Will Whistleblowers Still Come Forward?
A new SEC rule interpretation threatens to weaken the incentive for external whistleblowers to come forward with details about potential corporate fraud. The clarification states that a whistleblower’s tip has to offer insight “beyond what would be reasonably apparent” to the agency from publicly available information. This could make it harder for tipsters from outside a company to be awarded for their disclosure.
Up until now, anyone with “original” information of potential financial wrongdoing would be eligible if, after investigation, the SEC decides to initiate a lawsuit against the offending company. The awards enforcement action must result in monetary sanctions of more than $1 million. Section 922 of the Dodd-Frank Financial Reform Act provides an award for whistleblowers (who meet the criteria) of “not less than 10 percent and not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed on the company.”
So, the change in the criteria for an award is from simply providing original information unknown to the SEC to the reasonably apparent rule. On the surface, it seems like the latter is stricter since any “reasonableness” standard means whether the information might have been identified by others because it was “reasonably apparent.” This opens a gapping hole in the rules including substituting a relatively objective standard to one that is subjective.
In the original rules, the standard was whether the information was gained through “independent analysis,” meaning it was determined by an independent analysis or evaluation that may be public, done by a person or group that reveals information that isn’t generally known or available.
In its new guidance, the SEC said it would consider whether a whistleblower’s conclusion derives from multiple sources, “including sources that are not readily identified and accessed by a members of the public without specialized knowledge, unusual effort, or substantial cost.” The sources must also collectively “raise a strong inference of a potential securities law violation that is not reasonably inferable” from any single source.”
Whistleblowers and their attorneys are concerned that the interpretation could give the SEC greater scope to reject payouts and raise the bar for potential awards so high that some tipsters might be discouraged from coming forward.
It is difficult to know for sure whether whistleblower’s will be more reluctant to step forward given that it now will be more difficult to get an award. Let’s face it, the award is an incentive to disclose and would-be-whistleblowers may not want to risk being outed for a lesser chance of receiving an award. The odds of winning an award for submitting a tip to the program has been less than one-third of 1%. With the changes, it may be lesser than that.
Carolyn Crenshaw, an SEC Commissioner, responded to the change by stating, “the focus for the SEC should instead be on the quality of the information and the analysis provided by the tipster.” She clarified by saying, the rule “should not focus on whether the staff could have inferred the information from what was provided, but whether the staff actually did infer the information prior to getting the information.
This makes sense to me because the goal of the whistleblower program should be to punish companies that engage in financial fraud and any information not known to the SEC should be awarded, assuming it leads to a successful prosecution. The idea that it has to go beyond what a reasonable person might infer builds in a standard that is, at best, difficult to apply as is the case in any reasonable basis criteria.
We should judge the rule change by its intent. By all accounts the motivation is to cut down on the number of claims the SEC has to review, perhaps because of a lack of resources. The SEC has said it has received 40,200 tips through the whistleblower program. This is an enormous amount and adds credence to the rule change. Still, I worry whether good people with good motives will be turned off by the rule change. After all, the motivation for any change should to increase the likelihood that bad actors are caught and punished for their crimes.
In the spirit of the holiday season, I am giving away signed copies of my book to the first ten people who contact me at: [email protected] and provide a mailing address. May your 2021 be better than 2020. Let's face it, it can't be worse!
Posted by Dr. Steven Mintz, aka Ethics Sage, on December 17, 2020. You can sign up for his newsletter and learn more about his activities at: https://www.stevenmintzethics.com/. Follow him on Facebook at: https://www.facebook.com/StevenMintzEthics and on Twitter at: https://twitter.com/ethicssage.