SEC, Testing Power, Wants More Discretion to Set Whistleblower Awards

The U.S. Securities and Exchange Commission on Thursday proposed giving the agency’s top officials broader authority to set whistleblower awards, including added power to cut the largest bounties and boost those deemed too low.

SEC Chairman Jay Clayton said the formula used to determine awards has proved “too rigid.” Under the SEC’s whistleblower program, which was created by the Dodd-Frank financial reforms, tipsters can receive between 10 percent and 30 percent of monetary sanctions from the agency’s enforcement actions.

Whistleblowers involved in the SEC’s most significant enforcement actions would still be in line for immense wealth under the proposal advanced Thursday, but commissioners would have added discretion to dock bounties on the basis of their sheer size.

The SEC voted 3-2 to push the proposal out for public comment, with the two Democratic commissioners dissenting over concerns that the changes would undercut the whistleblower program and bring improper considerations into future award decisions.

In cases involving $100 million or more in monetary sanctions, Clayton said the proposal would allow commissioners to reduce whistleblower bounties so that they do not exceed what is “reasonably necessary” to reward the tipster and incentivize future reporting to the SEC. Awards in those cases could not be adjusted below a still-whopping sum: $30 million.

Clayton said the “$30 million minimum award threshold” would not reduce the incentive to blow the whistle in “any practical way.” He also noted that a substantial portion of the more than $266 million in awards has gone to a small handful of whistleblowers, underscoring the need for more discretion to consider the size of the “truly large” payout.

Phillips & Cohen partner Sean McKessy, who served as the first director of the SEC’s whistleblower program, questioned whether the proposal would send the wrong message to the would-be tipster with information about the “next Enron.”

“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?” he said.

Lev Bagramian, senior securities policy adviser for Better Markets, said Congress did not empower the SEC to tinker with the whistleblower award controls at the time the tipster program was created. “Congress, in law, set the hugely successful program’s award levels, and allowed no discretion to the commission to put a dollar limit on them,” Bagramian said.

The proposed changes come three months after the SEC approved a record-setting award of more than $33 million to one whistleblower, with two other whistleblowers sharing a bounty of nearly $50 million. In the seven-year history of the whistleblower program, the SEC has awarded 55 whistleblowers.

At the opposite end of the pay scale, in cases where the percentage formula would grant whistleblowers less than $2 million, the proposal would allow the SEC to raise awards up to the $2 million mark. The commissioners would still be bound by the percentage range outlined in Dodd-Frank when adjusting awards upward or downward.

Clayton emphasized the SEC’s efforts to increase smaller awards, saying that “people who come forward take a risk.”

“And if our formula produces a number we don’t think is sufficient, at the bottom end of the spectrum, I think we should be able to adjust it accordingly,” he said.

The Dissenting Voices

In her dissenting vote, Commissioner Kara Stein said she was “deeply troubled” by prospect of allowing the SEC to depart from its normal analysis, in which it sets a percentage based on factors that include the significance of the whistleblower’s tip.

“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.

Stein said she supported separate changes proposed Thursday. In the same package of changes, the SEC proposed allowing awards based on deferred prosecution agreements or nonprosecution agreements entered into with the Justice Department or a state attorney general’s office in a criminal case. Another proposed change would allow the SEC to more easily deny meritless or untimely award applications, a step designed to free up staff to review potentially deserving claims.

The package of proposals, if adopted, would also change the SEC’s rules to reflect a February decision in which the U.S. Supreme Court struck down the agency’s expansive view of whistleblower protections.

In Digital Realty v. Somers, the court unanimously ruled that whistleblowers need to contact the government to receive Dodd-Frank’s protections against retaliation. The SEC had argued that even whistleblowers who only reported misconduct internally could benefit from those protections.

Speaking at a conference in New York earlier this week, the director of the SEC’s whistleblower office said the Supreme Court’s ruling is “very clear: Whistleblowers who want to preserve their rights under the Dodd-Frank anti-retaliation provisions must report to the commission.”

“Full stop. And we need to get those reports before the retaliation occurs,” said Jane Norberg, who has led the SEC’s whistleblower office since 2016.

“In my opinion, whistleblowers will be rolling the dice not to report to the commission either at the same time or before reporting internally if they want the more robust protections under the Dodd-Frank statute.”

The National Law Journal | June 28, 2018