Wall Street’s top watchdog loves to tout the success and importance of its whistleblower program.
“These awards show how critically important whistleblowers can be to the agency’s investigation and ability to bring a case to successful and efficient resolution,” said Jane Norberg, who heads the Securities and Exchange Commission’s (SEC) program, when announcing a $50 million reward for two whistleblowers in March.
Norberg’s office is seen as one of the US government’s most successful whistleblower initiatives. It has brought more than $1.7 billion in fines and reimbursements since it started in 2011, helping the agency tackle crimes that threaten the financial system’s stability. So, it’s curious that the SEC is proposing changes to the program that whistleblower advocates say will deter potential tipsters from coming forward with information.
The program now rewards whistleblowers with 10% to 30% of any money collected above $1 million in cases that used their information. However, in cases that collect more than $100 million, the proposed changes would let the agency limit those awards to the lower end of that range—10% or $30 million, whichever is larger. The new rules would also bar informants who don’t report violations in writing—they can now do so verbally—from receiving SEC protection against retaliation. Further, it could raise the bar so that outside analysts who have revealed fraud by piecing together public information would have little incentive to go to the SEC.
The proposal follows other Trump administration rollbacks of legislation passed in response to the 2008 financial crisis, much of which was designed to safeguard financial markets but is seen as cumbersome by Republicans and many on Wall Street.
The SEC says its new whistleblower rules will make the office more efficient. Other changes in the proposal would speed up the process of rejecting applications that don’t hold up and let the agency bar people who repeatedly make frivolous claims. SEC chair Jay Clayton said the move would also allow the SEC to pay more to people who now receive awards below $2 million, which he says make up more than 60% of potential claimants. He argued that the limit to large awards “will not in any practical way affect incentives.”
Whistleblower advocates, however, are up in arms. They argue the new rules will prevent people from bringing claims.
“Why create this barrier—potentially kicking out many people in the system and disqualifying them?” asked John Kostyack, executive director of the nonprofit National Whistleblower Center, referring to the requirement to issue claims in writing. “This is completely contrary to the whistleblower section of the Dodd Frank Act, which was to encourage people to come forward.”
Sean McKessy, the founding head of the SEC whistleblower program, told Quartz he could think of at least four successful tipsters under his tenure—out of a total of more than 30—who would not be paid under the proposed rules, either because they were outside analysts or they had not followed the exact bureaucratic procedures required when first submitting the paperwork. “There are several people who came forward on my watch to save their company from an Enron-like fate,” said McKessy, who now works as a lawyer for SEC whistleblowers. “If you know just one success story like that, why wouldn’t you just say it was worth it?”
Whistleblowers themselves say the change will dissuade people from coming forward with information about massive, system-threatening issues. “Capping awards would all but ensure that the elephant never walks through the [SEC’s] doors, only rabbits and the occasional zebra,” wrote Harry Markopolos, a financial investigator who blew the whistle on Bernie Madoff.
Markopolos himself eschewed the whistleblower’s office with his latest project, instead partnering with a hedge fund to accuse General Electric of engaging in accounting fraud. (GE has so far denied the allegations as “meritless.”) Markopolos hasn’t said why he chose to bypass the SEC, though his “decent percentage” of the profits made from shorting GE would likely come a lot faster and with fewer hurdles than an SEC whistleblower claim.
The SEC declined to comment on this story.