Friday, February 12, 2021

U-5 Filings and the Compelled Self-published Defamation Doctrine


Last year, the California Court of Appeals issued a highly instructive opinion in the area of U-5 defamation. Some excerpts from that opinion will help us get started on a variety of blogs. The case is Tilkey v Allstate Insurance Company.


While Michael Tilkey and his girlfriend Jacqueline Mann were visiting at her home, the two got into an argument. Tilkey decided to leave the apartment. When he stepped out onto the enclosed patio to collect his cooler, Mann locked the door behind him. Tilkey banged on the door to regain entry, and Mann called police. Tilkey was arrested and pled guilty to a disorderly conduct charge only, and other charges were dropped. After Tilkey completed a domestic nonviolence diversion program, the disorderly conduct charge was dismissed as well.

Before the disorderly conduct charge was dismissed, Tilkey's company of 30 years, Allstate Insurance Company (Allstate), terminated his employment based on his arrest for a domestic violence offense and his participation in the diversion program. Allstate informed Tilkey it was discharging him for threatening behavior and/or acts of physical harm or violence to another person. Following the termination, Allstate reported its reason for the termination on a Form U5, filed with Financial Industry Regulatory Authority (FINRA) and accessible to any firm that hires licensed broker-dealers like Tilkey. Tilkey sued Allstate for wrongful termination and compelled self-published defamation.

The jury returned a verdict in Tilkey's favor on all causes of action and awarded him $2,663,137 in compensatory damages and $15,978,822 in punitive damages. The Court of Appeals concluded that compelled self-published defamation is a viable theory, and substantial evidence supported the verdict that the statement was not substantially true. The court did, however, remand the matter for recalculation of the punitive damages award.


On August 31, 2014, Mann sent an e-mail to Tilkey at work mentioning the charges that had been filed against him. A field compliance employee later discovered this e-mail while conducting a routine compliance review and forwarded it to Human Resources (HR). HR professional Tera Alferos conducted the initial investigation, and she interviewed Tilkey. She noted Tilkey had been asked to accept a plea deal to have two of the three charges dropped, then the last one dismissed. She never spoke with Mann or interviewed the arresting officers. She also did not investigate Mann's background or review her social media accounts.

A couple weeks later, Alferos sent her supervisor a summary of her investigation, which stated that the police report had been reviewed and noted Tilkey had been charged with but not convicted of a crime. The summary also explained there was no FINRA reporting obligation because there were no felony charges, and it concluded there had been no violation of company policy.

A supervisor then changed the conclusion to state Tilkey's behavior may have been at a level that caused the company to lose confidence in him. At the supervisor’s request, Alferos next added references to the domestic violence charge because it suggested Tilkey had engaged in behavior that could be construed as acts of physical harm or violence toward another person, in violation of company policy. In an e-mail referencing the decision to terminate Tilkey's employment, a Ms. Metzger wrote that they were amending the reason for terminating Tilkey to be "violence against another person whether employed by Allstate or not. "It identified the policy violation as "[t]hreats or acts of physical harm or violence to the property or assets of the Company, or to any person, regardless of whether he/she is employed by Allstate." When the company terminated his employment, it informed Tilkey, "Your employment is being terminated as a result of engaging in behaviors that are in violation of Company Policy. Specifically, engaging in threatening behavior and/or acts of physical harm or violence to any person, regardless of whether he/she is employed by Allstate."

The company then filed a Form U5 with FINRA reporting its reason for terminating him as follows: "Termination of employment by parent property and casualty insurance company after allegations of engaging in behaviors that are in violation of company policy, specifically, engaging in threatening behavior and/or acts of physical harm or violence to any person, regardless of whether he/she is employed by Allstate. Not securities related."

Tilkey sued Allstate asserting three causes of action: (1) violation of California section 432.7; (2) wrongful termination based on noncompliance with section 432.7; and (3) compelled self-published defamation to prospective employers. Following trial, the jury returned a verdict for Tilkey and awarded $2,663,137 in compensatory damages, with $960,222 for wrongful termination and $1,702,915 for defamation, and $15,978,822 in punitive damages. Allstate moved for a new trial, which the trial court denied. Allstate appealed.


Allstate argued it did not violate the California wrongful termination statue (432.7) when it used as a factor in its termination decision Tilkey's arrest and subsequent conditional plea and entry into a diversion program. Tilkey countered that the company's reliance on his arrest records violated section 432.7; thus, he was wrongfully terminated. The parties' disagreement hinged on the interpretation of section 432.7, subdivision (a)(1), which prohibits employers from utilizing as a factor in employment decisions any record of arrest or detention that did not result in conviction or any record regarding referral to or participation in any pretrial or post trial diversion program.

Allstate argued a conditional plea agreement qualifies as a conviction. Tilkey contended he never entered a guilty plea; thus, there was no conviction. The court concluded we conclude the term "conviction" as defined in section 432.7 does not require entry of judgment: “The plain language here makes clear that a judgment is not required because the conviction can exist without respect to sentencing. (See ibid.) The statute's legislative history supports this interpretation.” A conviction under section 432.7 does not require an entry of judgment; it simply requires entry of a guilty plea. Thus, Allstate did not violate section 432.7 by using Tilkey's arrest as a factor in its decision to terminate his employment.


Allstate next challenged the defamation verdict, contending that self-compelled defamation should not provide a basis for a defamation per se cause of action. It further contended there was no evidence that Tilkey's self-publication was compelled by its publication of the reason for his employment termination on the Form U5 because that publication contained a privileged statement. Finally, Allstate maintained that its statement was substantially true, justifying reversal of the verdict.

For a valid defamation claim, the general rule is that "the publication must be done by the defendant." (Live Oak Publishing Co. v. Cohagan (1991) 234 Cal.App.3d 1277, 1284 (Live Oak Publishing).) But there is an exception "when it [is] foreseeable that the defendant's act would result in [a plaintiff's] publication to a third person." For the exception to apply, the defamed party must operate under a strong compulsion to republish the defamatory statement, and the circumstances creating the compulsion must be known to the originator of the statement at the time he or she makes it to the defamed individual.

Compelled Self-Published Defamation Per Se

In an action for defamation per se, the meaning is so clear from the face of the statement that the damages can be presumed. The originator of the statement is liable for the foreseeable repetition because of the causal link between the originator and the presumed damage to the plaintiff's reputation but the publication must be foreseeable.  The presumed injury is no less damaging because the plaintiff was compelled to make the statement instead of the employer making it directly to the third party. Allstate offered several other arguments for why the Court should not accept a theory of compelled self-published defamation.

Form U5 Privilege

Allstate provided a written explanation for Tilkey's termination of employment on the Form U5 to FINRA, which was available to every prospective employer of similarly licensed employees. Thus, disclosure was not absolutely privileged. Thus, Tilkey was compelled to explain the reason for his discharge, and this repetition was reasonably foreseeable.

Additionally, the qualified privilege that attaches to communications about an employee's job performance when made without malice or abuse to a third party likewise protects an employer against compelled self-published defamation. This conditional privilege helps protect the free flow of reference information.

Firms are required to file a Form U5 with FINRA whenever a registered representative leaves the firm. If the registered representative's employment has been terminated, the form asks the firm to provide a reason for termination. When the Form U5 identifies allegations of improper conduct by a broker-dealer, an issue that FINRA may need to investigate, it can on those occasions be considered "a communication made 'in anticipation of an action or other official proceeding.' (Briggs v. Eden Council for Hope & Opportunity (1999) 19 Cal.4th [1106,] 1115.)" (Fontani v. Wells Fargo Investments, LLC (2005) 129 Cal.App.4th 719, 732, disapproved of on other grounds in Kibler v. Northern Inyo County Local Hospital District (2006) 39 Cal.4th 192.) In those instances, the information reported on the Form U5 would be protected by the absolute privilege outlined in Civil Code section 47, subdivision (b), at least in California.

Section 7 of the Form U5, however,  includes a list of disclosure questions for full terminations that asks if the terminated employee was the subject of a governmental investigation; was under internal review for fraud, wrongful taking of property, or violated investment related laws, regulations, or industry standards relating to compliance; was convicted of or pled guilty to a felony; or was convicted of or pled guilty to a misdemeanor that related to investments, fraud, false statements, bribery, perjury, forgery, counterfeiting, extortion, or wrongful taking of property. These questions make clear that FINRA seeks termination information that allows it to assess whether the employee's conduct lacked compliance with regulatory requirements in the securities arena. FINRA does not ask for information about non-securities-related activities because that information falls outside its scope of regulation.

Thus, according to the California Court, the absolute privilege extends to communications required by FINRA, i.e., fraud- and securities-related information. However, the communication of Tilkey's termination here did not regard improper securities-related conduct, and Allstate did not limit its responses to fraud- and securities-related information. Instead, Allstate explained Tilkey's departure was the result of a "termination of employment by parent property and casualty insurance company after allegations of engaging in behavior that are in violation of company policy, specifically, engaging in threatening behavior and/or acts of physical harm or violence to any person, regardless of whether he/she is employed by Allstate. Not securities related." This statement did not contain allegations of improper securities conduct, theft, or allegations or charges of fraud or dishonesty. It was not offered in anticipation of or to initiate an investigation; nor was it offered in the course of any other official 29 proceeding. (See Civ. Code, § 47, subd. (b).) Thus, the absolute privilege does not apply[1].

Substantial Evidence Supported the Jury Findings That Tilkey Was Compelled to Self-Publish a Statement That Was Not Substantially True

The jury concluded that Tilkey was under strong pressure to communicate Allstate's defamatory statement to another person. There was ample evidence to support this conclusion. A “vocational evaluator” testified Tilkey would have a difficult time ever getting another job because he had been terminated, and the reason for termination reported on the Form U5 was negative. He also noted that because Tilkey sold life insurance, he was required to hold securities licenses, and agencies and employers hiring those with securities licenses would have access to U5 forms. Tilkey's supervisor at Allstate, testified that Allstate routinely reviewed the securities public information from the Form U5 of any person they were hiring, and he could not recall ever hiring anyone at Allstate whose Form U5 stated he was terminated for cause. Tilkey testified that when he recruited agents, he would have someone check the Form U5, and he never hired anyone whose Form U5 showed the termination was for cause. He also never received an interview from any company that had access to a Form U5, even though he had 30 years of experience and performed well, receiving the third largest bonus in the state just a few weeks before his termination. Even if the company never offered any specific information about the reason for Tilkey's discharge from employment to prospective employers, its statement at the time of discharge and its reporting of the information on the publicly available Form U5 necessitated Tilkey's self-publication in other settings. In sum, the Court of Appeals upheld the defamation verdict but concluded that the punitive damage award was excessive. More on that later.

[1] Had Allstate instead eliminated the specifics in its statement, privilege may have attached because Allstate was required to report the termination. For example, it could have supplied the following statement: "Termination of employment by parent property and casualty insurance company after allegations of engaging behavior that are in violation of company policy. Not securities related."

Thursday, January 21, 2021

Gary Gensler Nominated to be the New SEC Chairman

On January 18th, a few days before Biden was sworn in as President, he announced his nomination for the new Securities and Exchange Commission (“SEC”) chairman.  President Joseph Biden named Gary Gensler as his pick for SEC chairman[1].  While Gensler still needs to be confirmed by the senate[2], it is expected that he will be approved. Gensler’s confirmation will create a 3-2 democratic majority in the SEC commission.

Gary Gensler has an extensive resume within the financial industry.  He is a former Commodity Futures Trading Commission (“CFTC”) chairman, and is known for supporting intensive regulation. During his tenure at the CFTC, he introduced new rules concerning derivative markets, and implemented the Dodd-Frank Act of 2010.  Gensler has also worked inside the industry he regulated, as an executive at Goldman Sachs from 1979 to the late 1990s[3]. Gensler has served as Secretary of the Treasury for Domestic Finance and Assistant Secretary of the Treasury for Financial Markets[4]. Currently, he is a professor of Global Economics and Management at MIT Sloan School of Management[5].

Gary Gensler is recognized as an aggressive regulator. He is known to be direct about his policy decisions and not straying away from controversy[6]. Gensler’s transparent conduct can be beneficial for the SEC, and also beneficial to those who fall under SEC regulation. Transparency in decision making can make it easier to predict what new polices could be passed, but more importantly, how those polices will affect the securities industry. This is primarily because Gensler is unambiguous about what he wants to accomplish. Gensler is consistent. While Gensler is transparent about his policy decisions, he advocates for that same transparency within securities markets. Possible changes include an increase in ESG disclosures[7], possible new rules to “swaps” (similar to his actions as CFTC Chairman), and increased whistleblower protections[8].

Gensler may impact the cryptocurrency industry. Gensler is a supporter of Bitcoin and other cryptocurrencies, however, he has also indicated the possibility of some cryptocurrencies falling under the scope of securities definitions (such as XRP)[9]. Overall, we can expect Gensler and the SEC to become more hands-on when it comes to regulation. 

At Cosgrove Law Group, we will be keeping a close eye on potential new regulation by the SEC. If you have any questions regarding securities regulations and rules, please feel free to give us a call at 314-563-2490.

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC


[1] Politi, J. (2021, January 18). Biden names Gensler as SEC head in push towards more scrutiny. Retrieved January 21, 2021, from

[2] Dizikes, P. (2021, January 19). MIT Sloan's Gary Gensler to be nominated for chair of Securities and Exchange Commission. Retrieved January 21, 2021, from

[3] Gary Gensler. (n.d.). Retrieved January 21, 2021, from

[4] Sprunt, B. (2021, January 18). Biden Taps Veteran Financial Regulators To Lead SEC, CFPB. Retrieved January 21, 2021, from

[5] Lundy, J. G., MacPhail, M. R., & Porteous, D. W. (2021, January 19). President Biden Announces Gary Gensler as SEC Chair Nominee. Retrieved January 21, 2021, from

[6] Nicodemus, A. (2021, January 19). 'A very strong and vocal regulator': Biden taps Gary Gensler to lead SEC. Retrieved January 21, 2021, from

[7] Glazer, E. (2021, January 18). Companies Brace Themselves for New ESG Regulations Under Biden. Retrieved January 21, 2021, from

[8] Schweller, G. (2021, January 18). Biden Picks Gary Gensler to Chair SEC. Retrieved January 21, 2021, from

[9] Basar, S. (2021, January 21). Crypto Industry Eyes Gary Gensler at SEC. Retrieved January 21, 2021, from


Wednesday, January 6, 2021

FINRA Orders Worden to Pay $1.2 Million in Restitution to Customers Whose Accounts Were Excessively Traded

FINRA announced last week that it sanctioned Worden Capital Management LLC (WCM) more than $1.5 million, including approximately $1.2 million in restitution to customers whose accounts were excessively traded by the firm’s representatives, and a $350,000 fine for supervisory and other violations. WCM must also retain an independent consultant to conduct a comprehensive review of the relevant portions of the firm’s supervisory systems and procedures.

FINRA found that from January 2015 to October 2019, WCM and the firm’s owner and CEO, Jamie Worden, failed to establish and enforce a supervisory system reasonably designed to achieve compliance with FINRA’s rules relating to excessive trading. As a result, WCM’s registered representatives made unsuitable recommendations and excessively traded customers’ accounts, causing customers to incur more than $1.2 million in commissions..

Jessica Hopper, Head of FINRA’s Department of Enforcement, said, “FINRA has an unwavering commitment to protect investors from excessive and unsuitable trading. Firms must ensure they establish systems and procedures reasonably designed to supervise representatives’ recommendations to their customers, and firms’ supervisory personnel must have in place the necessary tools and training to address red flags.”

FINRA also found that WCM and Worden interfered with customers’ requests to transfer their accounts to another member firm. Finally, as a result of supervisory failures, WCM failed to timely file amendments to registered representatives’ Form U4s and Form U5s to disclose the filing or resolution of customer arbitrations[1]

[1] Michelle, Ong. (2020, December 31). FINRA Orders Worden Capital Management LLC to Pay More than $1.2 Million in Restitution to Customers Whose Accounts Were Excessively Traded. Retrieved January 05, 2021, from


Monday, December 14, 2020

What Chairman Jay Clayton’s Resignation Could Mean for Future of Financial Regulation

On November 16th, 2020 Securities and Exchange Commission (“SEC”) Chairman, Jay Clayton announced he will be stepping down from his position at the end of 2020[1]. The Chairman’s announcement comes as no surprise, mainly due to Joe Biden’s presidential victory. SEC chairs typically step down when there is a new president elect[2]. (Former Chair Mary Jo White stepped down in 2016 after current President Donald Trump’s election[3] and former Chair Mary Schapiro resigned in 2012 after former President Barack Obama’s election.[4]) President-Elect Joe Biden is likely to nominate a new chairman before his inauguration on January 20th, 2021.

SEC Commissioner, Allison Lee is positioned to become the acting Chair until President Biden appoints a replacement for Jay Clayton[5]. Possible appointments include former SEC commissioner Kara Stein, Former commissioner Rob Jackson, Preet Bharara, a former United States attorney for the Sothern District of New York, Maxine Waters head of the House Financial Services Committee and, Gary Gensler who is currently leading the financial policy transition team for the future Biden administration[6].  

An appointment of a democratic chair will create a democratic majority within the commission. Historically, democratic members of the SEC rely heavier on enforcement than their republican counterparts. Gary Gensler, for example, aggressively implemented regulations such as the Dodd-Frank Act during his tenure as chairman of the Commodities Futures Trading Commission (“CFTC”)[7]. The appointment of a democratic chair within the SEC will result in increased enforcement and investigations.

The main question lies in where the priorities of enforcement will be.  Over the previous 3-years, the SEC commission focused more on deregulation and lowering business costs[8].  A democratic commission will possibly shift focus onto increased regulation, specifically on private markets. Additionally, environmental, social, and corporate governance (“ESG”) disclosures are likely to become a larger part of SEC enforcement in a democratic commission, particularly regarding environmental disclosures. Democratic Commissioner Allison Herren-Lee has advocated for standardized reporting for public companies regarding their climate risk[9] efforts which could lead to another amendment to Regulation S-K. Regulation Best Interest and Shareholder Proxy Voting are both expected to come under review with a democratic commission[10]. While these are just theories about what could potentially happen, it is still not for certain. When a new chair is nominated and confirmed, we will have a better idea of what to expect from the SEC. Here at Cosgrove Law Group, LLC we will keep an eye on future changes within the SEC and CFTC.

[1] Sorkin, A., Karaian, J., Merced, M., Hirsch, L., & Livni, E. (2020, November 16). Trump's S.E.C. Chairman Is Stepping Down. Retrieved November 30, 2020, from 

[2] Cox, J. (2020, November 16). Jay Clayton says he will step down early as head of the SEC at the end of 2020. Retrieved November 30, 2020, from 

[3] Merle, R. (2019, March 28). SEC chair to step down, clearing path for Trump to eliminate tough Wall Street regulations. Retrieved November 30, 2020, from 

[4] Press Release. (2012, November 26). Retrieved November 30, 2020, from 

5 Schroeder, P., Price, M., & Johnson, K. (2020, November 27). Factbox: The top contenders to run Biden's financial agencies. Retrieved November 30, 2020, from 

[6] Schroeder, P., Price, M., & Johnson, K. (2020, November 27). Factbox: The top contenders to run Biden's financial agencies. Retrieved November 30, 2020, from

 [7] Miedema, D. (2014, January 03). Swaps regulator Gensler: Banker turned Wall Street scourge. Retrieved December 01, 2020, from 

[8] Zanki, T. (2020, October 20). 4 Ways A Biden Election Could Swing SEC Priorities. Retrieved December 01, 2020, from 

[9] Pisani, B. (2020, November 12). What a Democrat-controlled SEC might look like and what it would mean for markets. Retrieved December 01, 2020, from 

[10] Rasmussen, P., & Tehrani, P. (2020, November 7). ANALYSIS: Four Spots Biden Is Likely to Reverse SEC Deregulation. Retrieved December 01, 2020, from

 AUTHOR: Julianna M. Ness

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC

Thursday, December 10, 2020

Missouri Securities Division Brings Action for Unregistered Investment Advice

Missouri’s Commissioner of Securities recently issued an Order to Cease and Desist against a California resident that was allegedly collecting fees to provide advice regarding stock selections. According to the order, Yifel Lu (“Lu”), “…for compensation, provided unregistered investment advice to individuals throughout the United States. Lu touted personal success in the United States stock market in an internet chat room. When asked for Lu’s advice, Lu instructed individuals to contact him on a separate phone/computer application. Once alternative contact was established, Lu proceeded to require clients to pay a fee of at least $300 for his advice. When the fee was agreed upon, Lu instructed clients to deposit funds electrically into a PayPal account.”  

Moreover, a Missouri Resident initially met Lu in a public chatroom on Moonbbs “where Lu, using the username “kyoraiden123,” touted his personal success in the United States stock market and advertised stock-selection advice. Lu promised multiple stock tips with the potential for high profit.”

The Enforcement Section is seeking disgorgement of the $300 fees and over $75,00 in civil penalties. Food for thought.

Monday, October 12, 2020

Robinhood Brokerage app under SEC and FINRA investigations

 Author: Juliana M. Ness, Cosgrove Law Group, LLC

In early September of this year, Robinhood (a brokerage app) became the subject of investigations by both the U.S. Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (FINRA)[1]. Both regulators cite two central concerns regarding Robinhood. The first relates to Robinhood’s practice of selling client orders to high-speed trading firms such as Citadel Securities and Two Sigma Securities[2]. The second relates to trading outages that occurred on Robinhood’s platform in March of 2020, the longest of which lasted 17 hours[3].  

The SEC and FINRA investigations regarding Robinhood’s practice of selling client orders to third parties mainly focuses on disclosures. Robinhood did not have public disclosures regarding its third-party relations until 2018. This practice is one of Robinhood’s primary sources of income[4]. (Nearly 70% of Robinhood’s income comes from high-speed trading.) The SEC investigation aims to determine whether the lack of disclosure by Robinhood could be considered Civil Fraud[5]. If determined that Robinhood’s actions were Civil Fraud, Robinhood may face an SEC fine upwards to 10 Million Dollars. 

The SEC and FINRA are also reviewing trading outages within Robinhood’s platform. Robinhood’s defense to the investigation regarding the March outages includes the discussion of extreme volume increases. Robinhood claims that in March, high market volatility and a record number of new accounts generated stress on the brokerage application’s infrastructure[6]. The unusually high demand for trading in March short-circuited Robinhood’s platform, causing the outage. More than 400 complaints against Robinhood were filed in this year’s first quarter, possibly sparking SEC and FINRA interest. Yet the trading outages have not been resolved. A similar event occurred in late August after stock splits from Apple and Tesla generated an increased demand for trading. This resulted in service outages not only at Robinhood but other brokerages such as Vanguard, Charles Schwab, TD Ameritrade, and Merrill Lynch[7]. In June, Robinhood reported an astonishing 4.32 million new accounts. The app continues to gain users, which puts it in a position for review by regulatory agencies.

The investigations into the outages also sparks an important question--Is technological failure result responsibility of brokerages when the failure resulted in possible investor losses? This question becomes more complex regarding technical issues that relate to an increase in user demand generating outages. Brokerages may not be able to reasonably foresee these issues. Robinhood is also a new company, established in 2013, and follows a business model different from most large brokerages. Since Robinhood’s platform does not use financial advisors, how much responsibility does the brokerage have when it comes to the service it provides to the client? More investment applications similar to Robinhood are popping up, and regulators are working on ways to better regulate this new trend.



[1] Brasseur, K. (2020, September 01). Robinhood adds two CCOs amid reported SEC probe. Retrieved October 07, 2020, from

[2] Smith, K. (2020, September 03). Robinhood Facing Multiple SEC Investigations Into Its Business Practices. Retrieved October 07, 2020, from

[3]Robinson, M., Alexander, S., & Massa, A. (2020, September 03). Robinhood Probed by SEC Over Payments From High-Speed Traders. Retrieved October 07, 2020, from

[4] Gunderia, E. (2020, September 03). Robinhood Under SEC Investigation. Retrieved October 07, 2020, from

[5] Gaus, A. (2020, September 02). Robinhood Faces SEC Fraud Investigation: Report. Retrieved October 07, 2020, from

[6] Tabacco, C. (2020, September 03). Robinhood Faces Investigations from SEC and FINRA - Tech. Retrieved October 07, 2020, from

[7] Ongweso, E., Jr. (2020, August 31). Tesla and Apple Stock Split, Investors Crash Robinhood, Nothing Makes Sense. Retrieved October 07, 2020, from

Monday, September 28, 2020

SEC Amends Whistleblower Award Rules

AuthorJuliana M. Ness, Cosgrove Law Group, LLC

On Wednesday, September 23, 2020, the Securities and Exchange Commission (the “SEC”) amended rules within their Whistleblower program. Their primary motivations behind these new amendments are to increase efficiency, transparency, and provide greater clarity within their decade-old program [1]. Since the inception of the program, The SEC has awarded nearly $523 million to whistleblowers. These new changes directly affect award amounts, establishing new criteria for whistleblower payouts, along with definitions to clarify the program’s award process.

The passed amendments assert the SEC’s authority in determining award amounts for whistleblowers[2].  An action defined within the Dodd-Frank Wall Street Reform and Consumer Protection Act (The Dodd-Frank Act) specifies that the SEC should determine an award amount that lies within 10-30 percent of monetary sanctions collected[3]. Since the development of the whistleblower program, the SEC has used this rule. A proposed amendment in July of 2018 would have codified the SEC’s role in determining award amounts (including downward adjustments1) within the Whistleblower program itself2. The SEC scrapped that proposal, claiming that the stipulation is not necessary to add. Similarly, another proposal enumerated in June of 20183 advocated for caps on awards. The SEC also rejected this proposal due to controversy over the idea of award caps. Critics of the proposal argued that caps would disincentivize individuals from blowing the whistle on critical violations. 

One of the amendments passed adds a presumption that whistleblowers who qualify for awards below $5 Million will receive the maximum statutory award amount. (30% of Monterey sanctions)2 This amendment to rule 21F-6(b) aims at creating more of an incentive for whistleblowers that would otherwise receive a lower award amount. Other awards over $5 million will remain under the determination of the SEC’s award criteria within Rule 21F-6. The enumerated criteria include both positives and negatives that affect award amounts. Examples of these criteria include but are not limited to the significance of the tip, the extent of assistance, delay in reporting, and integrity with compliance systems.  

The SEC also voted to clarify definitions of key terms within the rules. Rule 21F-2 modifications were aimed at establishing a uniform definition of “Whistleblower” in response to a 2018 Supreme Court decision.1,[4]These changes impact retaliation policies. Likewise, the SEC narrowed the scope of “related actions” concerning whistleblower awards1. The changes within rule 21F-3 state that any whistleblowers that pass on original information to another enforcement agency may also receive a reward for the SEC if that information led to the recovery of over 1 million in monetary sanctions3. The agencies included are the Attorney General of the United States, an appropriate regulatory authority, a self-regulatory organization, or a state attorney general in a criminal case3. This rule does not apply in cases where a sperate whistleblower award from another enforcement agency is more appropriate.  In short, the definition specifies that a whistleblower cannot obtain two separate awards for the same information and reports. 

The amendments take effect 30 days after publication in the Federal Register.

[1] Securities and Exchange Commission. (2020, September 23). Press Release. Retrieved September 25, 2020, from

[2] Barbarino, A. (2020, September 23). SEC Rule Asserts Authority To Adjust Whistleblower Awards. Retrieved September 25, 2020, from

[3] Zuckerman, J., Stock, M., & Krems, K. (2020, September 24). SEC Adopts Amendments to Whistleblower Rules that Will Strengthen Some Aspects of the Program But Also Reduce Large Awards and Limit Protection Against Retaliation. Retrieved September 25, 2020, from

[4] Wilson, S., & Achilles, J. (2018, March 3). Four key takeaways from the Supreme Court's decision in Digital Realty Trust, Inc. v. Somers, 138 U.S. 767  (2018): Perspectives: Reed Smith LLP. Retrieved September 25, 2020, from