Editors

Harry Cassin
Publisher and Editor

Andy Spalding
Senior Editor

Jessica Tillipman
Senior Editor

Richard L. Cassin
Editor at Large

Elizabeth K. Spahn
Editor Emeritus

Cody Worthington
Contributing Editor

Julie DiMauro
Contributing Editor

Thomas Fox
Contributing Editor

Marc Alain Bohn
Contributing Editor

Bill Waite
Contributing Editor

Shruti J. Shah
Contributing Editor

Russell A. Stamets
Contributing Editor

Richard Bistrong
Contributing Editor

Eric Carlson
Contributing Editor

Bill Steinman
Contributing Editor

Tillipman and Brownlow: Is the SEC about to weaken the whistleblower program?

On June 28, the U.S. Securities and Exchange Commission proposed amendments to its whistleblower award program and requested comments from the public.

Many of the proposed amendments to the SEC’s whistleblower rules serve to clarify and address issues identified over the past seven years of administration of the program. We are pleased with some of these proposals, which include:

  • Allowing awards based on deferred prosecution agreements and non-prosecution agreements or settlements
  • Providing the SEC with the discretion to make upward adjustments to small awards up to $2 million (subject to the 30% statutory maximum)
  • Elimination of a potential double recovery for whistleblowers where there is a separate whistleblower award scheme that more appropriately applies to the enforcement action
  • Prohibiting individuals from submitting award claims if they have submitted information that is false or repeatedly make frivolous claims, and
  • Creating a summary disposition process for claims that will likely be denied (i.e., claims with procedural defects).
The most controversial aspect of the SEC’s proposed amendments would give the commission the discretion to reduce awards in large cases — involving penalties of $100 million or more — to a level “that is reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers.” This discretion would be limited by the statutory minimum (10 percent) and “in no event would the award be adjusted below $30 million.”

The SEC argues this proposal is necessary to act as a responsible steward of the public trust while still providing incentives for whistleblowers to report. In support of this proposed amendment, the Commission claims that the Investor Protection Fund is substantially diminished by large whistleblower awards and the U.S. Treasury could instead use those funds for other public purposes.   

Commissioner Robert J. Jackson dissented during the open meeting where the amendments were publicly proposed, stating that the SEC’s proposal risked harm to investors by adding “uncertainty and politics” into an existing, successful program. He pointed out that less than one percent of whistleblower tips lead to an award, and whistleblowers take extreme personal risks to protect markets and investors.

Despite the existence of SEC whistleblower protection that aims to prevent and punish retaliation against whistleblowers, an employee who reports illegal activity by the employer often faces serious reprisals.

When Linda Almonte, the former JPMorgan Chase Bank assistant vice president alerted the SEC about gross negligence and fraud, she was fired, evicted from her home, and was unable to find another job even five years later. According to The National Whistleblower Legal Defense & Education Fund, the more senior the whistleblower is in the company, the more swift and brutal the retaliation is in an attempt to discourage others.
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Proponents of this amendment have argued that this amendment will help to rein-in plaintiff-side whistleblower attorneys, who have targeted the SEC whistleblower program in order to take advantage of potentially large recoveries. Although we see a benefit to reducing the risk of exploitation of this program, the SEC’s other proposed amendments — including the bar on individuals who submit false or frivolous claims — may adequately address this problem without resorting to actions that could harm or deter current or prospective whistleblowers.

The SECs whistleblower program has been an extremely successful enforcement tool. Among other benefits, it has led to over $266 million in awards to whistleblowers, $1.4 billion in financial remedies stemming from successful enforcement actions, and $740 million in disgorgement of ill-gotten gains since the program’s inception. Yet despite the program’s success, the SEC provided no data or assessment of how reducing awards may affect whistleblower reporting or incentives.

At this time, the future of the proposal is uncertain. The public comment period closes on September 18, after which the SEC will review comments and take further action on the proposal.

We encourage the SEC to reconsider this amendment. Whistleblowers are critical to the SEC’s mission of protecting investors and market integrity. They risk their careers, livelihoods, and reputation when they come forward. A robust whistleblower reward program encourages individuals to report wrongdoing to the SEC despite the serious risks and personal losses they face.

Reducing awards based on a rather nebulous standard is concerning. As former head of the SEC Whistleblower Program, Sean McKessey, noted: “How do you measure someone risking their career?”

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Jessica Tillipman, pictured above left, is a Senior Editor of the FCPA Blog and Assistant Dean at The George Washington University Law School. You can follow her on Twitter at @jtillipman

Paige Brownlow, above right, is a 2L at The George Washington University Law School. She’s the president of the law school’s Anti-Corruption & Compliance Association (ACCA).

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