By Amanda Rose
Professor of Law, Vanderbilt University Law School
Professor of Management, Vanderbilt University Owen Graduate School of Management
The SEC has proposed amendments to the rules governing its whistleblower bounty program. Most controversial among them is an amendment to Rule 21F-6, which governs the way the SEC calculates the amount of an award. In a recent paper, I analyze the wisdom of this proposed amendment. My take: it is wise, but incomplete.
SEC whistleblowers are statutorily entitled to between 10 and 30 percent of the money collected by the SEC in an enforcement action that the whistleblower’s tip helped lead to, if the monetary sanctions imposed exceed $1 million and certain other eligibility requirements are met. Within the 10-30% range, the statute grants the SEC unreviewable discretion to set the award amount. Rule 21F-6, in turn, requires that the SEC, in exercising this discretion, consider certain plus/minus factors to determine the percentage of collections to award within the statutory 10-30% range, but the SEC cannot consider the dollar amount the percentage arrived at would actually yield. So, in deciding that a 25% award is appropriate based on the factors laid out in the rule, the SEC is required to ignore that this would yield only $250,000 in a covered action with $1 million in monetary sanctions collected or a whopping $125 million in a covered action with $500 million in monetary sanctions collected.
The proposed amendments to Rule 21F-6 would free the SEC to take account of the dollar size of the award in order to make upward adjustments to very small awards (up to $2 million) and downward adjustments to very large awards (down to $30 million), within the statutory parameters. These proposed changes have provoked controversy. Commissioner Jackson and former Commissioner Stein objected, arguing that the SEC should not be given the authority to adjust downward large dollar awards.
To begin to evaluate the wisdom of these proposed changes requires an understanding of the purpose of whistleblower awards and an evaluation of how well the existing award calculation methodology advances that purpose. In my paper, I provide both.
My analysis suggests that the controversial proposed amendments are warranted, but incomplete. For reasons that I explain, a hybrid percentage-dollar approach that ties a whistleblower award to the value of the punishment imposed on the wrongdoer, while also taking into account the costs a whistleblower anticipated incurring by coming forward, makes sound policy sense. The proposed amendments move precisely in this direction and thus merit adoption. But my analysis also suggests two other important reforms that are worthy of consideration.
First, the SEC’s whistleblower program would better align whistleblowers’ incentives to tip with the SEC’s deterrence mission if awards were tethered to the value of all penalties imposed in the covered action rather than simply to monetary penalties collected.
Second, the SEC should be required to be more transparent about the percentages it is awarding and why. The SEC almost never makes the percentage it has determined to award public. This opacity is unnecessary and likely increases the risk discount that potential whistleblowers apply to expected awards when deciding whether the benefits of tipping outweigh the costs.
A full copy of my paper can be downloaded here.