The compliance community has less than two weeks left to submit comments on the Securities and Exchange Commission’s proposed revamp of its whistleblower awards program. So far, most of the comments received are not flattering.

The SEC voted 3-2 along party lines in June to issue the proposed tweaks to the whistleblower program, which has awarded $266 million since 2011. The ideas include giving the SEC more discretion to increase the size of small awards (those under $2 million); and more controversially, to cap award amounts in the $100 million-plus cases at 10 percent, rather than the current 10 to 30 percent range.

That idea has been panned by pretty much everyone submitting comments so far. D.C. law firm Kohn, Kohn & Colapinto, which represents whistleblowers, called the proposed cap “a drastic step in the wrong direction.” The lawyers said a cap would discourage would-be whistleblowers to submit tips on major corporate fraud if the biggest potential awards are fixed at a much lower level. Doing so would “send the wrong message” to fraudsters and whistleblowers.

They also said (and this is a good point) altering the terms after whistleblowers have come forward in good faith would violate due process for pending cases.

whistleblower reportingMany argued that a 10 percent cap would make awards determinations too subjective and uncertain for whistleblowers. Others weren’t so measured in their words. One tartly called the proposal “184 pages of fan fiction.” Another said something in the proposal “stinks,” and questioned who would benefit. And one coordinated letter-writing campaign has resulted in more than 1,300 comments, all essentially the same form letter, calling for the cap to be withdrawn.

Kohn, Kohn & Colapinto also said that with only two awards above the $100 million threshold, large whistleblower paydays aren’t a pressing problem. The bigger issue, they said, is the long wait time (more than four years in some cases) for whistleblowers to learn whether they qualify for an award. The SEC’s slow pace, backlog, and lack of deadlines are what really needs fixing.

Beyond Whistleblower Caps

The proposal to extend the whistleblower program to cases resulting in deferred- or non-prosecution agreements was better received. Former compliance officer and whistleblower Peter Sivere praised it, citing situations where a whistleblower submitted tips to the SEC that ended up being prosecuted by the Justice Department, leaving the whistleblower with no monetary award. (Sivere was one of several who submitted multiple comments to the commission, variations of the same topic.)

Also stirring protest are reforms for what qualifies as “independent” analysis that makes an outsider (say, a freelance industry analysis) eligible for a whistleblower award.

Currently, whistleblowers without inside information can qualify for an award if the analysis of data opens up a new line of inquiry or significantly advances an existing investigation. The proposal would change that standard; a submission would have to provide evaluation or insight beyond what would be “reasonably apparent” to the SEC from publicly available information.

Many said that language was too ambiguous; a whistleblower analysis of publicly available information could come years before an SEC analysis of the same information. Case in point: the Bernie Madoff ponzi scheme, which Harry Markopolos uncovered and reported based on publicly available information. The SEC bungled and ignored those alarms for years.

Others said the SEC could use that “beyond scary” definition of independent analysis to deny almost any claim brought by an outsider, and amounted to grand larceny of whistleblower payouts. As Dom Laviola with StockShortData.com eloquently put it: “WTF is wrong with you people?”

The public comment period is open through Sept. 18. You can submit comments to the SEC via its website.

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