The SEC may conduct a successful enforcement action against a corporate entity that is not the result of an SEC whistleblower’s tip. However, Rule 21F-11 allows an SEC whistleblower who provides “information related to the conduct” that the SEC’s enforcement action addressed to claim a “related-action award.” To do so, the whistleblower must pursue an action under the specific procedures that apply to the related-action award. These include different procedural requirements and timelines from those that apply to SEC whistleblower awards under Rule 21F-3. For example, under Rule 21F-11(c), eligible SEC whistleblowers can file a claim for a related-action award up to 90 days after the SEC’s enforcement action becomes a final order.

What Retaliation Protection Do SEC Whistleblowers Actually Have?

Does the Dodd-Frank Act’s Anti-Retaliation Provision Protect all SEC Whistleblowers?

The Dodd-Frank Act’s anti-retaliation provision, Section 922(h), provides protection to individuals who, “for the purpose of enforcing or seeking the enforcement of any rule, regulation, or order issued under this Act, or enforcing any provision of the Securities Act, the Securities Exchange Act, or the Sarbanes-Oxley Act, provides information to the Securities and Exchange Commission.” As a result, while employees who raise their securities law concerns internally to their employer will not be protected under Dodd-Frank, those who report their securities law concerns to the SEC will be protected.

For employees who do raise their securities law concerns internally to their employer or an other government authority before providing information to the SEC, protection may still be available under the Sarbanes-Oxley Act (SOX) and the Employee Retaliation Protection Program. Under SOX, a qualifying report made internally to a supervisor is protected. However, under SOX, retaliation complaints must be filed with the Occupational Safety and Health Administration (OSHA) within 180 days of the retaliation (which is shorter than the 180 days for the Dodd-Frank Act’s private retaliation remedy).

How Does the Dodd-Frank Act’s Retaliation Provision Work?

Under Section 922(h) of the Dodd-Frank Act, if an employee is retaliated against as a result of protecting his or her whistleblower rights under the act, then that employee has the right to take his or her employer to court for back pay and other monetary losses. Dodd-Frank whistleblower retaliation remedies include reinstatement, double back pay plus interest, litigation expenses, and other monetary losses.

What is Rule 21F-17(a)?

Rule 21F-17(a) prohibits companies from taking “any action to impede an individual from communicating directly with the SEC about a possible securities law violation.” While Rule 21F-17(a) is related to the whistleblower program’s other provisions, it is not part of the Dodd-Frank Act’s private retaliation remedy. For example, Rule 21F-17(a) prohibits confidentiality agreements that limit an individual’s ability to communicate with the SEC, and it also prohibits attempts to prevent employees from speaking to the SEC.

What Counts as Retaliation under the Dodd-Frank Act?

The Dodd-Frank Act protects whistleblowers from “retaliation,” which means any “adverse action against a whistleblower in response to the whistleblower’s protected communication.” In employment law, this is generally defined as an adverse action that reduces the employee’s compensation, benefits, terms or conditions of employment, or employment status. At the same time, the Dodd-Frank Act’s anti-retaliation provision does not prevent employers from taking adverse action against an employee for reasons other than his or her status as a whistleblower. For example, an employee can still be fired or disciplined for reasons related to his or her performance, behavior, or the company’s business needs.

Does the Dodd-Frank Act’s Anti-Retaliation Provision Protect Against Retaliation in Lawsuits or Trials?

No, the Dodd-Frank Act’s anti-retaliation provision only protects against “adverse actions” taken against whistleblowers by their employers. This is because Section 922(h) of the Dodd-Frank Act protects whistleblowers “from retaliation by their employers,” which limits the protection to actions taken in response to employees’ status as whistleblowers. As a result, whistleblowers can still face adverse effects from testifying in lawsuits, criminal cases, and trials.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 212-300-5196.