At long last, the SEC seems ready to vote on reforms to its whistleblower awards program, a contentious proposal that would cap the size of large awards while giving the SEC more discretion to hand out smaller awards.
The commission has scheduled an open meeting for next Wednesday, Oct. 23, to review and presumably adopt the amendments. UPDATE: The SEC canceled that meeting on Monday, Oct. 21. It is expected to be rescheduled for November.
We don’t know what the final proposed reforms will look like, but the original proposal in June 2018 had the following key points:
- Setting a $30 million ceiling on large whistleblower awards;
- Expanding the SEC’s discretion to increase the size of smaller awards, bringing the amount to $2 million;
- Allowing outsiders to bring tips based on publicly available information, but raising the standard of “independent analysis” that would let those tipsters deserve an award;
- Clarifying that whistleblowers must provide their tips “in writing” — although that really means submitting information through the SEC’s tip website — to be eligible for awards and anti-retaliation provisions;
- Establishing new procedures to accelerate the dismissal of claims that seem destined for dismissal anyway (frivolous or untimely claims; tips based on public information that the SEC would never use anyway, and so forth).
Those proposals went out for public comment 16 months ago, and the comments haven’t stopped since. The cap on large awards prompted the most complaints, with whistleblower advocates and lawyers warning that such a cap will cool corporate executives’ willingness to report truly large scams that might risk their future careers.
One telling comment came last fall from Sen. Chuck Grassley, R-Iowa and chairman of the Senate Finance Committee. Grassley has been an outspoken defender of whistleblowers. In a comment to the SEC he submitted last year, Grassley minced no words: “In establishing the whistleblower award program, Congress was not concerned about a reward figure being ‘too big’.”
Well, the SEC exists to implement laws as passed by Congress. So when one of the most important voices in the Senate warns that a cap on large awards isn’t what Congress had in mind, that’s saying something.
Moreover, when SEC chairman Jay Clayton first proposed the cap on large awards last year, then-commissioner Kara Stein, a Democrat, questioned whether the agency had statutory authority to impose a cap, when the Dodd-Frank Act (which established the SEC whistleblower rewards program) said nothing about that idea.
So my guess: when Clayton rams through his whistleblower reforms anyway — because that’s what he’s going to do, on a 3-2 partisan vote — any cap on large awards will be challenged in federal court. Expect those litigants to say that the SEC didn’t demonstrate sufficient rationale for why capping large awards helps whistleblowers, or something like that.
Or, if Clayton is wise, he’ll broker a compromise where a cap isn’t etched into regulatory stone, but the commission will have more discretion to lower gigantic awards like we see from time to time.
On the rest of the proposals — well, anything that encourages whistleblowers to report misconduct is a good thing. So the idea of more discretion to offer relatively large awards for smaller frauds is good. Streamlining the review of tips for faster dismissal of invalid reports is also good, since it will let would-be whistleblowers know more quickly that they might not be eligible for Dodd-Frank whistleblower protections.
Anyway, the vote is next week. Let’s see what happens.