Securities Regulation Daily SEC reports $60M in whistleblower payouts; Clayton clarifies purported ‘cap’ on large awards
Friday, November 15, 2019

SEC reports $60M in whistleblower payouts; Clayton clarifies purported ‘cap’ on large awards

By John M. Jascob, J.D., LL.M.

Fiscal year 2019 saw the Commission pay out its third highest award since the whistleblower program began, while Chairman Clayton asserted that proposed rules guiding the issuance of awards over $30 million are not intended to place a limit on big awards.

The SEC awarded approximately $60 million in whistleblower awards to eight individuals in FY 2019, according to the Office of the Whistleblower’s annual report to Congress. The Commission also reported receiving its second largest number of whistleblower tips in the course of making its third largest award to date—a $37 million award to a whistleblower announced in March 2019. Chairman Jay Clayton issued a statement, however, clarifying that the SEC’s proposed rulemaking to guide the Commission’s exercise of discretion in the case of awards over $30 million was not intended to operate as a "cap" on such large awards.

The Dodd-Frank Act amended Exchange Act Section 21F to direct the SEC to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions over $1 million and successful related actions. Awards must be made in an amount that ranges from 10 percent to 30 percent of the monetary sanctions collected. The Dodd-Frank Act also requires the Office of the Whistleblower to report annually to Congress on the office’s activities, whistleblower complaints received, and the response of the Commission to such complaints.

Whistleblower report. According to the report, the SEC received over 5,200 whistleblower tips in FY 2019, a 74 percent increase since the program was established in 2010. The Commission received tips from every state in the United States as well as from individuals in 70 foreign countries. The tips covered a broad range of allegation types, including nearly 300 tips relating to cryptocurrencies. Recipients of whistleblower awards in FY 2019 were diverse as well, with three award recipients being located abroad.

On March 26, 2019, the SEC announced that two whistleblowers were awarded a total of $50 million for information leading to a successful enforcement action. One whistleblower received $37 million and the other was awarded $13 million for providing original information to the Commission that led to a successfully settled cease-and-desist proceeding. According to the report, the Commission has awarded approximately $387 million to 67 individuals since the beginning of the whistleblower program.

Clayton statement on "caps." In his statement announcing the release of the report, SEC Chairman Jay Clayton took the opportunity to clarify that the Commission’s proposal in July 2018 to amend the rules governing its whistleblower program was large designed to allow the SEC to get money into the hands of more whistleblowers faster. Clayton said that the most controversial element of the proposal, a framework to guide the exercise of discretion by

The SEC in the case of awards over $30 million, has been mischaracterized by some commenters as a "cap" on these awards. Clayton said this proposal is not a cap and could not be one. Rather, the SEC will continue to exercise its sound judgment under the authority granted in the Dodd-Frank Act.

This mischaracterization has had a beneficial result, however, because it has made Clayton even more aware of the effect that uncertainty—even uncertainty regarding the award process for very large awards—can have on the willingness of potential whistleblowers to come forward. Clayton said that he expects the SEC to consider final rules in the near future, and he expects that the enhancements from these rules will continue to incentivize whistleblowers to provide valuable information to aid the SEC in protecting investors and markets.

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