This article was originally published on Bloomberg Law.
Most Securities and Exchange Commission observers expect Wall Street insider and new SEC Chair Paul Atkins to bring a light-touch approach to regulation and enforcement but maintain the agency’s core mission to protect investors by promoting fairness and efficiency in the markets.
Whistleblowers have played an increasingly important role in enhancing and expediting the SEC’s work. Atkins should preserve and enhance the SEC’s whistleblower program to benefit the agency and protect the markets.
Established in response to the serial misconduct by large corporations and financial institutions that led to the 2008 financial crisis, the SEC whistleblower program empowers individuals to report violations of federal securities laws, with significant incentives and employment protections.
Tips that lead to a successful enforcement action, and where monetary penalties exceed $1 million, may generate rewards between 10% to 30% of the total amount collected. Rewards don’t come from taxpayer dollars—they’re paid for by a fund financed by penalties levied against securities law violators. The program, in other words, pays for itself.
And it has been an unmitigated success. The SEC last reported total awards exceeded $2.2 billion. Monetary sanctions from actions started or substantially assisted by whistleblowers are on track to surpass an astonishing $10 billion. In 2023, the SEC issued its highest-ever award to a whistleblower who helped expose foreign bribery by Swedish telecom giant Ericsson, leading to a $1.1 billion settlement.
Early on, many in the securities industry—including Atkins—doubted the program. Wary observers were concerned that the floodgates would open to disgruntled employees, the SEC’s enforcement division would be buried by junky submissions, and the program would circumvent compliance efforts and undermine internal reporting mechanisms.
In practice, these concerns have fallen by the wayside. With a mandate that a tip must be “specific, credible, and timely” to cause the SEC to open an investigation, or that it must “significantly contribute” to the success of an ongoing investigation, unsubstantiated tips simply don’t qualify for awards.
And while the SEC faces a high volume of whistleblower tips, it has developed internal processes that allow enforcement staff to prioritize high-quality submissions. Triage can always be improved, but on balance, the quality of tips associated with whistleblowers’ reporting far exceeds the burden of intake.
The program hasn’t undermined compliance programs; most employee whistleblowers try to report internally, despite the clear risks of doing so. SEC rules clearly state that whistleblowers who follow internal compliance processes qualify for higher awards. For many, including whistleblowers with whom I work, reporting to the SEC is the last resort, not the first step.
The program isn’t likely to disappear any time soon. But if Atkins were to somehow weaken it, he would be jeopardizing the agency’s access to one of its best sources of information: company insiders. Whistleblowers face massive risk in reporting to the SEC, and without the combination of rewards and anti-retaliation protection, they’d be far less likely to come forward. Importantly, whistleblowers can submit tips anonymously if they do so through an attorney—a significant layer of protection for those worried about retaliation.
While Atkins surely will scrutinize large penalties against entities that haven’t caused direct harm to investors, he also surely understands the value of regulated, orderly securities markets. As whistleblowers have played a pivotal role in rooting out massive fraud while improving the efficacy of the SEC writ large, Atkins should continue to support this mission-critical anti-fraud program.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Copyright 2024 Bloomberg Industry Group, Inc. (800-372-1033) http://www.bloombergindustry.com. Reproduced with permission.
