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January 15, 2021

Lawsuit Challenging SEC Whistleblower Rule Is “On Target”

Lawsuit Challenging SEC Whistleblower Rule Is “On Target”
Earlier this week, Jordan Thomas, a leading whistleblower attorney and former SEC Assistant Director of Enforcement, filed a lawsuit in federal court alleging that the SEC’s recent amendments to its whistleblower program are contrary to law, irrational and procedurally flawed. He’s seeking an order prohibiting implementation of the rule and vacating it entirely.  
Thomas’s lawsuit is on target. The new rule represents another in a long series of SEC missteps over the last four years that will undermine enforcement of the securities laws and ultimately hurt countless investors who needlessly become victims of securities fraud. The rule has at least four strikes against it since it includes key provisions that are unlawful, unwise, unfair and unnecessary.
In the new rule, the SEC has claimed the discretion to cap large awards based on the agency’s subjective judgment that the awards are simply too high in dollar amount. And it has established a more stringent test for “related actions,” a vague new definition that threatens to sharply curtail the ability of whistleblowers to collect awards when the information they provide leads to enforcement actions by other agencies in addition to the SEC.
As Better Markets argued in our comment letter, these changes to the whistleblower program have no justification. They’re unlawful because they violate the letter and the spirit of the Dodd-Frank Act. Congress never authorized or intended the SEC to impose such limits. They also represent bad policy as they are sure to undermine a whistleblower program that has proven to be wildly successful since it was established nearly 10 years ago. Under the new rule, whistleblowers will have weaker incentives to step forward and undertake the arduous and potentially career-destroying process of exposing illegal activity at powerful financial firms.
The rule is even flawed procedurally since the SEC didn’t give fair notice of its final provision on capping large awards, and it unfairly decided to make that aspect of the rule retroactive, suddenly affecting dozens of whistleblowers who have already come forward, shared their evidence, assumed the risks, and applied for an award. And in the rulemaking process, the SEC never bothered to analyze the harm that the rule would inflict on investors who become victims of securities fraud because insiders are reluctant to become whistleblowers in light of uncertainty about award amounts.
To cap it off, the rule is entirely unnecessary. There is nothing to suggest that the amount of whistleblower awards needed adjustment or that the whistleblower program posed a threat to the coffers of the SEC or presented any other drawbacks. Nor did the SEC justify its decision to narrow the scope of the “related actions” provision in the Dodd-Frank Act, offering no persuasive evidence that this aspect of the program wasn’t working as intended. In short, the rule is another case of irrational rulemaking that directly conflicts with the law and with the SEC’s core mission of protecting investors.
The new leadership at the SEC should promptly fix this rule by excising both toxic provisions. Meanwhile, we will closely track the lawsuit with an eye toward filing an amicus brief in support of plaintiff Thomas.
Stephen Hall, Legal Director and Securities Analyst           Lev Bagramian, Senior Securities Policy Adviser


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