More than two years after proposing them, the Securities and Exchange Commission (SEC) approved a series of amendments Wednesday to its whistleblower program that were designed to make the issuance of awards more streamlined and efficient. An amendment that addressed the agency’s evaluation of large awards, however, was excoriated by two commissioners and some whistleblower advocates.
The approval came in the form of a split vote—as it is with nearly every contentious issue before the SEC—with Chairman Jay Clayton, listed as Independent, joined by Republican Commissioners Hester Peirce and Elad Roisman in approving the amended rules. Democratic Commissioners Allison Herren Lee and Caroline Crenshaw, who just joined the Commission in August, voted no.
“Today’s rule amendments will help us get more money into the hands of whistleblowers, and at a faster pace,” Clayton said in a press release on the amendments. “Experience demonstrates this added clarity, efficiency and transparency will further incentivize whistleblowers, enhance the whistleblower award program and benefit investors and our markets.”
The SEC first proposed amendments to the whistleblower program in 2018, then scheduled and canceled meetings in both 2019 and earlier this year to discuss them. It was the agency’s stance on large whistleblower awards that drew the most criticism; the SEC withdrew its proposed changes and said it would continue to evaluate large awards the same way it always has.
On awards larger than $5 million, the SEC’s amended rules continue to give the Commission the discretion to lower or raise awards within 10-30 percent of an enforcement action. The Commission discarded a previously proposed amendment that said evaluating awards worth $100 million or more would start at a floor of $30 million, then move upward based on its evaluation of the value of the information provided by the whistleblower. But apparent in the SEC’s previous comments, including those made by Clayton, was that the Commission will seek to limit large awards.
Commissioner Lee said this manner of evaluating—and potentially reducing—big awards treats some whistleblowers unfairly.
Let’s say, all things being equal, there were two whistleblowers who met all the same criteria, Lee proposed. The information from one whistleblower led to an award of $10 million; the other, $500 million. (The SEC has never issued a whistleblower award for more than $50 million since the whistleblower program launched in 2010).
“Under this new interpretation of our authority, I asked, can the Commission reach a different award percentage between these two cases? Again, not one single fact is different except the dollar size of the potential award. The answer I was given was an unequivocal ‘yes,’” she said in her dissenting statement. She asked this same question to the SEC’s general counsel during Wednesday’s meeting, and he responded with a yes.
Lee said under such an evaluation system there would be no transparency in the SEC’s decision-making process and no accountability. “I cannot support a rule that allows two different outcomes where the only difference is the size of the amount collected,” she said.
Sean McKessy, now a partner at the firm Phillips & Cohen and the founding chief of the SEC’s Office of the Whistleblower under President Barack Obama, called the amendments “a net negative for whistleblowers and the people who represent them.” The agency’s take on reducing large awards gives the SEC a power that’s not in the statute, McKessy said.
“This reinterpretation is contrary to the statute and injects a level of uncertainty in how the awards will be assessed, which will act as a disincentive for some whistleblowers from coming forward. It is also inconsistent with how claims were processed while I was chief of the Office of the Whistleblower,” he said.
Lev Bagramian, senior securities policy advisor at Better Markets, a nonpartisan group that promotes the public interest in the financial markets, said, “Today’s changes send a chilling message to all potential whistleblowers: if you provide original information—often at the risk of your career—your award may be arbitrarily reduced to conform to the ideological whims of the Commission or its staff.”
But not all whistleblower advocates felt the SEC’s amendments were awful.
Stephen Kohn, a whistleblower attorney at Kohn, Kohn & Colapinto and the chairman of the board of directors of the National Whistleblower Center, said the SEC’s previous amendments to the whistleblower program were worse.
“Whistleblowers scored a major victory today when the SEC backed down from two proposals that would have devastated its whistleblower reward program,” he said in a statement. “The Commission did not approve proposals that would have triggered an automatic reduction in the amount of rewards issued in large enforcement actions. However, the dissents of Commissioners Lee and Crenshaw demonstrate that significant issues remain that could impact the program.”
The SEC whistleblower program has awarded approximately $523 million to 97 whistleblowers since it was launched in 2010, resulting in recovery of $1.4 billion in investor funds and the return of nearly $750 million to harmed investors. The business community had encouraged the SEC to revisit some facets of the program, particularly its evaluation of potential large awards. Some SEC members had also worried large awards would drain the independent fund from which whistleblower payouts are drawn.
“The Whistleblower reforms bolster an important avenue to spot and correct mistakes,” said Tom Quaadman, executive vice president of the Center for Capital Markets Competitiveness for the U.S. Chamber of Commerce, in a statement. “The SEC took a number of procedural steps to improve the efficiency of this program and preserve due process.”
Another amendment that was of concern to whistleblower advocates was on the new definition for “independent analysis.” The definition said in order to be considered for an award, the analysis “must provide evaluation, assessment or insight beyond what would be reasonably apparent to the Commission from publicly available information.”
McKessy said, ”This means that the SEC could claim, with the benefit of years of hindsight by the time a claim for award is processed, that the information was ‘reasonably apparent’ and decide on a case-by-case basis what that means. Whistleblowers relying on independent analysis now will face an uphill climb to qualify for an award.”
In her dissent, Commissioner Crenshaw worried that one amendment will make it harder for whistleblowers to qualify for protection against retaliation.
“Today, by limiting the anti-retaliation protections to whistleblowers who submit information in writing, we fail to do all we can to protect those who cooperate with our exams and investigations,” she said. “In other words, if a whistleblower provides information to the Commission through interviews or testimony, that whistleblower does not necessarily get the benefits of the anti-relation provision.”
Some of the less controversial elements of the amendments include granting power to the SEC to stop taking “frivolous” whistleblower complaints after three are filed by the same whistleblower and to create a pathway for whistleblowers whose tip gets acted on by another law enforcement agency to still qualify for an award under the SEC’s whistleblower program.
Also relatively uncontroversial was a rule change that orders the SEC to approve the maximum award amount allowed by law for awards up to $5 million. According to the rules for the whistleblower program set up under the Dodd-Frank Act of 2010, whistleblowers can receive between 10 and 30 percent of enforcement actions over $1 million if they provide relevant and timely information that helps investigators make a case. Clayton said whistleblower awards under $5 million constitute 75 percent of all awards paid since the program was launched.