Whistleblower Attorney Warns Proposed “Soft Cap” on SEC Whistleblower Awards Could Undermine Whistleblower Program’s Deterrent Effect

The U.S. Securities and Exchange Commission (SEC) will soon vote on proposed amendments to the agency’s highly successful whistleblower program. The most controversial of these amendments involve the institution of a “soft cap” that would allow the SEC to reduce whistleblower awards in most large cases. Many opponents of the proposal have fretted that the cap would impact employees’ willingness to blow the whistle and risk damage to their professional and personal lives. In a recent article, Stephen M. Kohn, founding partner at qui tam law firm Kohn, Kohn & Colapinto and the Chairman of the Board of Directors of the National Whistleblower Center, emphasizes another potential negative consequence of the proposed amendment: it could undermine the deterrent effect of the whistleblower program.

Through the SEC Whistleblower Program, individuals who provide the agency with original information that leads to successful enforcement action are entitled to monetary awards of 10-30% of the funds recouped by the government. The SEC considers a number of factors to determine the exact percentage, which varies by the individual award. The proposed amendment would require the SEC to consider the amount of an award a whistleblower could obtain and lower the percentage paid to whistleblowers in large cases. Under the current rules, the award’s size is not a factor in determining the percentage the whistleblower is awarded.

In his piece, Kohn explains that one of the major benefits of large whistleblower awards is that they deter individuals from committing crimes. “Ultimately, the long-term deterrent effects on crime can save investors and the public far more than is recovered from specific prosecutions,” he writes. Kohn highlights that in the Dodd-Frank Act (DFA), the legislation that established the SEC Whistleblower Program, Congress explicitly required that the SEC evaluate the deterrent effects of whistleblower awards when determining the amount of an award. Thus, he asserts that “the SEC should reject any rule that would permit the Commission to reduce an award if such a reduction would undermine the deterrent effect.” Kohn also notes that the SEC did not address the impact on deterrence in their comments on the proposed amendment.

Kohn supports his claim on the strength of whistleblower awards’ deterrent effect by drawing upon several objective academic studies. One study, Jetson Leder-Luis’ Whistleblowers, The False Claims Act, and the Behavior of Healthcare Providers (2019), found that “the deterrent value of whistleblower cases is over six-times as great as the immediate enforcement value.” Another study Kohn draws from is Christine I. Wiedman and Chunmei Zhu’s Do the SEC Whistleblower Provisions of Dodd-Frank Deter Aggressive Financial Reporting? (2017) which looks directly at the SEC Whistleblower Program. Kohn quotes the conclusion of this report: “These findings provide evidence of significant benefits of the SEC WB Program and underscore the role that whistleblowers can play in the detection and deterrence of fraud.”

The main justification the SEC has offered for the proposed “soft cap” is that it would help ensure that the Investor Protection Fund (IPF) “is used in a manner that effectively and appropriately leverages the IPF to further the Commission’s law-enforcement objectives.” However, Kohn notes that this reasoning is troubling because of Congress’ explicit directions in the DFA that “the amount of money in the IPF was not permitted to be criteria for determining the amount of an award.” It should be noted that the money used for whistleblower awards are obtained from funds recouped in the very enforcement actions whistleblowers trigger, not taxpayer funds.

“An effective whistleblower program creates a win-win-win-win scenario,” Kohn explains in his conclusion. “The government wins by being able to police illegality. The whistleblower wins because he or she can obtain compensation. The public wins because a criminal is prosecuted. The markets win because potential bad-actors are deterred from committing crimes, permitting fair competition and long-term savings to investors.”

Read the Full Article: SEC’s Proposed Whistleblower Rules Undermine Dodd-Frank Deterrent Effect

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