Lawyer Sues SEC Over New Whistleblower Rules

The rules encouraged whistleblowers to come forward "by guaranteeing that those individuals who acted properly would be awarded accordingly and would not have their awards unfairly and arbitrarily diminished," the suit states.

However, in 2018 the commission "changed course," proposing to amend its rules as they "were leading to whistleblower awards that were too large in situations where the SEC collected significant monetary sanctions."

The commission then proposed to adopt a new rule that "would allow the agency to consider the amount of the monetary sanctions collected (and the potential dollar amount of the whistleblower award) when calculating the whistleblower award and to lower whistleblower awards when they were based on high-dollar monetary sanctions."

In doing so, the commission explained that it needed to adopt a new rule because it had no authority under its current rules to lower whistleblower awards on the basis that the award was "unnecessarily large."

In reliance on the prior rules, the lawsuit states, "courageous whistleblowers have put their careers and lives on the line to assist the commission — including wearing FBI wires, testifying in high-profile trials, and smuggling key documents out of foreign countries. Now, in the middle of the proverbial football game, the Commission has moved the goal posts on literally hundreds of SEC whistleblowers."

SEC Chair Gensler Could 'Fix' Whistleblower Rule

Thomas hopes the suit will be resolved this year. However, if Gary Gensler, former chairman of the Commodity Futures Trading Commission, is picked by President-elect Joe Biden as the new SEC chair — and confirmed by the Senate — Thomas hopes he'll have the agency fix the whistleblower changes ushered in under former SEC Chairman Jay Clayton.

"Gary Gensler made his name aggressively pursuing Wall Street. However, with Clayton's parting gift, he's going to find it harder than last time because fewer whistleblowers are going to be willing to participate in the Wall Street program," Thomas told ThinkAdvisor.

Whistleblowers, Thomas said, "tend to be industry insiders who think like outsiders and they scare big financial firms more than anything else because they are impossible to predict and control, which is why Wall Street has attempted to muzzle them" with the changes to the SEC's whistleblower rule.

While Thomas said he's "very confident" that the courts will overturn the SEC's "ill-advised rulemaking," Gensler could "propose a new rulemaking to fix this problem. It's my hope that they will, but my clients can't afford to wait for something like that to happen."