SEC Seeks to Reform Its Whistleblower Process

As more fully set forth in the April 9th BrokeAndBroker article, in November 2014, I filed a complaint with the SEC's Officer of Inspector General ("OIG") and requested an investigation of what I deemed OWB's dilatory conduct. In submitting my complaint, I was required to participate in a substantial telephone interview by the third-party service provider that the SEC retains for such purposes. During that interview, I provided the sum and substance of my complaint. I then awaited some meaningful follow-up. And I waited. And I still wait.

In my futile attempts to communicate with OIG, I have referenced the April 9th BrokeAndBroker.com Blog article, which details my exasperation with both OWB and OIG. In response, OIG referred me back to OWB!  Additionally, OIG persists in asking me to provide information that I had previously submitted -- but OIG will not acknowledge that it has either misplaced or lost that information and I will not cooperate further without such an admission or explanation to the contrary. Ten months have passed since the filing of my complaint with OIG and there has be no effort to contact me to discuss my concerns.

Keep in mind that my client was finally awarded about $1.6 million after the publication of the April 9th BrokeAndBroker.com Blog.  It's one thing to write me off as disgruntled because my client's claim was denied but it's quite another thing when you're trying to marginalize the grievances of someone who provided substantial assistance to the SEC and eventually gained a sizable award. The system is broken and needs to be fixed.

Although the SEC and OIG would likely prefer to dismiss my complaints as the cranky musings of a crackpot and gadfly, it turns out that about a month after the BrokeAndBroker.com Blog article, the Wall Street Journal published two articles about the same issues:

"SEC Backlog Delays Whistleblower Awards / Claimants are often kept waiting for a decision, data show" (Wall Street Journal, Reporters Rachel Louise Ensign and Jean Eaglesham, May 4, 2015).

"Whistleblowers Find SEC Rewards Slow and Scarce / The Securities and Exchange Commission offers financial rewards for information on wrongdoing. But many tipsters have found it tough to collect" (Wall Street Journal, Reporters Rachel Louise Ensign and Jean Eaglesham, May 25, 2015).

The Securities and Exchange Commission today voted to propose amendments to the rules governing its whistleblower program.  The whistleblower program was established in 2010 to incentivize individuals to report high-quality tips to the Commission and help the agency detect wrongdoing and better protect investors and the marketplace.

The Commission's whistleblower program has made significant contributions to the effectiveness of the agency's enforcement of the federal securities laws.  Original information provided by whistleblowers has led to enforcement actions in which the Commission has ordered over $1.4 billion in financial remedies, including more than $740 million in disgorgement of ill-gotten gains and interest, the majority of which has been, or is scheduled to be, returned to harmed investors.

After nearly seven years of experience administering the whistleblower program, the SEC has identified various ways in which the program might benefit from additional rulemaking.  The proposed rules would, among other things, provide the Commission with additional tools in making whistleblower awards to ensure that meritorious whistleblowers are appropriately rewarded for their efforts, increase efficiencies in the whistleblower claims review process, and clarify the requirements for anti-retaliation protection under the whistleblower statute.   

"Whistleblowers have made significant contributions to the SEC's enforcement efforts, and the value of our whistleblower program is clear," said SEC Chairman Jay Clayton.  "The proposed rules are intended to help strengthen the whistleblower program by bolstering the Commission's ability to more appropriately and expeditiously reward those who provide critical information that leads to successful enforcement actions.  I look forward to public feedback and encourage everyone with an interest to give us their ideas on the proposed rules."

The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register.

FACT SHEET

SEC Open Meeting

June 28, 2018

Background

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 21F to the Securities Exchange Act of 1934 (the "Exchange Act"), establishing the Commission's whistleblower program.  Among other things, Section 21F authorizes the SEC to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions over $1 million and successful related actions.  Awards must be made in an amount equal to 10 to 30 percent of the monetary sanctions collected.  Congress established a separate fund at the Treasury Department, called the Investor Protection Fund (IPF), from which whistleblower awards are paid.  Since the program's inception, the Commission has ordered over $266 million in 50 awards to 55 whistleblowers, including individuals filing jointly, whose information and cooperation assisted the Commission in bringing successful enforcement actions.

The proposed whistleblower rule amendments would make certain modifications and clarifications to the existing rules, as well as several technical amendments.

Highlights

Additional Tools in Award Determinations

Allowing awards based on deferred prosecution agreements ("DPAs") and non-prosecution agreements ("NPAs") entered into by the U.S. Department of Justice ("DOJ") or a state attorney general in a criminal case, or a settlement agreement entered into by the Commission outside of the context of a judicial or administrative proceeding to address violations of the securities laws:  This proposed amendment will ensure that whistleblowers are not disadvantaged because of the particular form of an action that the Commission, DOJ, or a state attorney general acting in a criminal case may elect to pursue.  Currently, the Commission's whistleblower rules do not address whether the Commission may pay a related-action award when an eligible whistleblower voluntarily provides original information that leads to a DPA or NPA entered into by DOJ or a state attorney general in a criminal proceeding.  Under the proposed amendment, the Commission would be able to make award payments to whistleblowers based on money collected as a result of such DPAs and NPAs, as well as under settlement agreements entered into by the Commission outside of the context of a judicial or administrative proceeding to address violations of the securities laws.

 

Additional considerations for small and exceedingly large awards: 

 

Historically, over 60% of the awards given out in our whistleblower program have been less than $2 million.  In the context of potential awards that could yield a payout of less than $2 million to a whistleblower, the proposed rules would authorize the Commission in its discretion to adjust the award percentage upward under certain circumstances (subject to the 30% statutory maximum) to an amount up to $2 million.   In exercising its discretion to increase an award under this provision, the Commission would consider whether the increase helps to better achieve the program's objectives of rewarding meritorious whistleblowers and sufficiently incentivizing future whistleblowers who might otherwise be concerned about the low dollar amount of a potential award. 

 

The proposing release also includes a general inquiry for public comment regarding whether the Commission could establish a potential discretionary award mechanism for Commission enforcement actions that do not qualify as covered actions (because they do not meet the more than $1 million threshold requirement), are based on publicly available information, or where the monetary sanctions collected are de minimis.

 

Forty percent of the aggregate funds paid by the Commission to whistleblowers have been paid out in only three awards.[1]  In the context of potential awards that could yield total collected monetary sanctions of at least $100 million, the proposed rules would authorize the Commission in its discretion to adjust the award percentage so that it would yield a payout (subject to the 10% statutory minimum) that does not exceed an amount that is reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers.  However, in no event would the award be adjusted below $30 million.  This proposed amendment is intended to make sure that the Commission is a responsible steward of the public trust while continuing to provide strong whistleblower incentives.

 

Elimination of potential double recovery under the current definition of "related action":  This proposed amendment would prevent the irrational result that could occur if a whistleblower could receive multiple recoveries for the same information from different whistleblower programs.  The proposed amendment would clarify that a law-enforcement or separate regulatory action would not qualify as a "related action" if the Commission determines that there is a separate whistleblower award scheme that more appropriately applies to the enforcement action. 

Uniform Definition of "Whistleblower"

In addition to the foregoing recommendations, the Commission proposes rule amendments in response to the Supreme Court's recent decision in Digital Realty Trust, Inc. v. Somers.  In that decision, the Court held that the whistleblower provisions of the Exchange Act require that a person report a possible securities law violation to the Commission in order to qualify for protection against employment retaliation under Section 21F.  The Court thus invalidated the Commission's rule interpreting Section 21F's anti-retaliation protections to apply in cases of internal reports. 

The proposed rules would modify Rule 21F-2 so that it comports with the Court's holding by, among other things, establishing a uniform definition of "whistleblower" that would apply to all aspects of Exchange Act Section 21F-i.e., the award program, the heightened confidentiality requirements, and the employment anti-retaliation protections.  For purposes of retaliation protection, an individual would be required to report information about possible securities laws violations to the Commission "in writing".  To be eligible for an award or to obtain heightened confidentiality protection, the additional existing requirement that a whistleblower submit information on Form TCR or through the Commission's online tips portal would remain in place.

Increased Efficiency in Claims Review Process

Two further proposed changes are designed to help increase the Commission's efficiency in processing whistleblower award applications.

Proposed new subparagraph (e) to Exchange Act Rule 21F-8 would clarify the Commission's ability to bar individuals from submitting whistleblower award applications where they are found to have submitted false information to the Commission, as well as to afford the Commission with the ability to bar individuals who repeatedly make frivolous award claims in Commission actions.  To prevent repeat submitters from abusing the award application process, the proposed rule would permit the Commission to permanently bar any applicant from seeking an award after the Commission determines that the applicant has abused the process by submitting three frivolous award applications.  

 

Proposed new Exchange Act Rule 21F-18 would afford the Commission with a summary disposition procedure for certain types of likely denials, such as untimely award applications, applications that involve a tip that was not provided to the Commission in the form and manner that the rules require, and applications where the claimant's information was never provided to or used by staff responsible for the investigation.  The proposed summary disposition procedures would help facilitate a more timely resolution of such relatively straightforward denials, while freeing up staff resources to focus on processing potentially meritorious award claims.  As under current rules, Claimants would have an opportunity to contest a preliminary denial of their claim before the Commission makes its final determination.

Clarification and Enhancement of Certain Policies and Procedures 

The proposed amendments would clarify and enhance certain policies, practices, and procedures in implementing the program.  These recommendations include the items listed below.

Proposed revisions to Exchange Act Rule 21F-4(e) to clarify the definition of "monetary sanctions" so that it codifies the Commission's current understanding and application of that term.

 

Proposed revisions to Exchange Act Rule 21F-9 to provide the Commission with additional flexibility to modify the manner in which individuals may submit Form TCR (Tip, Complaint or Referral). 

 

Proposed revisions to Exchange Act Rule 21F-8 to provide the Commission with additional flexibility regarding the forms used in connection with the whistleblower program. 

 

Proposed amendment to Exchange Act Rule 21F-12 to clarify the list of materials that the Commission may rely upon in making an award determination. 

 

Proposed amendment to Rule 21F-13 to clarify the materials that may comprise the administrative record for purposes of judicial review.

Interpretive Guidance

In addition to the foregoing proposed rule amendments, the Commission is publishing proposed interpretive guidance to help clarify the meaning of "independent analysis" as that term is defined in Exchange Act Rule 21F-4 and utilized in award applications.  Under the proposed guidance, in order to qualify as "independent analysis," a whistleblower's submission must provide evaluation, assessment, or insight beyond what would be reasonably apparent to the Commission from publicly available information.   

What's Next?

The proposal seeks public comment and data on a broad range of issues relating to the whistleblower program.  After careful review of the comments, the Commission will consider what further action to take on the proposal.

 

[1] Whenever the reserve in the Commission's Investor Protection Fund ("IPF") falls below $300 million, the Commission by law must replenish the IPF with any collected monetary sanctions that are not paid to the victims of the violations.  These funds otherwise would be directed to the United States Treasury, where they could be made available for use in funding other valuable public programs.

The final item on the agenda is consideration of amendments to our whistleblower program rules.  Approximately seven years ago, the Commission first opened the doors of its Office of the Whistleblower.  There was great anticipation for this groundbreaking program, with its three key components - monetary awards, heightened confidentiality, and anti-retaliation protections.  But no one knew what kind of effect it would have on the enforcement of the securities laws.  The key question in everyone's mind was:  Would the Commission receive specific, timely, and credible high-quality tips that would lead to successful enforcement actions? 

Based on our experiences, I think the answer is a resounding "yes."  The Commission's whistleblower program has contributed significantly to our ability to detect wrongdoing and better protect investors and the marketplace, particularly where fraud is well-hidden or difficult to detect.  As we continue our pursuit of enforcement initiatives focused on misconduct that impacts the retail investor, the strength of our whistleblower program is a critical component in our investor protection toolbox.

After nearly seven years of administering the whistleblower program, the staff and, in particular, the Office of the Whistleblower and the Office of General Counsel, have identified various ways to make the program more effective.  The proposed rules would enhance the Commission's ability to more appropriately and expeditiously reward those who voluntarily provide critical information that leads to successful enforcement actions.  Each of the proposed amendments is important to achieve this objective. 

A number of the amendments being proposed today are intended to provide us with greater flexibility to get more money into the hands of worthy whistleblowers.  On certain occasions, the rigidity of the current rules has prevented us from paying higher awards.  One of our proposals would allow the Commission to pay awards based on certain types of settlement agreements that are entered outside the context of judicial or administrative proceedings, such as non-prosecution agreements entered into by criminal authorities. 

Another proposal would provide the Commission with discretion (subject to the statutory maximum) to increase the amount of certain awards that are less than $2 million.  The Commission, by its own rule, currently is not permitted to consider the actual dollar amount of the award.  Instead, the Commission, based on various criteria, identifies a percentage between the statutory bounds of 10% and 30% and, then, the selected percentage is applied to our collection of monetary sanctions to determine the payment to the whistleblower.  Let's call this "the percentage formula."  I believe that, for awards below $2 million, this is too rigid and the Commission should have the authority to depart upward (but not downward) from the amount determined by the percentage formula.   

Historically, over 60% of the awards given out in our whistleblower program have been under this $2 million figure.  We want to incentivize potential whistleblowers by affording that majority of our whistleblowers the possibility of obtaining a larger award where they did everything right, yet our monetary collections may have been comparatively low.  Related to this objective, we are also seeking public comment on how we might be able to establish a potential discretionary award mechanism for whistleblowers who make significant contributions in Commission enforcement actions, but where the monetary sanctions collected are de minimis or otherwise do not qualify for an award.

At the same time, the proposed amendments are intended to make sure that we are responsible stewards of the public trust while in no way diminishing the monetary incentive to blow the whistle on wrongdoing.[1] 

Of the $266 million we have awarded in 50 separate awards, more than 40 percent of those funds have been paid out in only 3 awards.  As such, in a small subset of cases with large awards under the percentage formula, it is appropriate for the Commission to have discretion to consider the size of the payout.  We are thus proposing a rule that would allow us the ability to determine whether a truly large award was reasonably necessary to advance the program's goals, or whether some reduction of the award amount is appropriate.

Importantly, in no case would an exercise of this discretionary authority result in an award of less than $30 million.  This $30 million minimum award threshold has been set to ensure that we are not in any practical way reducing the incentive to blow the whistle.  Our experience administering the program suggests that adding this discretion to our percentage formula for large awards but with a $30 million floor will not in any practical way affect incentives.  For example, historic data shows that large majority of corporate officers and other high-ranking executives that have come forward and submitted tips and received awards under the program have done so in return for monetary awards of less than $5 million.      

Beyond these amendments that would provide the Commission with additional flexibility, we are proposing amendments to the rules to comport with the Supreme Court's recent decision in Digital Realty Trust, Inc. v. Somers[2] by, among other things, promulgating a uniform definition of "whistleblower" that would apply to all aspects of Exchange Act Section 21F.  Many have asked whether the SEC will continue to enforce the anti-retaliation provisions of Dodd-Frank.  Let me be clear:  retaliation protections are a key component of the whistleblower program, and we will bring charges against companies or individuals who violate the anti-retaliation protections when appropriate.

In addition to the foregoing amendments, we will consider several other amendments that are intended to clarify and enhance certain policies, practices, and procedures in implementing the program and to increase the efficiency of the claims review process.  

Since rulemaking presents an opportune time to solicit input from the public, we will also be considering proposed interpretive guidance to help clarify the meaning of "independent analysis" as that term applies to submissions of publicly available information under the program. 

I would like to acknowledge a number of individuals who have contributed to this rulemaking and to the success of the whistleblower program. 

From the Office of the Whistleblower:  Jane Norberg, Emily Pasquinelli, Kelly Breakey, Michael Hurwitz, Cree Kelly, Ami Mukerjee, Lisa Wardlaw, and Nikkia Wharton. 

From the Office of General Counsel:  William (Brooks) Shirey, Brian Ochs, Michael Conley, Laura Jarsulic, Thomas Karr, Stephen Yoder, Bryant Morris, and Connor Raso.

From the Division of Economic and Risk Analysis:  Chyhe Becker, Hari Phatak, Vanessa Countryman, Y.C. Loon, Daniel Bresler, and Sai Rao.

And now, I will turn it over to Jane Norberg, the Director of the Office of the Whistleblower, and Brooks Shirey, in the Office of the General Counsel, for the staff's presentation of the recommendation.

 

[1] By law, once our Investor Protection Fund drops below $300 million, we are required to divert money to replenish the fund.  That money otherwise would go to the United States Treasury, where it could be used for other similarly important public purposes.  It is therefore important for us to make sure that the money in the fund is used efficiently.

[2] 138 S. Ct. 767 (2018). 

Thank you, Chairman Clayton, and thank you to the wonderful Staff in the Office of General Counsel and the Office of the Whistleblower for all of your work on this proposal. Our colleagues Bob Stebbins, Michael Conley, Connor Raso, Brian Ochs, Laura Jarsulic, Brooks Shirey, Jeff Finnell, and the Office of the Whistleblower's incredible Jane Norberg and her staff were especially thoughtful and patient with me and my office throughout this process, and we are very grateful for their work.

Whistleblowers are crucial to our enforcement efforts, and experts of all stripes have said that this program-which rewards those who make the difficult decision to come forward to help us expose fraud-is among our Staff's most successful endeavors.[1] In addition to certain necessary fixes, the proposal before us today empowers the five of us Commissioners to reduce certain larger whistleblower awards and increase smaller ones.[2]

Today's proposal risks harming investors by adding two things to this exceptionally successful program that don't belong in the world of whistleblowers: uncertainty and politics. Because I believe that American investors are already dealing with plenty of both, I respectfully dissent.

*          *          *          *

Let's start from the perspective of an employee who is witnessing a significant corporate fraud. Especially if she is a high-ranking insider at a large public company-the whistleblowers who are most valuable to us in protecting our markets-there are major risks for the employee if she comes forward.[3] She may lose her job and her salary, but worse, she faces the very real prospect of never working in a senior position in her field again.

When whistleblowers take these risks for the benefit of all investors, what they need from us is certainty. They are, in the parlance of economics, risk-averse individuals, and we're asking them to put their livelihood on the line to help us enforce the law. Less than one percent of whistleblower tips actually lead to any award, so when they do, the rewards must be significant and clear.[4] Adding uncertainty to that process risks that would-be whistleblowers will stay quiet.

Suppose, for example, we gave a whistleblower a choice between an absolutely certain award of $100 and a 50% chance to receive an award of $200. Even though those two propositions have the same expected value, we can expect an overwhelmed and risk-averse potential whistleblower to choose certain payments over risky ones.[5] Put another way, by increasing the uncertainty associated with the amounts of our awards, we decrease the value of those payments[6] to whistleblowers at the moment when they decide whether to come forward-so we can expect that, under this proposal, fewer will come forward, and fewer frauds will be discovered in time to protect investors.[7]

Even worse, the uncertainty that today's proposal injects into our whistleblower process is political uncertainty.[8] I don't know what the subjective views of future Commissioners will be about whistleblower awards, whether large or small. Perhaps future Members of this Commission will view awards favorably; perhaps not. The point is that it doesn't matter what their views will be. The simple fact that those views cannot now be known, and that political risk infects the value of future awards, decreases whistleblowers' incentives to come forward. At the end of the day, in light of the risk that whistleblowers are being asked to take to protect investors, the size of their awards should not depend on who occupies the Membership of this Commission.

I urge commenters to come forward and provide us with their views regarding today's proposals, and in particular data that might help us understand the proposal's effects on whistleblowers' incentives to help us uncover frauds and protect investors. In the meantime, I am deeply grateful for the Staff's hard work on the proposal, and look forward to learning more about commenters' reactions.

 

[1] See, e.g., Securities and Exchange Commission Investor Advisory Committee Testimony Spotlight, John C. Coffee, Jr., Hobson's CHOICE: The Financial CHOICE Act of 2017 and the Future of SEC Administrative Enforcement (June 22, 2017) ("The SEC has had great success with its program to pay bounties to whistleblowers"); Amanda M. Rose, Better Bounty Hunting: How the SEC's New Whistleblower Program Changes the Securities Fraud Class Action Debate, 108 Nw. U. L. Rev. 1235-1300 ("[T]he uptick in the number of high-quality tips the SEC has received in the wake of the [whistleblower program] indicates that [financial awards for whistleblowers] are working in the securities context."); see also James Cox, Robert W. Hillman and Donald C. Langevoort, Securities Regulation: Cases and Materials 44 (7th ed. 2016).

[2] Securities and Exchange Commission, Proposing Release, Proposed Amendments to the Commission's Whistleblower Program (Exchange Act Rules 21F-1 et. seq.), Release No. 34-____ (June 28, 2018).

[3] Congress foresaw such risks when constructing the whistleblower program. See 156 Cong. Reg. S5929 (daily ed. July 15, 2010) (statement of Sen. Dodd) ("The Congress intends that the SEC make awards that are sufficiently robust to motivate potential whistleblowers to share their information and to overcome the fear of the loss of their positions. Unless the whistleblowers come forward, the Federal Government will not know about the frauds and misconduct."); see also generally 15 U.S.C. § 78u-6(h) (protecting whistleblowers against "demot[ion], suspen[sion], harass[ment and] other . . . discriminat[ion]" by employers").

[4] See Proposing Release, supra note 2, at 8.

[5] For the seminal economic explanation why this is so, see, e.g., John W. Pratt, Risk Aversion in the Small and in the Large, 32 Econometrica 122-136 (1964).

[6] One way to address this problem, of course, is to increase the total amounts of awards. Nothing in today's proposal or my conversations with the Staff, however, provides any assurance that awards will be increased in order to compensate for the political uncertainty would-be whistleblowers will face under the proposal.

[7] It is tempting to assume that the discretionary increase of smaller awards contemplated by the proposal will offset this effect. The temptation is especially strong because of the declining marginal utility of wealth. In light of that fact, increasing a small award by a dollar while decreasing a large award by a dollar should, all else equal, enhance the utility of whistleblowers ex ante. The idea is that, for this reason, whistleblowers overall are left better off on balance by the changes outlined in the proposal.

There are two reasons that this casual assumption. First, it's far from clear to me, or frankly anyone else, what the overall effect of these changes will be on the total value of whistleblower awards, since we cannot and do not know the views of future Members of the Commission with respect to those awards, see infra text accompanying note 8. Second, the purpose of the whistleblower program is not to maximize the utility of whistleblowers, but instead to maximize deterrence. I suspect that, given the well-known incentive effects of significant prizes, see, e.g., Thomas A. Garret & Russell S. Sobel, Gamblers Favor Skewness, Not Risk: Further Evidence from United States' Lottery Games, 63 Econ. Letters 85-90 (1999), decreasing large awards may reduce the deterrence of fraud in the long run, even if we increase small awards at the same time.

[8] It might be argued that today's proposal does not change the presence of politics in whistleblower awards, because a future Commission can always reverse today's decision and give up its Members' power to change awards. But that hope is contrary to the history of human behavior that has ordinarily shaped our law, which assumes, not without basis, that once federal appointees have arrogated more power to themselves, they are unlikely to give it up. As Justice Scalia explained in his dissents relying on the wisdom of Lord Acton, "no government official is tempted to place restraints on his own freedom of action." See Scalia Dissents 44 (Kevin King ed. 2016); see also Letters of Lord Acton to Bishop Creighton ("Everybody likes to get as much power as circumstances allow, and nobody will vote for a self-denying ordinance.").

I would like to join Chairman Clayton in thanking the staff in the Whistleblower's Office, the Office of the General Counsel, and the Division of Economic and Risk Analysis for their hard work on this proposal.

The Securities and Exchange Commission's Whistleblower Program was created by Congress in 2010 to encourage the reporting of illegal conduct in our markets. To achieve this goal, the statute says the Commission shall give eligible whistleblowers awards of 10 to 30 percent of the money collected in actions brought as a result of information provided by the whistleblower. By all accounts, the Whistleblower Program has been a resounding success.[1] From the time the Commission's whistleblower rules were adopted in 2011 until the end of 2017, the Commission has received over 22,000 whistleblower tips. These tips have resulted in more than $1.4 billion in financial remedies.[2] Of this amount, the majority has gone back to harmed investors,[3] but a substantial amount has also been sent to the United States Department of the Treasury.

Today's proposal would make various changes to the Commission's Whistleblower Program, many of which I support and believe will be good for the overall Program. At the same time, I am also concerned about some of the proposed changes because I fear they could threaten the Program's ongoing success.

First, I am deeply troubled that the proposal would give the Commission authority to depart from its normal analysis for determining the amount of an award in certain circumstances. Currently, to determine the precise award percentage, the Commission considers a list of specific factors, such as the significance of the information provided by the whistleblower.[4] However, under the proposed Rule, the Commission would, in certain circumstances, be able to consider not just the enumerated factors, but also the overall dollar amount of the award. Practically speaking, this means the Commission can reduce the award if, in its sole discretion, it thinks the award is "too large." I am worried that this subjective determination will be used as a means to weaken the Whistleblower Program.

To understand why I am worried, it is important to first understand how the Whistleblower Program works. The money awarded to whistleblowers comes from a special account at Treasury. This account is funded by the monetary sanctions the Commission collects from wrongdoers, not by taxpayers.[5] Congress' idea behind the Whistleblower Program was to use money from wrongdoers to clean up the markets. This makes sense and it is good public policy. Yet, this proposal suggests that the Commission is unduly worried that the Whistleblower Program may be taking money from other worthy uses. This is not so. The Commission has sent billions of dollars to the Treasury since 2011.[6] This is money that, if needed, could have been used to fund whistleblower awards. But in fact, we have used only a tiny fraction of this amount-$266 million-to award whistleblowers.[7] Furthermore, successful whistleblower tips have resulted in $1.4 billion being returned to harmed investors or being sent to Treasury. Indeed, the amount of money the Commission has sent to Treasury alone as a direct result of whistleblower tips far exceeds the $266 million provided to whistleblowers for bringing wrongdoing to light. Simply put, the Whistleblower Program has more than paid for itself. There are not many government programs that can make that claim.

So why do we have today's proposal before the Commission to limit the size of whistleblower awards?[8] We have no evidence that there is a problem. Nor do we have any evidence of how the proposed $30 million threshold would affect the incentives or behavior of whistleblowers. The proposal states this change is needed to ensure that whistleblower awards do not "exceed an amount that is appropriate to achieve the goals and interests of the program." However, we do not have the necessary facts to show that $30 million, or any other number for that matter, is the point at which there magically starts to be diminishing returns for whistleblower awards. I worry that we are creating a $30 million glass ceiling.

In addition, I am not sure we actually have the authority to take today's proposed action. In the whistleblower statute itself, Congress specifically told the Commission that we could "not take into consideration the balance of the Fund" in determining the amount of an award.[9] In a nod to this specific direction from Congress, the proposed Rule states "the Commission shall not consider the balance of the Investor Protection Fund ("IPF") when determining whether to make an adjustment to an award under this provision."[10] However, three sentences later the proposed Rule states that when determining how to adjust the dollar amount of an award "the Commission shall consider . . . the potential impact any adjustment might have on the IPF."[11] It seems to me that considering the "impact" on the Fund versus the "balance" of the Fund when determining an adjustment to the size of an award is a distinction without a difference. It is legalistic nonsense. In reality, the rule proposes to do something that on its face appears inconsistent with the explicit instructions we received from Congress.

In its justification for this departure from the law, the proposal states that that we should take the balance of the Fund into consideration because the money the Whistleblower Program generates could be sent to Treasury for "other important public purposes."[12] Frankly, I'm not sure what this really means. I can only imagine that the release is suggesting that the Commission be mindful of other federal budget priorities and its place within government writ large. I, too, believe in the notion of "good government." But, the Whistleblower Program is exactly that -- good government. It incentivizes the private marketplace to better surveil itself and has resulted in the government bringing cases against fraudsters it might not have otherwise discovered. Incentivizing market participants and others to provide information about wrongdoing has helped protect more investors, preserve the integrity of our capital formation process, and ensure that our markets are fair and efficient. In many ways it has aligned incentives so that the government is able to use its scarce resources in a more efficient manner.

In addition to the proposed Rule's provisions limiting award size, I am also concerned about the guidance being proposed today. This guidance is supposed to help clarify what "independent analysis" means. I am not sure that it does. So, I would ask commenters to look at this guidance carefully and tell us whether it helps or hinders your understanding of what independent analysis means. Does the guidance appropriately draw the line between meritorious and non-meritorious whistleblower cases? In effect, how should the Commission define "independent analysis"? Does the Rule text and the proposed guidance appropriately define the type of whistleblowing activity that should receive an award? If not, what should the Rule text and/or guidance be? I look forward to your best thoughts on these issues.

CONCLUSION

As I mentioned earlier, there are many good parts of today's proposal and I thank the staff for their hard work on those items. However, I simply cannot support the recommendation as a whole, because I do not think we have the authority to limit whistleblower awards in the manner proposed. Congress has spoken on this issue, and we need to follow the law.

Thank you, and I look forward to receiving comments on these many issues.

[1] See, e.g., The SEC as the Whistleblower's Advocate, Speech by SEC Chair Mary Jo White, April 30, 2015, available at https://www.sec.gov/news/speech/chair-white-remarks-at-garrett-institute.html (stating the Whistleblower Program "has proven to be a game changer" and that the program has increased the SEC's efficiency and conserved its scarce resources); David Floyd, The SEC Whistleblower Program's Quiet Success, Investopedia (Sep. 26, 2016), available at https://www.investopedia.com/news/sec-whistleblower-programs-quiet-success-db-mon/ ; Jason Zuckerman and Matt Stock, One Billion Reasons Why the SEC Whistleblower-Reward Program Is Effective, Forbes (Jul. 18, 2017), available at https://www.forbes.com/sites/realspin/2017/07/18/one-billion-reasons-why-the-sec-whistleblower-reward-program-is-effective/#5d5486f23009 ("[T]he program has proved to be an unmitigated success in enabling the SEC to discover fraud, protect investors, and prevent another financial crisis.")

[2] Release at 8.

[3] Id.

[4] 17 CFR § 21F-6. Other factors include the assistance provided by the whistleblower, the Commission's law enforcement interests, the whistleblower's participation in internal compliance systems, the whistleblower's culpability in the wrongdoing, any unreasonable reporting delay, and any interference with internal compliance and reporting systems.

[5] Generally speaking, once the Fund falls below $300 million, any monetary sanctions collected in SEC enforcement actions that aren't returned to investors are deposited into the Fund until the Fund again exceeds $300 million. 15 U.S.C. § 78u-6(g) If the amount of money deposited into or credited to the Fund is not sufficient to satisfy an award, then the Commission will deposit enough money into the Fund from the monetary sanctions collected by the Commission in that particular action to pay the unsatisfied portion of the award. Id. It is unlikely that this would happen, but if this is what is truly motivating the desire to limit whistleblower awards, a $30 million award seems unlikely to cause this problem.

[6] SEC Agency Financial Reports for fiscal years 2011-2017, available at https://www.sec.gov/about/annrep.shtml.

[7] Release at 8.

[8] The release suggests that the proposal is not a cap on potential awards, but is simply a means by which the Commission can retain flexibility to reduce an award to the extent it deems appropriate. I reject this assertion in part for the reasons I discuss below. In addition, I believe that the means by which the proposal provides such flexibility would have the practical effect of serving as a cap.

[9] 15 U.S.C. § 78u-6(c)(B)(ii).

[10] Proposed Rule 21F-6(d).

[11] Proposed Rule 21F-6(e).

[12] Release at 13

I would first like to thank the Chairman for making this rulemaking a priority. I also want to thank our staff in the Office of the General Counsel, Office of the Whistleblower, and Division of Economic and Risk Analysis for their hard work on this release. I appreciate your responsiveness to my questions, comments, and edits.

The SEC's Whistleblower Program is a critical part of our enforcement program. Jane Norberg and her staff in the Office of the Whistleblower provide a vital service in helping protect investors. The most important part of our Whistleblower Program, of course, is the whistleblowers themselves, who bring to our attention securities law violations that otherwise might not come to light for years or even forever. They sometimes do so at great risk to themselves and their careers. Whistleblower awards offset some of those losses and, therefore, can help to encourage people to come forward. As of last year, information provided by whistleblowers to the SEC has resulted in wrongdoers paying over $975 million in total monetary sanctions, much of which has been paid back to victims.[1]

The Commission is responsible for reviewing our rulemakings to ensure they are working as intended. Good regulatory practice includes periodically conducting a retrospective review to assess what works and what can be improved. After all, as Michael Jackson-who died nine years ago this week-once noted:

If you wanna make the world a better place

Take a look at yourself and then make a change[2]

We are doing that today. In 2011, the Commission adopted a comprehensive set of rules that established the framework for our new whistleblower program. The amendments we are considering draw from our experiences with those rules to ensure that the Commission is getting the most "bang for its buck" through its Whistleblower Program. By tweaking the rules as we propose to do today, we hope to better achieve the program's goals of eliciting useful information and appropriately rewarding people who bring that information to our attention.

Among other things, these amendments provide the Commission with greater flexibility -- within the range of discretion that Congress provided us -- to ensure that our payouts are appropriate. In adopting the existing rules, we put on an unnecessarily restrictive straightjacket; we deprived ourselves of the ability to exercise discretion to ensure that we are not shortchanging or overcompensating whistleblowers. Within the statutory range of ten to thirty percent of collected monetary sanctions, Congress gave us discretion -- bounded by statutory criteria and additional rule-based factors that we deem important -- to determine award amounts. We would not be exercising that discretion properly if we did not take into account our now extensive experience administering the Whistleblower Program. Our proposal adjusts the program's payout options in light of this experience.

In addition, today's proposed amendments would make clear that deferred prosecution agreements and non-prosecution agreements entered into by the U.S. Department of Justice and settlement agreements entered into by the Commission outside of the context of a judicial or administrative proceeding factor into the whistleblower payout calculation. Additionally, today's amendments address overlaps with other whistleblower programs, update policies, practices, and procedures governing the administration of the Whistleblower Program, and bring our interpretation of the term "whistleblower" in line with the Supreme Court's.[3]

Speaking of the Supreme Court, Justice Kennedy's resignation announcement yesterday follows closely on the heels of Commissioner Piwowar's resignation announcement. That is surely no coincidence. It makes Commissioner Piwowar's next job clear. Yes, we all know that he is an economist. In the decade or so I have known him, however, he also has begun to fancy himself somewhat of a lawyer. In fact, in a couple notable instances, the courts have sided with him when he has taken a different view of the law than Commission lawyers. The Supreme Court has a vacancy. Mike likes being an economist among lawyers. He's already survived the nomination gauntlet once. The Court seems to like hearing securities cases, so having an expert will come in handy. Regardless of whether you land at the Supreme Court, we will all miss you.

In closing, I want to again commend the staff for their hard work on this release. These amendments will make our effective Whistleblower Program even better. I am happy to support the proposed amendments and I have no questions. Thank you.

[1] U.S. Sec. & Exch. Comm'n, Whistleblower Program 2017 Annual Report to Congress at 1 (Nov. 15, 2017), available at https://www.sec.gov/files/sec-2017-annual-report-whistleblower-program.pdf.

[2] Michael Jackson. "Man in the Mirror." Bad, Epic Records (U.S.) and CBS Records (internationally), 1987.

[3] Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018).

Throughout my tenure, I have been an outspoken advocate of retrospective review of Commission rules. It is a fundamental best practice of good government to observe carefully how our regulations work-not just in the mind's eye of the rule-makers-but in the real world. Then, armed with the wisdom of observation and experience, we can propose thoughtful improvements to our rules that help advance the Commission's essential work. The proposed amendments to our whistleblower rules before the Commission today are a sterling example of this approach.

Since the Commission first adopted rules implementing the whistleblower program in May 2011, we have received over 22,000 whistleblower tips, obtained over $1.4 billion in financial remedies related to those tips, and ordered over $266 million in whistleblower awards to 55 individuals. These are impressive numbers, and reflect both the dedicated work of our staff in the Office of the Whistleblower and Division of Enforcement, and the quality of tips provided by individuals willing to step forward with their information. Each of these whistleblowers provided the Commission with valuable information and often extensive assistance that enabled us to bring successful enforcement actions in cases that we might not have uncovered on our own. As we consider changes to our whistleblower rules today, we can all be proud of the whistleblower program's accomplishments to this date.

As the statistics I just mentioned reflect, the last seven years have given us a great deal of experience with the operation of our whistleblower rules. I am pleased to see that we are using that experience to inform the current proposal. The changes that we are proposing are incremental, but meaningful, and I think they will incentivize helpful whistleblower activity while increasing the efficiency of the SEC's whistleblower program-and adding clarity as well.

I am confident we will get constructive comments on each of the suggested modifications in the proposal.

I would like to thank the Office of General Counsel, and the Office of the Whistleblower, for their fine work on this proposal. I am happy to support it.

Thank you. I have no questions.

• SEC
• Whistelblower
• OWB
• OIG
• Office of Inspector General
• BrokeAndBroker
• Rory Flynn
• Gary Aguirre
• Bill Singer
• Chair Clayton
• Commissioner Stein
• Commissioner Jackson
• Commissioner Peirce
• Commissioner Piwowar
• Lord Acton