Risk Management

SEC Wants the Power to Limit the Size of Whistleblower Awards

Proposed amendments to the rules would give commissioners more discretion over the size of whistleblower awards; some say they could undercut the p...
William SprouseJuly 2, 2018
SEC Wants the Power to Limit the Size of Whistleblower Awards

The Securities and Exchange Commission apparently thinks the federal government is paying some whistleblowers too much for revealing corporate malfeasance.

So, the SEC is proposing amendments to rules governing the whistleblower program. Among other things, the changes would give commissioners more discretion over the dollar size of awards.

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Under the current rules, whistleblowers can receive between 10% and 30% of monetary sanctions from SEC enforcement actions. The new rules would allow commissioners to reduce bonuses for cases over $100 million, with an award minimum of $30 million. For smaller cases, commissioners could raise the award to $2 million.

In a press release, the SEC pointed out that “forty percent of the aggregate funds paid by the Commission to whistleblowers have been paid out in only three awards” and that excessively large awards are not “reasonably necessary.”

whistleblower awardsThe proposal allowing commissioners to reduce bonuses “is intended to make sure that the [SEC] is a responsible steward of the public trust … ” according to the press release.

The SEC voted 3-2 to propose the amendments, with two Democratic commissioners who dissented saying the changes could undercut the program.

In a statement, the SEC said the rules would better incentivize individuals to report high-quality tips. They would also allow awards based on deferred prosecution agreements and non-prosecution agreements.

Another amendment to the rules would require that a whistleblower report a possible securities law violation to the SEC in order to qualify for protection against employment retaliation under Section 21F of the Securities and Exchange Act. (Previously, the SEC interpreted 21F protections as applying in the case of internal reports also.) That change was necessitated by a Supreme Court ruling.

“The proposed rules are intended to help strengthen the whistleblower program by bolstering the Commission’s ability to more appropriately and expeditiously reward those who provide critical information that leads to successful enforcement actions,” SEC Chairman Jay Clayton said.

Clayton has previously said the rules were “too rigid.”

Commissioner Kara Stein said she was “deeply troubled” by the prospect of allowing the SEC to depart from its normal analysis for determining the amount of an award in certain circumstances.

“Practically speaking, this means the commission could reduce the reward if, in its sole discretion, it thinks the award is too large. I am worried that this subjective determination would be used to as a means to weaken the whistleblower program,” she said.

SEC Commissioner Robert Jackson also voted “no” on the rule change.

“Whistleblowers are, in the parlance of economics, risk-averse individuals, and we’re asking them to put their livelihood on the line to help us enforce the law,” he said. “Adding uncertainty to that process risks that would-be whistleblowers will stay quiet.”

The SEC approved an award of $33 million in March, the highest award to a single person ever. The previous record was $30 million in 2014.

The SEC said information from whistleblowers has led to enforcement actions that resulted in more than $1.4 billion in financial remedies, including more than $740 million in disgorgement of ill-gotten gains.

The program was set up in 2010.

Sean McKessy, the SEC’s first whistleblower director and now a partner at Phillips & Cohen, said the amendments could send the wrong message:

“Why would you say it’s not reasonable to award somebody who stopped a billion-dollar fraud at the highest amount if they earned it?”

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