The Securities and Exchange Commission (SEC) issued a proposed rule Thursday to reduce the size of whistle-blower rewards in cases in which the U.S. recovers $100 million or more.
The Securities and Exchange Commission voted 3-2 Thursday to seek comment on a plan that would let them reduce whistle-blower awards in cases where penalties are $100 million or more. The proposal gives commissioners flexibility to adjust tipsters’ payouts within the legal requirement that they range from 10 percent to 30 percent of total fines in the case they aided. SEC members wouldn’t be allowed to push awards below $30 million and they could boost payments that would be less than $2 million.
“Our whistle-blower program is a critical component in our investor-protection toolbox,” SEC Chairman Jay Clayton said before the vote. “The proposed rules would enhance the commission’s ability to more appropriately and expeditiously reward those who voluntarily provide critical information that leads to successful enforcement actions."
One expert in whistleblowing law, however, said the proposed rule would have the effect of discouraging high-ranking and well-compensated employees at large financial institutions from blowing the whistle.
National Whistleblower Center Executive Director Stephen M. Kohn, who has represented 34 whistle-blowers, said the proposal “kills the goose that lays the golden egg.”
The SEC’s whistle-blower program was established in 2010 to incentivize individuals to report high-quality tips to the SEC and help the agency detect wrongdoing and better protect investors and the marketplace. To date, original information provided by whistle-blowers have triggered SEC enforcement actions that have led to $1.4 billion in financial remedies, including more than $740 million in disgorgement of ill-gotten gains and interest.
The success of the SEC’s whistle-blower program could be undermined, however, if awards are slashed in a way that deters executives with inside information and much on the line from coming forward, said Kohn, an expert in whistle-blower law who participated in the drafting of the Dodd-Frank Act directing the SEC to create the whistle-blower program.
“The risk an employee takes in blowing the whistle and placing their entire career on the line are enormous and the ability to collect a large award is the single most important motivating factor encouraging employees to take this risk. This is especially true with high-level executives who could lose large salaries and face the complete destruction of their careers,” said Kohn.
He also met individually with every SEC commissioner during the SEC’s rulemaking process establishing whistle-blower awards.
The SEC is asking for the ability to reduce awards because 40 percent of funds paid whistle-blowers have been paid out in only three very large awards. In the largest of the tree cases, three whistle-blowers received a record $83 million award for providing information that led to a $415 million Merrill Lynch settlement with the SEC. The former Bank of America executives provided information that showed the bank's Merrill Lynch brokerage misused customers' cash from 2009 to 2012 to finance its own trading and generate profits.