On the same day the SEC announced its largest whistleblower award ever—$50 million to a former BNY Mellon trader who reported the bank’s pattern of overcharging big clients on currency trades—an advocacy group accused the agency of working to weaken the program’s efficacy.

Better Markets, a bipartisan nonprofit made up of money managers and former congressional staffers, warned in a new white paper that changes sought by SEC Chairman Jay Clayton were “dangerous and legally baseless” and risk discouraging whistle-blowers from reporting illegalities to the SEC.

The SEC has received a record-breaking 4,000 tips, complaints and referrals from mid-March to mid-May—a 35% increase from the same period last year.

John Berry, a partner at Munger, Tolles & Olson LLP, and former SEC enforcement attorney in the agency’s Los Angeles office, told Financial Advisor magazine that “even if the pace dies down a bit, the number of tips for [fiscal yaer] 2020 will be huge for the SEC.”

Better Markets contends in the white paper, “The SEC's Whistleblower Program: A $2B Success Story Under Threat,” that the changes Clayton seeks would expose investors to needless harm, discourage whistle-blowers and increase the chances that fraud would go unreported and undetected, leaving fraudsters on the loose to continue their scams.

The SEC “should act with maximum caution and humility in attempting to tamper with a wildly successful program that has helped millions of investors and punished lots of fraudsters,” Better Markets said in the white paper. The report is available here: https://bettermarkets.com/sites/default/files/Better_Markets_White_Paper_SEC%27s_Whistlebower_Program_06-04-2020-Upload.pdf

The group zeroed in on two proposed SEC changes it said would be counterproductive to the success of the whistleblower program:

1. A proposed cap of 10% of the collected sanctions for whistleblowers who are first to come to the commission with evidence of significant wrongdoing. Currently, whistleblowers can receive up to 30% of money collected when scofflaws are assessed with penalties exceeding $1 million.

2. No public sources. The proposal includes “interpretive guidance” that allows SEC staff to disqualify a whistleblower report if their information could have been inferred from public sources.

“In other words, when a whistle-lower provides original information to the commission that may contain a news article or other publicly available information, the commission could argue that this whistleblower’s information is unoriginal since bits and pieces of it are based on publicly available information which the commission—in due time—would have gleaned and acted upon,” the white paper said. “The proposals would make the Whistleblower Program user-unfriendly and contrary to Congress’s intent.”

During the past 10 years since the program’s inception, the SEC awarded more than $500 million to 83 individual whistleblowers, while recouping more than $2 billion—including more than $1 billion in disgorgement of ill-gotten gains and interest—from fraudsters and others who violated the SEC’s rules. Of this amount of recovered monies, the SEC has returned or is scheduled to return almost $500 million to harmed investors.

“Remarkably, the commission has awarded more to meritorious whistleblowers in the last six months than it did in the entire 2019 fiscal year: more than $64 million compared to $60 million, which, again, reflects the quality and value of the information provided by the whistle-blowers,” Better Markets said.

Berry, the former SEC attorney, also noted that “this is the first time the program is confronted with the fallout from a recession, and so it’s not surprising that the number of tips is increasing more than any other year since the program started. And it’s not just the recession. Added to that is the impact of the pandemic—millions of people without work or working at home away from their colleagues. All of that can lead to a very large increase in whistle-blower tips this year,” Berry said.