SEC Proposes $30 Million Cap on Whistleblower Awards

Following the announcement of an $83 million whistleblower award, the SEC is looking to put a cap on tipster payouts. A recent 3-2 vote by the Commission said yes to capping awards at $30 million.

SEC Proposes $30 Million Cap on Whistleblower Awards

The $83 awarded to three whistleblowers last March ignited the flame of the “awards are getting too large” sentiment that guides tort reform advocates across the nation. When it comes to SEC whistleblowers, they may finally be getting their big day.

The cap is, of course, bad news for the public and good news for dishonest corporations that make billions of dollars a year, for whom having to shell out one or two hundred million is merely a tickle.

Awards are an incentive to whistleblowers, who often lose their jobs and their livelihood in their attempt to expose fraudsters. If putting caps on rewards becomes a habit, it will be bonanza time for fraudsters, but the SEC does not appear to see it that way.

According to SEC Chairman Jay Clayton, “The proposed rules are intended to help strengthen the whistleblower program by bolstering the Commission’s ability to more appropriately and expeditiously reward those who provide critical information that leads to successful enforcement actions.” 

The SEC’s proposal is controversial, to say the least. If False Claims Act and tax whistleblowers can get no-cap awards, why should securities whistleblowers’ rewards be limited?

Whenever a SEC whistleblower case leads to sanctions over $1 million, the tipster is entitled to 10-30% of the total. If the new proposal moves forward, that would no longer be the case for the largest awards. 

Under the proposed rule, the SEC would be able to reduce the whistleblower award if it thinks the payment is excessive. Specifically, the Commission could limit awards when the sanctions exceed $100 million. While they would have a discretion to reduce awards in these cases, the minimum would be established at $30 million.

According to one of the Democrat members of the Commission, Kara Stein, implementation of the proposed ruled would clearly “be used as a means to weaken the Whistleblower Program.”

For her fellow SEC member Robert Jackson (also a Democrat), “Whistleblowers are, in the parlance of economics, risk-averse individuals, and we’re asking them to put their livelihood on the line to help us enforce the law. Adding uncertainty to that process risks that would-be whistleblowers will stay quiet.”

Stein emphasizes the fact that the SEC has recovered or returned to defrauded investors over $1.4 billion thanks to whistleblower tips. Only $266 million of that has gone into rewarding the tipsters. 

The SEC has repeatedly said whistleblowers provide an invaluable service, but it doesn’t seem to be acting accordingly these days. Stein also believes the caps may be in violation of the 2010 Dodd-Frank Reform Act.

According to a spokesperson for the whistleblowers who shared the $83 million award, the caps could well deter potential whistleblowers in large fraud cases. “Congress wisely chose not to impose a cap on SEC whistleblower awards, and the SEC should refrain from doing so,” the spokesperson added.

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