SEC boosts incentives for whistleblowers

By Jim Tyson for CFODive.com

• The Securities and Exchange Commission (SEC) approved amendments to whistleblower rules aimed at expanding incentives in a program that since 2010 has awarded more $1.3 billion to individuals who flagged wrongdoing at publicly traded companies.

• The SEC in a 3-2 vote on Friday established authority to award whistleblowers for actions brought by other agencies such as the Justice Department, while eliminating SEC authority to reduce a potential award when it is considering an increase. The approvals revised rules made under the Trump administration.

• “These rules will strengthen our whistleblower program,” SEC Chair Gary Gensler said in a statement. “That helps protect investors.” The SEC has brought more than $5 billion in sanctions based on information from whistleblowers.

The rule changes drew criticism from two SEC commissioners. The amendments are “solutions in search of a problem,” Hester Peirce said in a statement, adding that they “carry harmful consequences for both the whistleblower program and for the commission’s rulemaking process.”

The changes complicate “the already Byzantine rules governing” the whistleblower program and are just one of several examples where the agency has unnecessarily revised recently adopted mandates, according to Peirce, appointed under the Trump administration.

Commissioner Mark Uyeda, appointed by the Biden administration, echoed Peirce’s concern. “The decision to revisit recently adopted rules risks creating a regulatory seesaw,” Uyeda said in a statement.

“Reversing rules shortly after adoption, in the absence of a regulatory weakness or failure, sets a bad precedent, risks eroding the commission’s regulatory credibility and increases costs for market participants by requiring frequent reevaluations of compliance obligations,” he said.

The agency should consider reviewing the role of lawyers who represent whistleblowers on a contingency fee basis and how they present tips to agency staff, Uyeda said. “The whistleblower program has come under increasing scrutiny from some on the basis that it operates with a lack of transparency.”

The SEC last year received on average 49 whistleblower tips every workday, according to a study by Alexander Platt, an associate professor at the University of Kansas Law School. “Success depends on sifting through this avalanche of tips to determine which ones to investigate.”

Both the SEC and the Commodity Futures Trading Commission “have effectively privatized the tip-sifting” by relying on private attorneys who have extracted hundreds of millions in fees and expenses while remaining almost completely free of public accountability, Platt said in “The Whistleblower Industrial Complex.”

The most successful attorneys are former SEC employees, Platt said, noting “significant efficiency and accountability deficits imposed by this oversight-free private outsourcing program.”

In recent years, the awards and number of whistleblowers has soared. The SEC awarded a total of $564 million to 108 individuals last year compared with $60 million to eight individuals in 2019.

The SEC in its revised rule says the whistleblower program plays an important part in protecting investors.

“Over the past 10 years, the whistleblower program has been an important component of the commission’s efforts to detect wrongdoing and protect investors in the marketplace, particularly where fraud is difficult to uncover,” the agency said.