The U.S. Securities and Exchange Commission (SEC) postponed its vote on controversial changes to the highly successful whistleblower program. Whistleblower advocates have warned that some of the proposed changes, including removing protections for internal whistleblowers and instituting a strict requirement regarding the filing of whistleblower tips, would undermine the success of the program. In a recent article, Stephen M. Kohn, a partner in whistleblower law firm Kohn, Kohn & Colapinto, and Chairman of the Board of Directors of National Whistleblower Center examines the dangers of one of the proposed changes: the institution of a “soft cap” on whistleblower rewards.
Under the current rules, qualified SEC whistleblowers are entitled to an award between 10-30% of any funds recouped by the SEC in the relevant enforcement action. The proposed change would institute a “soft cap,” which would presumptively set the whistleblower award to the lowest possible percentage (10%) in cases where over $300 million was recouped. Kohn notes that numerous whistleblower advocates, including the Congressional expert on whistleblower legislation Senator Charles Grassley (R-IA) and Enron whistleblower Sherron Watkins, have filed comments strongly opposing the cap.
Kohn argues against the institution of the cap because it would undermine the program’s deterrent effect on criminal activity. He draws from a range of studies that document the deterrent effect of whistleblower rewards. Kohn quotes one study which explains that, because of the deterrent effect, “‘whistleblowers can do more than just uncover and report knowing violations of the law. They can also prevent noncompliance from happening in the first place.’” Overall, Kohn argues, “the benefits of paying large rewards overwhelmingly outweigh any alleged costs associated with these payments.” Kohn also notes that Congress recognized the importance of the deterrent effect when crafting the Dodd-Frank Act, the Wall Street reform bill, which created the SEC Whistleblower Program.
Kohn concludes his piece with: “The SEC’s final rule on the cap issue will send a powerful message to the markets. Will it be one of deterrence, or will it signal a retreat from a willingness to use one of the most effective regulatory tools to deter corruption in the markets?”
Read: Should Whistleblower Reward Laws be Capped? – Pro Market