Some lucky corporate whistleblower received $4 million from the Securities and Exchange Commission today, the first whistleblower award issued under the Trump Administration—with an added layer of mystery about whether the award was based on a sanction imposed by a non-financial regulator.
As usual, we don’t know much about the case. According to the SEC’s announcement, the whistleblower approached the agency “with detailed and specific information about serious misconduct,” and then “provided additional assistance during the ensuing investigation, including industry-specific knowledge and expertise.”
What does that mean? Unclear. One could speculate that if the SEC needed industry-specific knowledge, that might mean the industry isn’t broker-dealer or financial services, since the SEC has plenty of in-house expertise for those fields.
We do get a hint in the footnote to the SEC’s order determining the $4 million amount. The award was derived from a sanction imposed, at least in part, by some governmental body other than the usual financial regulators.
Bear with me as we walk through SEC rules.
SEC whistleblower awards are typically 10 to 30 percent of the total sanction imposed on the company in question. To protect the whistleblower, the SEC doesn’t identify what that exact sanction amount is. (If we do the math, this award of $4 million implies a total sanction against the company of $13 million to $40 million.)
In this case, the footnote said the $4 million was calculated from a sanction paid to “another governmental authority.”
Rule 21F-3(b)(1) of the Exchange Act does allow the SEC to do that. It also identifies several types of authorities that qualify under the rule: the Justice Department; other financial regulators; self-regulatory organizations, such as the New York Stock Exchange; or state attorneys general.
In this instance, however, the other governmental authority “is not one of the specifically enumerated authorities listed.” Well, if this mystery authority isn’t the Justice Department, a financial regulator, an SRO of some kind, or a state attorney general—then who are they?
As usual in the maddening world of SEC whistleblower rewards, we don’t know. If it’s an industry regulator like the Food & Drug Administration or the Nuclear Regulatory Commission (I picked them at random), that could explain why the SEC needed the whislteblower’s “industry-specific knowledge expertise.” I suppose the authority could even be a foreign government—although, again, that’s just speculation. And how much of the award was based on this mystery regulator, rather than penalties the company might have paid to the SEC or a more traditional Dodd-Frank regulatory agency? Again, we don’t know.
The SEC has claimed the power to calculate awards based on sanction from “other governmental authorities” before. It first did so in 2014, with an $875,000 award split between two whistleblowers. We don’t know the identity of the other governmental authority in that case, either. Nothing in Rule 21F, which governs how whistleblower awards are doled out, says the SEC can’t interpret the language of the rule expansively.
That last bit, in fact, might be the most telling detail of all. We now have a significant whistleblower award under President Trump, a man with fierce anti-regulatory views. (Yes, one award for $7 million was issued on Jan. 23, the first full working day of the Trump Administration. I don’t count that one.) This award also came under the watch of Acting Chairman Michael Piwowar, a Republican who typically prefers strict interpretation of the rules.
Cynics would expect whistleblower awards like this no longer to happen, and perhaps in the future they won’t—but one happened today. Which is a fact you can take to your CEO or audit committee the next time they start wondering whether you still need rigorous corporate compliance programs. Yes, you do.