SEC Pushes To Cap Whistleblower Rewards
By: Marc S. Raspanti
Gerald Hodgkins, former Associate Director for the Securities and Exchange Commission’s (SEC) Enforcement Division, gave an interview with the Corporate Crime Reporter in which he concurrently explained and expressed his support for the SEC’s proposal to limit the rewards whistleblowers receive.
In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act that supplied protections and financial incentives to whistleblowers who provide information that the SEC utilizes in furtherance of an enforcement action. Under this Act, whistleblowers are entitled to receive an award from ten to thirty percent of the government’s recovery if the action has a judgment of over $1 million. From the first SEC whistleblower award in 2012 to September 2018 the SEC has awarded 59 whistleblowers more than $326 million. The program seems to be gaining momentum with a documented increase each year since 2015.
The SEC is attempting to impose a cap on whistleblower awards when the government recovers over $100 million, potentially entitling the whistleblower to an award over $30 million. Hodgkins argues that capping an award at $30 million wouldn’t decrease the amount of whistleblowers that come forward, and that anything over $30 million is simply a windfall. Hodgkins further claims that whistleblowers don’t base their decision to report SEC violations upon a specific number they must recover since whistleblower rewards are set by the SEC only after they receive the whistleblower report.
After the SEC receives the whistleblower report, the Whistleblower Office recommends a reward for the whistleblower of ten to thirty percent of the government’s recovery. The Claims Review Staff then evaluates the Whistleblower Office’s recommendation and determines if it is accepted, rejected, or needs to be changed. The SEC bases their reward upon the significance of the information to the SEC, assistance and participation of the whistleblower, culpability of the whistleblower, any unreasonable reporting delay of the whistleblower, and any interference with internal compliance or reporting system of the whistleblower.
The National Whistleblower Center (NWC) opposes this cap out of the fear that it will deter insiders at large financial institutions from coming forward. NWC believes that people who already make a lot of money need the incentive of a large financial reward to draw them in. The SEC received over 3,000 comment letters, and the vast majority agreed with the NWC and opposed the cap. The Securities Industry and Financial Markets Association (SIFMA) agrees with Hodgkins’ above stated assertions and supports the SEC’s proposal as well.
The Take Away
Officially, the “SEC is seeking discretion to take into account the size of the award when the award is particularly large and particularly low.” However, the main purpose of the SEC’s proposal will be to cap whistleblower rewards at $30 million. With the number of whistleblower tips increasing each year it will be interesting to see if a cap on rewards will hinder this progress. According to Hodgkins’, the SEC has to read all 3,000 comments and will likely amend its proposal to address some of the public’s concerns over the next several months.
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