The Security and Exchange Commission’s whistleblower program has recovered over $1.7 billion in sanctions from wrongdoers over the past decade, including $900 million in disgorgement of ill-gotten gains and interest. The program is widely regarded as a large success. Why then would the SEC propose regulations that would seriously weaken it?
Enron whistleblower Sherrod Watkins poses this question in his comments on the proposed rules changes. (His letter is in the public comment file: https://www.sec.gov/comments/s7-16-18/s71618.htm ; the proposed rules are at https://www.sec.gov/rules/proposed/2018/34-83557.pdf ). Specifically, he objects to proposed Rule 21F-9(e), which increases reporting mechanism hurdles, and Rule 21F-6, which would place an arbitrary limit on the bounty reward. Watkins argues that the first proposed rule would create “unrealistic reporting procedures that would disqualify a vast number of whistleblowers, simply because they reported their concerns to the wrong office at the SEC, rather than filling out a specific form and filing it according to specific reporting procedures.” He rejects the second proposed rule because it would “disincentivize whistleblowers from coming forward by placing an arbitrary limit on whistleblower rewards, especially in cases where the whistleblower uncovered massive frauds. Congress has rejected such arbitrary limits, but the Commission’s proposed rule would authorize these drastic reductions in the amount of rewards in major fraud cases. … The bounty reward program built into the Dodd-Frank Act has attracted legal talent to the causes and support of whistleblowers and that is a godsend, both legally and emotionally. Employees blow the whistle to stop their organizations from continuing to do harm. Monetary rewards are not at the forefront of their motivations. However, without the monetary rewards, the playing field for speaking truth to power is not level and the powerful organization overwhelms the whistleblower every time.”
It's reasonable to ask if Watkins’ views are isolated and unsupported by others. They are not. Over 9000 comments have been filed, and their assessments of these proposed rules are strongly negative. (Read the comments to learn other objections, as well as a few more positive assessments.) I haven’t yet found any commenter offering a public interest justification for adopting more rigid filing procedures for whistleblowers. The SEC has accepted submissions from several different channels in recent years, and there is no obvious reason why they can’t continue to do so. Restricting rewards to whistleblowers in cases where the payout is extraordinarily large is viewed by some as a way to reduce an inefficient allocation of reward money, because a smaller reward arguably would have been sufficient to induce whistleblower action in cases with very large damages. Such a fixation on the incentives facing whistleblowers neglects how these rules would change the incentives for swindlers and criminals: if the SEC caps rewards for large cases, while imposing more stringent and rigid reporting requirements for whistleblowers, it will be viewed (in fact, it already is widely viewed) as telling evidence that the SEC is de-emphasizing enforcement, and thus creating a more permissive environment for unethical or illegal activity. Laws and punishments are commonly justified by their deterrent effect. Actions that are perceived to weaken SEC monitoring will encourage the criminal element to take more chances, especially in big cases where the payoffs are quite large. If crime increases, then the money that the SEC saves by constraining whistleblowing and capping large rewards will be a false economy.
It’s widely expected that the Commission will issue a determination on these proposed rules near the end of this month. The comment site still appears to be open, so you still have time to post there or contact the Commissioners directly.
