Clayton Hints on Whistleblower Program

The Securities and Exchange Commission seems to be introducing new wiggle room in the proposed overhaul of its whistleblower awards program, with chairman Jay Clayton publishing a statement supposedly mistaken perceptions of the proposal have had “a salutary effect” on the agency’s thinking.

The statement is a bit weird, so let’s take it from the top.

First, the SEC Office of the Whistleblower published its 2019 annual report on Friday, as it does every year right around now. The short version of that report: more than 5,200 tips received by the SEC last year (second-busiest year since the whistleblower program was created in 2011); plus $60 million in actual awards handed out to eight persons. 

More interesting was that Clayton published an accompanying statement about the Office of the Whistleblower report — and devoted almost all of his statement to reforms that the SEC staff developed last year under Clayton’s direction. 

Most of those proposed reforms are sensible adjustments, except one: a measure that would let SEC commissioners essentially cap large awards at $30 million. 

That specific idea prompted lots of pushback from the whistleblower lobby. They say it would drive more whistleblowers to stay quiet, especially senior executives who would typically know about large corporate frauds. Those are the people most likely to risk their careers for blowing the whistle, and they’d want a suitable (read: huge) whistleblower award for taking that risk. 

Moreover, Democratic SEC commissioners have also pointed out that capping large awards might not be permitted under the language of the Dodd-Frank Act, and that the SEC’s cost-benefit analysis didn’t demonstrate how capping awards would actually help anyone. Statements like that were seen as a thinly veiled, “Someone please sue us if the Republican majority rams this idea through on a 3-2 vote.”

Anyway, back to Clayton and his statement today. He said this: 

One aspect of that proposal has received significant attention: a proposed framework to guide the exercise of discretion by the Commission in the case of awards over $30 million. This proposal was mischaracterized by some as a “cap.”  The proposed provision was not a “cap,” it could not and was not intended to operate as a “cap,” and I do not support a cap. 

OK, member of the Trump Administration complaining about media coverage. Nothing new so far. Then Clayton said… 

This mischaracterization did have a salutary effect. The whistleblower bar, members of Congress and other commentators brought to my attention the fact that the mischaracterization raised uncertainty about the agency’s commitment to the program. They explained that uncertainty, including even uncertainty regarding the award process for very large awards, could deter potential whistleblowers from coming forward.

Whatever you need to tell yourself, Mr. Chairman. But this statement clearly suggests that Clayton knows any attempt to cap exercise discretion over large awards is problematic, and he needs an out. 

What will that out actually look like? We don’t know yet. It is worth noting that the SEC originally planned to review and adopt final rules at an open meeting scheduled for Oct. 23 — but then canceled that meeting on short notice. 

At the time, the SEC said the meeting would be rescheduled for sometime in November, but nothing has been posted yet, and November is half over, with Thanksgiving still to come. 

My guess is that the whistleblower bar told Clayton that if the commission forced through its proposed cap, that would be challenged in court. So rather than pick a fight over that one issue, Clayton stalled for time while he looks for some compromise. 

And we should remember, most of these proposed reforms are good ideas. More discretion to give out smaller awards, for smaller frauds and settlements? Awesome, because that encourages more whistleblowers. Having people submit tips via online form, so the SEC can expedite review and tell frivolous whistleblowers they have no claim? Great, because people who stand no chance of an award should know that as soon as possible. Clayton should be praised for that part of the plan.

The problem has always been about this cap on large awards, regardless of what we call it. Clayton seems to be trying to make that problem go away.