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The SEC Whistleblower Program: Make Or Break Time

This article is more than 4 years old.

The Securities and Exchange Commission whistleblower program is at a critical crossroads.

Will it live up to the promising future envisioned when the whistleblower reward program was launched nearly ten years ago, or will the SEC whistleblower program continue its sluggish pace of rewarding only a tiny number of whistleblowers each year, discouraging those who have valuable information about financial fraud and other types of securities law violations from coming forward?

Since the SEC whistleblower program was established in 2010, more than 33,000 whistleblower submissions have been filed with the agency. In recent years, the SEC has received over 5,200 whistleblower submissions annually. At the same time, approximately 150 SEC enforcement actions a year exceed the $1 million recovery threshold for potential award eligibility.

Despite these impressive numbers, the SEC has made only eight whistleblower awards a year on average.  

The problem is evident. Even if only 10 percent of enforcement actions recovering more than $1 million are whistleblower-generated, the SEC’s slow pace of processing awards has led to a mountain of unpaid whistleblower claims.

With more and more award applications being submitted every year, the award pipeline is clogged to overflowing with no relief in sight. The SEC has not articulated how it will clean out this backlog and at the same time keep up with the deluge of whistleblower submissions.

Indeed, some whistleblower are now waiting five years or longer for determinations on their awards after the enforcement actions in their cases have been resolved. In many instances, the award decision is taking longer than the underlying enforcement action took start to finish.

The SEC whistleblower program is not supposed to work this way. It simply is not reasonable that whistleblowers must wait many years to receive awards that they are entitled to by law. 

If the glacial pace of whistleblower rewards continues, the SEC risks lasting damage to the program. Many fewer people will risk their jobs and careers to provide the SEC with information about significant securities law violations, which would make it harder for the SEC to stop wrongdoers and protect investors.

In what could be a telling sign, the number of whistleblowers filing claims with the SEC slightly declined in fiscal year 2019 compared to the previous year – the first decline the program has suffered since its inception. While there are no conclusive reasons for that decline, the small number of awards could be a factor.

SEC officials have said for years that the SEC whistleblower program is a huge success and that whistleblowers have become critical sources for the agency’s enforcement efforts. 

What has compelled thousands of whistleblowers in the US and other countries to turn to the SEC is the promise of a reward.

While many countries have whistleblower programs that promise confidentiality and protection from job retaliation (which the SEC program does as well), the vast majority do not offer financial incentives for reporting wrongdoing. The potential for financial rewards – 10 percent to 30 percent of money collected in a case – is what makes the US program very attractive.

The SEC Office of the Whistleblower has said that making awards to whistleblowers is a top priority and that it is aware of the despair felt by many whistleblowers regarding long-delayed awards. It assures program participants that it is developing efficiencies in processing awards.

More needs to be done. Last year, Sen. Chuck Grassley (R-IA) introduced a bill that would require the SEC to make initial decisions about whistleblower awards within one year of the filing of whistleblower award claims, although in complex or multi-whistleblower cases, the deadline could be extended up to an additional 360 days.

While that legislation is a start, it does not address the program’s structural and resource problems. Unfortunately, the proposed legislation would also likely further delay awards already in the pipeline, since the contemplated deadlines would apply only to those award claims filed after the bill is enacted.

Structural changes in the program are needed now. The SEC should consider revising the cumbersome and time-consuming procedure for whistleblower award applications that gives extensive procedural rights to individuals who simply are not entitled to an award. No other whistleblower program invites all-comers to apply for awards through the “Notice of Covered Action” (NOCA) mechanism employed by the SEC and CFTC.

The NOCA approach is an invitation for prolonged, unnecessary delays. It should be abandoned in favor of a process that rejects non-meritorious whistleblower submissions early and provides notice only to those whistleblowers whose submissions are timely and include allegations that overlap with the enforcement action.

In instances where there are multiple whistleblowers, the SEC should offer an opportunity for whistleblowers, through counsel, to reach agreement on sharing the award before the SEC makes its award determination. This could save a great deal of time in the award process and has worked to great effect in “qui tam” whistleblower cases brought under the False Claims Act. Multiple whistleblowers in the same false claims cases often work out sharing agreements on their own.

Finally, the award determination process must be subject to far greater transparency and oversight. The SEC’s communication with whistleblowers throughout the award process must be improved. Years of silence is not only demoralizing, but it breeds distrust and discourages potential whistleblowers from stepping forward.  

The whistleblower program clearly has paid off for the SEC’s Enforcement Division, where high quality information and assistance has yielded billions in recoveries.

Now the SEC needs to make good on its promise to whistleblowers. Despite the challenges, the SEC must find ways to accelerate the award-making process or else it risks losing the all-important trust of whistleblowers.

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