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Proposed SEC whistleblower rules might harm program

The SEC will vote on rules that may harm its whistleblower program. Photo by arsheffield via Flickr, (CC BY-NC 2.0).

The US Securities and Exchange Commission is considering new whistleblower program rules, which include a defacto cap on whistleblower rewards that would discourage highly placed insiders from blowing the whistle on large-scale fraud.

In another possible blow to the SEC whistleblower program, the SEC is considering redefining “independent analysis” so that it could reject a whistleblower claim for an award if it determined that evaluation, assessment or insight provided by the independent analysis does not go beyond what would be “reasonably apparent” to the SEC from publicly available information.

Whistleblowers in the early stages of stepping forward have been voicing concerns about possible rule changes, says Phillips & Cohen partner Erika Kelton.

Both Kelton and Phillips & Cohen partner Sean McKessy have spoken out against the defacto cap and the change in the independent analysis guidance, arguing that they will harm whistleblowers and the mission and efficacy of the SEC’s whistleblower program. McKessy has met with SEC Chairman Jay Clayton to share the concerns of whistleblowers and their counsel about the possible impacts of the rule changes.

The SEC is scheduled to vote Sept. 23 on the proposed rules, which were announced in 2018. Two previously scheduled votes were postponed.


Proposed SEC whistleblower rules

The cap on big rewards and the SEC’s increased discretion to dismiss whistleblower reward claims based on independent analyses are the most concerning proposals in the series of changes.

Whistleblowers who provide information and assistance to the SEC in cases where more than $100 million in monetary sanctions are collected would not be able to get an award that exceeds the statutory minimum of 10% of the amount collected or $30 million, whichever is greater.

This means that whistleblowers responsible for the SEC’s largest enforcement actions could see their rewards slashed. This would greatly reduce the incentive of top-level insiders to blow the whistle on the largest cases of financial misconduct. Whistleblowers take considerable, often life-altering risks when reporting securities fraud. The rewards need to balance out those professional and personal risks.

The proposed change in the definition of “independent analysis” – which the SEC currently defines as the “examination and evaluation of information that may be publicly available, but which reveals information that is not generally known or available to the public” – also is concerning.

The SEC would have the leeway to stiff whistleblowers who expose fraud via their own independent analyses by retroactively claiming that the alleged fraud was already apparent, and therefore the whistleblower does not merit a reward.

Harry Markopolos, the forensic accountant who uncovered Bernie Madoff’s historic Ponzi scheme through thorough research, is a prime example of the potential value of independent analysis in rooting out obscured financial fraud. His information, which the SEC ignored, was part of the reason Congress created the SEC whistleblower program.

There are other proposed changes that would improve the SEC whistleblower program.

One proposal would increase the awards of whistleblowers who otherwise would be awarded $2 million or less. The SEC would have the authority to adjust the award percentage up to the statutory maximum of 30%. This would help incentivize future whistleblowers who might otherwise be concerned about the low dollar amount of a potential award, says the SEC.

In addition, the SEC is seeking the authority to dismiss meritless applications for whistleblower rewards more quickly and summarily reject obviously inadequate whistleblower submissions that contain no information of value.

However, individuals who have no knowledge of fraud and no basis for receiving rewards often flood the SEC with applications. This adds to the considerable backlog of whistleblower cases and reward applications as the SEC must conduct an extensive evaluation and review of every application.

The SEC already has banned serial filers who send unwarranted reward applications from the program to reduce future frivolous claims.

Kelton has won four SEC rewards for her whistleblower clients, including the largest SEC award ever granted to an international whistleblower – over $32 million. McKessy was the founding Chief of the SEC’s Office of the Whistleblower and played a key role in setting up that office and its processes and rules for evaluating whistleblower submissions and reward applications.



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