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SEC Chairman Rejects Caps on Awards to Whistleblowers

Yesterday the Securities and Exchange Commission Chairman Jay Clayton appeared to cave-in to common sense when he announced in a Senate hearing that the Commission will not introduce caps on awards to whistleblowers.

Just so you understand the impact of this, the Ontario Securities Commission has a Whistleblower Program and it has a $5 Million cap on awards.  It got 200 tips in the two years from 2016 through 2018.

The SEC whistleblower program, had 5,200 tips in fiscal 2019 alone, according to its latest report.

Yes, the U.S. is bigger. Yes, Canadians may pride themselves more on their honesty in securities markets than we do, but their Commission got in two years the amount of tips the SEC might get in two weeks. Hey Ontario, lift the Cap!

To get the type of inside information only whistleblowers have, at least the SEC program has so far made it clear it will pay for such information.  So, it is getting tips., thousands of tips which make it possible to find out about real fraud.

The SEC can always do more. It can prosecute more cases of fraud and it can issue more awards, but having a cap on awards hampers the process and makes it unclear to people what the incentive is to report. In this particular world, which usually involves highly compensated people, who are used to working based on monetary incentives, capping awards makes especially little sense.  You really expect a broker making $10M a year to come forward for an award that is capped? You expect attorneys to handle years of complicated material and explain a multi-million or billion-dollar fraud which may or may not produce a dime, if when one finally does work out that award is capped?

Whenever the idea of “Caps” on awards is presented I always want to ask who put the cap on Fraud? If a bank makes $500 Million or $5Billion in profit, we do not say “hey, you should be capped in your earnings”. The defenders of free-market capitalism have only one caveat as to what anyone should be allowed to make, they want to cap what people make for reporting fraud. The people making such proposals have only one thing really in mind and that is 5,200 tips to the SEC is at least 5201 too many.

The Whistleblower community has been fighting the proposed cap on awards since the SEC announced them as part of the new rules they were proposing.

The good guys from the likes of Taxpayers Against Fraud and many, many, colleagues who care about whistleblowers, and by the way any of them no doubt could make a lot more money if they switched sides and defended fraudsters, rallied. Of course, Senator Charles Grassley put on some pressure and for the moment this absurd idea has been put away.  Make no mistake it will come back as will other so-called whistleblower improvements.

We have to keep our eyes open, but at least for today, we can join with the whistleblower community in celebrating the idea that a clear incentive to report fraud has been preserved and the SEC’s fax machine will still be busy getting those TCR forms with fresh new information to investigate.