How should SEC whistleblower awards be calculated? In a working paper, I address this timely question.
SEC whistleblowers are statutorily entitled to between 10 and 30 percent of the money collected by the SEC in an enforcement action that the whistleblower’s tip helped lead to, if the monetary sanctions imposed exceed $1 million and certain other eligibility requirements are met.
Current SEC rules require the agency to consider certain plus/minus factors to determine the percentage of collections to award within the statutory 10-30 percent range, but the SEC cannot consider the dollar amount the percentage arrived at would actually yield.
For example, if 15 percent of collections seems appropriate in light of the plus/minus factors, the SEC is required to award 15 percent regardless of whether the monetary collections will total just $1 million (yielding an award of only $150,000) or, conversely, reach $1 billion (yielding an award of $150,000,000).
Recently proposed amendments would operate to free the SEC to take account of the dollar size of the award in order to make upward adjustments to very small awards (up to $2 million) and downward adjustments to very large awards (down to $30 million), within the statutory parameters. These proposed changes have provoked controversy. Commissioner Jackson and former Commissioner Stein objected, arguing that the SEC should not be given the authority to adjust downward large dollar awards.
To begin to evaluate the wisdom of these proposed changes requires an understanding of the purpose of whistleblower awards and an evaluation of how well the existing award calculation methodology advances that purpose. In my paper, I provide both.
My analysis suggests that the controversial proposed amendments are warranted, but incomplete. For reasons that I explain, a hybrid percentage-dollar approach that ties a whistleblower award to the value of the punishment imposed on the wrongdoer, while also taking into account the costs a whistleblower anticipated incurring by coming forward, makes sound policy sense.
The proposed amendments move precisely in this direction and thus merit adoption. But my analysis also suggests two other important reforms that are worthy of consideration.
First, the SEC’s whistleblower program would better align whistleblowers’ incentives to tip with the SEC’s deterrence mission if awards were tethered to the value of all penalties imposed in the covered action rather than simply to monetary penalties collected. Second, the SEC should be required to be more transparent about the percentages it is awarding and why.
The SEC almost never makes the percentage it has determined to award public. This opacity is unnecessary and likely increases the risk discount that potential whistleblowers apply to expected awards when deciding whether the benefits of tipping outweigh the costs.
A full copy of my paper can be downloaded here.
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Amanda M. Rose, pictured above, is a Professor of Law at Vanderbilt University Law School and a Professor of Management at Vanderbilt University’s Owen Graduate School of Management. She can be contacted here.
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