SEC Adopts New Rules Making Whistleblower Program More Transparent

The SEC adopted new rules today, and I guess the real headline is it could be a lot worse, at least as far as anyone can tell.

The SEC put off voting on new rules twice and for some reason decided today was the day to enact amendments to their Whistleblower reward rules.

The Commission claims these new rules will make the award program more efficient and transparent. One of the distinguished whistleblower lawyers on a list serve was a little offended by that idea. He has a point. Whatever else these rules do and whatever else the presentation of them did today, it had little to do with making anything more “transparent.” Indeed, you need a law degree and time to decipher them and see how they are applied. In fact, they assert broad discretion to lower the biggest awards and there is little transparency about it. The rules however, do not appear to allow for an award outside the statutory minimum of 10% and the SEC has a pretty good track record so far in its awards. There is no reason to panic on the basis of what was decided today.

The big scare was that the SEC would completely knock down the biggest awards and while they seem to be reserving the right to lower such awards, there is no hard cap on awards.  Anything that makes for more complicated discussions of what whistleblowers may get complicates these issues and therefore as far as I am concerned undercuts the idea of creating strong, powerful ad clear incentives. People who know about big securities fraud likely already have a few bucks so they would like some idea of a percentage. Right now that’s hard to provide except that the minimum is 10% and the maximum is 30% and we likely will be squabbling.  All that effort to fight about rewards is also counterproductive.

I think we can take as a positive development that the rules provide a so-called presumption on the smaller awards, the awards up to $5million dollars account for the majority of all SEC awards.

That “presumption” would provide the whistleblower the maximum under the statute of 30% until the amount reaches $5 Million. It’s a presumption, which is no guarantee, but it does mean that if they can find a way to give an award of $5 Million the SEC likely will. It also inherently means that for anyone to receive more than $5 Million will be difficult and likely require a very large collection indeed.

I take issue with the definition of “monetary sanctions” under the new rules. The reason? The SEC now makes explicit it will deduct the expenses of obtaining money for investors through the use of court-ordered receivers from the total amount of such sanctions.

The SEC wants people to blow the whistle, then they want whistleblowers to cooperate with all activities including what amount to collect, not whistleblower actions. They offload the expense of collections to a court-appointed receiver, who can charge investors, in a manner that no whistleblower has any discretion to either oppose or volunteer to perform. Then that money is deducted from the “monetary sanctions” collected and the amount the SEC pays from the money allocated by Congress to reward whistleblowers. The SEC thereby saves money both ways.  They don’t have to go after the money themselves and they don’t have to pay the whistleblower as much when they don’t. Receivers get paid their full rate, and they earn it, but they would not be there and there would be no collection to help investors without the whistleblower whose award is reduced by this process.

On the other hand, before we get too upset. Ten percent of a billion-dollar securities fraud is still at least theoretically possible to collect under this program. For now we’ll have to settle for that possibility and for trying to get as many of our clients that nice $5 Million award for blowing the whistle as we can.