SEC Receives Extensive Criticism in Comments on Proposed Changes to Whistleblower Program

U.S. Securities and Exchange Commission Photo credit Diego Radzinschi

Washington, D.C. – September 21, 2018. The public comment period for the U.S. Securities and Exchange Commission (“SEC”) proposed amendments to the rules governing its successful whistleblower program closed on Tuesday, September 18. More than 99% of the comments posted on the SEC’s public comment page oppose the proposed rules. 

The proposed amendments , announced on June 29, 2018, have two provisions, among others, that will undermine the current successful SEC Whistleblower Program:

  1. The proposed cap on rewards associated with the enforcement of large frauds as set forth in Proposed Rule (d)(2); and
  2.  The “Proposed Analyst Guidance” which essentially allows the Commission to reject any analyst merely because the information the analyst relied on was public, even if it was information the Commission would never have used to initiate an investigation of its own volition.

Among those the over 3,500 comments that opposed the proposed changes to the SEC whistleblower program were whistleblowers, whistleblower attorneys, the National Whistleblower Center and Senator Charles Grassley.

Much of the criticism focused around the impact the proposed changes would have on the incentive for whistleblowers of large frauds to come forward. Distinguished whistleblower lawyer, Stephen M. Kohn, stated that “the proposed rule amendments, specifically limiting the percentage of reward in cases where a corporation is fined above $100 million, disincentivizes would be high level corporate whistleblowers.”

Senator Grassley commented that the SEC’s proposal “suggests that awards that are too large are not ‘appropriate.’” Grassley responds “In establishing the whistleblower award program, Congress was not concerned about a reward figure being “too big.” If anything, the legislative history shows that Congress was more concerned about potential whistleblower awards being too stingy.”

Veteran whistleblower attorneys, Kohn, Kohn & Colapinto, explained to the SEC that experience has shown large sanctions and awards send a strong anti-fraud message and the bigger the award the more powerful the message to would be fraudsters.

A comment filed by the National Whistleblower Center (“NWC”) on September 18, 2018, cites to quotes from several corporate law firms to support its position that large rewards serve important functions, incentivizing whistleblowers to come forward and encouraging companies to maintain robust internal compliance programs. The law firms quoted include: Gibson Dunn LLC, BDO USA LLP and Clayman & Rosenberg LLP, and Epstein Becker Green, LLC. These firms defend corporations regulated by the SEC and therefore their comments regarding the impact of large rewards encouraging companies to enhance internal compliance programs highlight the importance of large monetary rewards.

“At the end of the day, an effective anti-corruption program can work only if telling the truth and reporting frauds is more profitable then committing the crimes. The proposed rule ignores this reality. It disincentives the most important potential whistleblowers in the securities industry and takes away the Commission’s best advertisement for promoting honesty in the markets,” said Kohn.

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