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April 11, 2022

Better Markets Urges SEC to Rescind Flawed Rules Undermining Successful Whistleblower Program

Better Markets filed a comment letter in response to the Securities and Exchange Commission’s proposed amendments to its Whistleblower Program.

Why It Matters.  Congress established the SEC’s Whistleblower Program in the Dodd-Frank Act, not only in response to the rampant misconduct that triggered and fueled the financial crisis but also in response to the high-profile failure of the SEC to heed repeated warnings that Bernie Madoff was running what would prove to be the largest Ponzi scheme in history.  The program requires the SEC to reward those who come forward with often difficult to uncover evidence of misconduct.  It requires the SEC to pay them between 10% and 30% of any monetary sanction exceeding $1 million that the SEC obtains in an enforcement action based on the original information or independent analysis provided by the whistleblower.  It also requires the SEC to make an award for successful actions brought by other agencies based on the whistleblower’s information (a “related action”).

Since its establishment, the program has amassed an impressive record as a law enforcement tool, as whistleblowers have provided the SEC with information leading to nearly $5 billion in monetary sanctions, including $3.1 billion in disgorgement of ill-gotten gains and more than $1.3 billion slated for return to investors.  Despite this impressive track record, in 2020, the SEC finalized amendments that weakened the program.  Those changes made it more difficult for whistleblowers to collect an award based on related actions, gave the SEC unfounded authority to arbitrarily reduce award amounts, and erected unnecessary hurdles for whistleblowers seeking to collect awards on the basis of their independent analysis.

What We Said. The SEC’s proposal goes a long way toward fixing the problems introduced by the 2020 amendments.  By making it clear that the SEC does not have authority to arbitrarily lower  an award amount, the proposal will reduce uncertainty that may prevent some whistleblowers from coming forward.  Likewise, by changing the flawed 2020 approach to related actions, the proposal will reduce the likelihood that whistleblowers will receive a severely inadequate award, or even no award, for a successful related action.  In our comment letter, we urge the SEC to go further and simply jettison the flawed 2020 approach to related actions and revert to a simple rule that tracks the statute.  We also urge the SEC to remove the obstacles facing whistleblowers who provide independent analysis, to ensure that the agency does not once again find itself blind to a massive ongoing fraud such as Bernie Madoff’s.

Bottom Line. Better Markets supports the Commission’s efforts to address some of the most problematic aspects of the 2020 amendments to its Whistleblower Program, but we urge the Commission to go further to ensure that whistleblowers are fully incentivized to come forward with relevant information that is critical to successful enforcement of the securities laws.

Read our full Comment Letter here.

Comment Letters

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