Earlier this summer, the Securities and Exchange Commission issued a proposal that would give it greater discretion when making awards to people who blow the whistle on securities violations under the Dodd-Frank Act. Allowing it to offer larger awards in small cases would foster compliance in the industry, the agency says. It would pay for the increases by cutting into the very large awards paid out in a handful of cases each year.
Overall, the SEC’s whistleblower program has been highly successful. Between 2011, when it was first implemented, and the end of fiscal year 2017, the agency received 22,000 tips that led to enforcement actions. The total recovery in those cases was $1.4 billion.
From those recoveries, the SEC paid 55 whistleblowers a total of $266 million after their cooperation resulted in successful enforcement actions. However, about $112 million of that was paid out to just four people for their cooperation in three cases.
The SEC argues that it could achieve better results if it could increase the payouts in smaller cases because these tend to be cases that are reported earlier, before the violations become major. Incentivizing earlier reporting of violations is good public policy.
Under the proposed rule change, the commission could increase awards in smaller cases up to a cap of $2 million, still subject to a 30-percent statutory maximum. Historically, over 60 percent of SEC whistleblower awards have been lower than $2 million.
To pay for those increases, the SEC would also be given discretion to lower the amount of some if its largest awards. In actions that could yield a total recovery of $100 million or more, the proposal would give the commission the authority to adjust the whistleblower’s award downward to a floor of $30 million, still subject to the 10 percent statutory minimum on such awards.
Presumably, the incentive for individuals to bring forward large cases would still be quite strong when they could expect a minimum of $30 million as a reward.
The proposal would also make the SEC’s definition of “whistleblower” consistent with the Supreme Court’s definition in Digital Realty Trust v. Somers earlier this year.
Before you make the decision to blow the whistle, you should know that the 2010 Dodd-Frank Act makes it illegal for your employer to retaliate against you if you report certain securities violations to the SEC. That said, as we discussed in February, the Supreme Court ruled in Digital Realty Trust v. Somers that the same protection may not be available to whistleblowers who make only internal reports to their employers. Therefore, it is crucial for potential whistleblowers to discuss their plans with an attorney to ensure their rights are protected.