The Securities and Exchange Commission (SEC) decided in late June to propose changes to its reward program for whistleblowers. The potential changes provide a good opportunity to look at the pros and cons of the system.
The motivation for the reward program is simple: given the risk of retaliation, there aren’t many incentives to be a whistleblower. Whistleblowers may lose their jobs, drown in legal fees, or both. The relief offered in most statutes tends to be small, even if the whistleblower wins the case. The SEC, however, offers rewards between 10 percent and 30 percent of the amount the SEC recovers as a result of the whistleblower’s tip. Providing a financial incentive to report misconduct encourages employees with important information to come forward when the risk would otherwise be too great.
The law that created the SEC’s whistleblower reward program is in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), at 15 U.S.C. § 78u-6. The process for whistleblowers to receive an award has several steps:
- First, an employee submits a tip to the SEC Office of the Whistleblower (OWB). Tips can be submitted anonymously, but to receive a reward, the whistleblower must either reveal their identity or be represented by an attorney.
- When OWB successfully recovers $1 million or more from an enforcement action, it posts a Notice of Covered Action (NoCA) online regarding the enforcement action.
- Whistleblowers who believe their tip contributed to the successful enforcement can submit an application to OWB to be considered for a reward.
- OWB attorneys review each application and prepare a recommendation, which they send to the Claims Review Staff, who issue a preliminary determination.
- If the award is denied, whistleblowers have 60 days after the preliminary determination is issued to request reconsideration.
- If the preliminary determination contains a reward for the whistleblower, it becomes the proposed final determination. Commissioners then have 30 days to request another review.
The program has advantages and drawbacks. From a purely quantitative perspective, the program’s results are impressive. The SEC reports that the number of tips it receives annually has grown by almost 50 percent since FY 2012, receiving 4,484 tips in FY 2017. Since the program began in 2010, the SEC has received over 22,000 tips leading to more than $1.4 billion recovered. The Commission receives tips from all over the world, and there has been an unprecedented surge of law firms willing to represent whistleblowers. All are promising indicators of success.
However, the flood of tips the SEC receives can also be a disadvantage. In reality, very few actually receive a reward from the program. In FY 2017, for example, only 12 whistleblowers received awards. Over the course of the program, the SEC has issued 50 rewards to 55 whistleblowers, some of whom filed together. As a result, some groups feel that programs like the SEC’s offer whistleblowers false hope with infinitesimal chances of recovery.
Further, the “bounty” program has not had comparable success to the False Claims Act, under which whistleblowers do more than give evidence to the government. Under that law, they file lawsuits to fight and win the battles on behalf of taxpayers. The False Claims Act has averaged approximately $1.5 billion in recoveries each year, compared to the bounty program’s combined $1.4 billion in six years.
Addressing this imbalance is one intention of the changes the Commission has proposed, though groups disagree over how effective the changes will be. In the SEC press release regarding the proposal, SEC Chairman Jay Clayton stated, “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.”
Some of the changes relate to internal processes and would make the award disbursement process more efficient. Other proposals more directly affect whistleblowers seeking a reward. Some of the most important proposed changes include the following:
- Give the Commission discretion to make certain awards larger. If a whistleblower’s award would be less than $2 million according to the current guidelines, the Commission would be able to increase the award to a maximum of $2 million, subject to the 30 percent limit. The intent of this change is to incentivize whistleblowers to report smaller instances of fraud. The SEC hopes that this change would encourage potential whistleblowers for whom the monetary reward of reporting a tip would otherwise be too small to be worth the risk.
- Allow the Commission to establish a separate system to reward whistleblowers whose disclosures do not qualify for an award under the statutory program.
- Give the Commission discretion to lower awards related to sanctions of $100 million or more (without dropping them below the 10% minimum). The Commission hopes the awards would be large enough to continue to incentivize whistleblowers while freeing up more of the funds from which awards are distributed.
- Require that whistleblowers report their tips to the SEC in order to be eligible for an award (under the current guidelines, internal reporting can qualify an employee for a reward). This change is the SEC’s response to the recent Supreme Court decision in Digital Realty Trust, Inc. v. Somers,in which the court determined that employees who report only internally do not qualify as whistleblowers under the statute.
The SEC is holding a public comment period on the proposals until September 18. The Commission encourages people to submit comments about the proposed changes, including alternatives to any of the proposals. Instructions for submitting comments can be found at www.sec.gov/rules/submitcomments.