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There have been a number of seven-figure awards under the SEC’s whistleblower program, so a recent $2.5 million award wouldn’t merit much attention – that is, if the recipient wasn’t an employee of a government law enforcement organization.

Typically, government law enforcement organization employees aren’t eligible to receive whistleblower awards – but as this Hogan Lovells memo notes, this award indicates the SEC Staff is inclined to read that limitation on eligibility narrowly:

The SEC indicated that although an employee of a law enforcement organization is not normally eligible as a whistleblower, there may be an exception when law enforcement is just one component of the agency’s purposes and the employee does not work for that component of the agency. According to the SEC, employees of law enforcement organizations—defined as organizations “having to do with the detection, investigation, or prosecution of potential violations of law”—are eligible for the award so long as they do not work for the “sub agency components that perform the law enforcement responsibilities.”

The memo points out that the ability of government employees to blow the whistle may complicate the relationship between companies & their regulators:

Personal gain could motivate a government employee to pass along information to the SEC in hopes of receiving an award, especially if the reward encourages competition among government employees to provide information to the SEC. Companies that regularly work and communicate with regulatory agencies should consider the risk of sharing information that could serve as evidence of securities violations, particularly if the likely sanctions could exceed $1 million, which is the threshold required to receive a whistleblower award.

The SEC Staff’s decision to read the law enforcement exclusion from eligibility narrowly also signals that the whistleblower program will continue to feature prominently in its enforcement efforts under the Trump Administration.

SRO Rulemaking: DC Circuit Decision May Slow SEC Action on Rule Proposals

A recent ruling from the DC Circuit may slow down the SRO rulemaking process by effectively raising the standard for SEC review of new rules. This Davis Polk memo explains:

The case, Susquehanna International Group, LLP, et al. v. SEC, decided on August 8, involved a petition by two options exchanges and two broker-dealers (“Petitioners”) for review of an SEC order approving a proposed change by the Options Clearing Corporation (“OCC”) to its rules. The proposed rule set out a plan to bolster its capital by restructuring its capital contribution requirements, fees, rebates and dividends. The proposal was filed by the OCC in 2015 and the SEC issued an order approving the proposal in February 2016.

In reviewing SRO rule changes, the court held that the SEC must undertake its own “reasoned analysis,” not take the SRO’s “word for it” that statutory standards are met, and that SEC approvals may be set aside as being “arbitrary and capricious” unless its determinations are supported by “substantial evidence.” The court reviewed the SEC’s discussion of various aspects of the OCC proposal and found the agency’s analysis concerning the satisfaction of statutory standards to have been insufficiently probing.

The SEC often relies on SRO statements about satisfaction of statutory standards in approving rule changes, and the Court’s insistence on a more probing analysis may slow a process that market participants complain is already too slow and cumbersome.

Links to Exhibits: Remember, Remember! The 1st of September. . .

Sorry for misappropriating & re-dating the famous verse about Guy Fawkes & the Gunpowder Plot – but I wanted to remind everybody that the new rules mandating links to Exhibits in SEC filings go into effect on September 1st. This Sidley blog has an overview of the requirements.

Broc blogged last week that it appears that Corp Fin has provided some informal guidance on how to link to very old exhibits. We continue to post memos in our “Exhibits” Practice Area.

– John Jenkins