Whistleblower advocates voiced alarm Wednesday over the U.S. Securities and Exchange Commission asserting broad discretion to lower awards for tipsters who assist with investigations, saying the agency’s move threatens to undermine a program that has been hailed as a “game changer” for the agency’s enforcement efforts.
At a public meeting Wednesday, the SEC voted 3-2 to adopt changes to the bounty program that the commission’s chairman, Jay Clayton, said would expedite the process of reviewing award applications and deliver more money to tipsters. The whistleblower program, created as part of the Dodd-Frank financial reforms, allows whistleblowers to receive between 10 and 30 percent of monetary sanctions collected from cases in which they assist the SEC.
The final rules package was notable also for what it did not include: A proposal raised in 2018 to give the SEC more discretion to lower the very highest bounties so that the dollar amounts would not exceed what is “reasonably necessary” to reward tipsters and incentivize future whistleblowing. But, on Wednesday, the exclusion of that specific provision from the final rules package came as little comfort to whistleblower lawyers.
Explaining her dissent from the party-line vote, Commissioner Allison Herren Lee said the SEC had concluded that it has always had the authority to lower bounties based on the perceived appropriateness of the dollar amount paid to whistleblowers. Lee said the assertion of that legal authority went beyond the 2018 proposal, which would have limited the SEC’s ability to lower awards to cases that netted more than $100 million in sanctions.
In those cases, the proposal would have prevented the SEC from reducing bounties below $30 million. While an undoubtedly weighty sum, whistleblower lawyers and other advocates expressed concern that such a limit could dissuade corporate insiders with knowledge of massive frauds from risking their careers and reporting wrongdoing.
“We claim a new discretion to consider dollar amounts—in the setting of award amounts—that is broader than the discretion we proposed to write into the rule [in 2018], because it is applicable to all awards, no matter their size,” Lee said, adding that there is “no transparency” in the use of that discretion.
“It provides whistleblowers no way to contest its application,” she said.
Defending the SEC’s move, Clayton said “it is dollars, not percentages, that motivate behavior.”
Lee was joined by Commissioner Caroline A. Crenshaw in opposing the amended whistleblower rules.
Phillips & Cohen partner Sean McKessy, who stepped down in 2016 as the first chief of the SEC’s whistleblower program, described the commission’s rollout of the changes as “slick.”
“The spin is just remarkable,” McKessy said. “Overall, this is a net-negative for whistleblowers. Even though it’s spun as providing more transparency and clarity, it does none of those things.”
McKessy said the SEC’s assertion of authority to lower awards was “actually more nefarious than what they proposed to do in the first place,” because the 2018 proposal came with a $30 million floor for the largest awards.“Now, we have all of the worst of the proposal and none of the ‘best,’” McKessy said.