Big SEC Whistleblower Awards Triggered Fund Refill for First Time

Stay up-to-date with the latest developments in securities law through access to both news and all statutes and regulations. Find relevant corporate filings through a searchable EDGAR database. And...

By Andrew Ramonas

The SEC had to replenish a whistleblower awards fund for the first time in the account’s eight-year history in May after a record-breaking payout that might be among the last of its kind.

The Securities and Exchange Commission disclosed the replenishment in a 184-page proposal to amend whistleblower program rules released June 29. The right-leaning commission voted 3-2 along ideological lines to seek public comment on the plan.

The SEC currently gives whistleblowers 10 percent to 30 percent of the money collected in cases that yield at least $1 million in fines and sanctions against a company.

The proposal would give commissioners more liberty to restrict bounties for tipsters in cases that bring massive fines. Whistleblowers would get an amount of money that is “reasonably necessary” for their help and still encourage others to come forward, according to the proposal.

The SEC wouldn’t be bound by a formula it uses to determine the percentage of money it awards tipsters when they help secure sanctions of at least $100 million. Instead, the commission generally would have the power to keep awards from rising above $30 million even if the formula would have directed it to pay more. For example, a whistleblower whose case brings $200 million in sanctions would receive between $20 million and $60 million today, but might not get above $30 million under the proposal, regardless of what the formula says.

The $83 million payout that triggered the first-ever refill of the investor protection fund in May included a $33 million award for one whistleblower and $50 million bounty for two tipsters. The whistleblowers provided information about Bank of America Corp.’s Merrill Lynch unit, which reached a $415 million settlement with the SEC in 2016 to resolve claims it misused client money, according to the tipsters’ lawyers at Labaton Sucharow LLP. The awards are the largest bounties the fund has ever paid since the Dodd-Frank Act established the fund in 2010.

The SEC must replenish the fund when it gets below $300 million. The fund, which is supported through monetary sanctions, began with $452 million and dwindled to $322 million by Sept. 30, 2017, according to SEC records. An agency official declined to disclose to Bloomberg Law exactly how much money was in the account immediately before and after the record payout, as well as the current size of the fund.

The SEC’s 184-page whistleblower proposal mentions the $83 million payout multiple times amid discussion about why commissioners should have more flexibility in determining the size of awards.

“The commission may find itself faced with the possibility of paying out significantly large awards that are in excess of the amounts appropriate to advance the goals of the whistleblower program,” the proposal said.

Money the agency gets from sanctions and is not used to replenish the whistleblower fund would go to the Treasury for “valuable public programs,” according to the document.

Proposal Needed?

SEC Commissioner Kara Stein, a Democrat, said during a meeting to consider the proposal she has seen “no evidence” that the size of whistleblower awards is a problem. She voted no on the plan with Commissioner Robert Jackson, who also occupies a Democratic seat on the commission.

“The proposal states this change is needed to ensure that the whistleblower awards do not ‘exceed an amount that is appropriate to achieve the goals and interests of the program,” Stein said. “However, we do not have the necessary facts to show that $30 million, or any other number for that matter, is the point at which there magically starts to be diminishing returns for whistleblower awards.”

SEC Chairman Jay Clayton said at the meeting the $30 million threshold would “not in any practical way affect incentives.” Clayton, a right-leaning independent, voted in favor of the proposal with Republican Commissioners Michael Piwowar and Hester Peirce.

“The proposed amendments are intended to make sure that we are responsible stewards of the public trust while in no way diminishing the monetary incentive to blow the whistle on wrongdoing,” Clayton said.

The public will have 60 days to comment on the proposal once it’s published in the Federal Register.

To contact the reporter on this story: Andrew Ramonas in Washington at

To contact the editor responsible for this story: Seth Stern at

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Securities & Capital Markets on Bloomberg Law