The Securities and Exchange Commission (SEC) will propose to a rule that would slash awards to whistleblowers in some of the biggest cases of securities-law violations – a move that raises concerns such a rule could weaken incentives for individuals to report fraud and other wrongdoing.
Currently, whistleblowers who tip off the SEC to securities violations receive between 10 and 30 percent of the total sanctions levied against the violating firm, as long as the sanctions amount to at least $1 million.
The Wall Street Journal notes that the narrow majority of awards doled out under the SEC’s whistleblower program have been lower than $2 million, but a few whistleblower awards have hit the stratosphere. For instance, in March, three whistleblowers split an award of $83 million after their tips led to a $415 million settlement between the U.S. government and Bank of America.
Last February, the SEC awarded one whistleblower $48 million and a second whistleblower $13 million for tips and assistance they provided about JPMorgan Chase & Co.’s failure to properly inform some wealthy investors about conflicts of interest.
The SEC will publish its proposed rule and open it to public comment. The rule would give SEC commissioners the authority to limit awards in cases with penalties of $100 million or more.
According to the Wall Street Journal, the SEC would lower whistleblower awards to a level “that is reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers.” The SEC indicated in documents that the level would be a 10 percent maximum in the biggest cases but would not drop below $30 million.
Critics of the proposed rule say that it would not serve in the interests of fraud protection and could let some of the biggest fraud cases slip away unnoticed.
Stephen Kohn, head of the National Whistleblower Center, told the Wall Street Journal the SEC’s rule, if passed, would “kill the goose that lays the golden egg.”
“Large financial rewards are necessary to encourage high-ranking and highly compensated corporate executives to blow the whistle on fraud,” Mr. Kohn said.
Former SEC Chief Sean McKessy told the Wall Street Journal it wasn’t clear how the SEC will determine what whistleblower awards are appropriate: “How do you measure someone risking their career?” He also said the language of the proposed rule would give the SEC a greater scope to reject payouts, making it riskier for a whistleblower to come forward, the Wall Street Journal reported.