Proposed Legislation Could Weaken SEC Whistleblower Program

April 6, 2017
Murat Kayali

Under the SEC’s whistleblower program, established in 2011, a whistleblower who reports misconduct to the SEC can receive an award of between 10 percent and 30 percent of the money collected as a result of the SEC’s enforcement action. Whistleblowers who were themselves co-conspirators in the wrongdoing are eligible to receive an award, provided that they have not been criminally convicted or charged for the same or related conduct.

Republicans in the House of Representatives are currently seeking to make changes to the SEC whistleblower program through a proposed bill known as the Financial CHOICE Act. According to recent reports, House Financial Services Committee Chairman Jeb Hensarling, R-Texas, has circulated a memo to Republicans in Congress that summarizes proposed changes to the SEC whistleblower program. Among the proposals in the memo is a provision that would bar co-conspirators from recovering whistleblower awards.

Barring wrongdoers from collecting rewards for reporting misconduct in which they played a part may seem intuitive and reasonable, but enactment of the proposal could prove detrimental to the SEC’s enforcement objectives of rooting out fraud and securities violations. While it may not be ideal to reward participants in misconduct, incentivizing co-conspirators to come forward with tips can alert the SEC to violations of which it would otherwise be unaware. By encouraging lower-level players to come forward with information, the SEC can identify and discipline higher-level actors, which furthers the SEC’s important mission to protect investors.

In terms of establishing fair financial markets and preventing investor fraud, the benefits of obtaining information about malfeasance outweighs the cost of rewarding the bad behavior of a single individual who exposes an illegal scheme. The Republican proposal to bar rewards to whistleblowers who have been complicit in wrongdoing runs counter to the enforcement objectives of the SEC whistleblower program and could weaken an important tool in the regulation of the nation’s financial markets.

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