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SEC Commissioner Calls for Less Secrecy in Whistleblower Awards

Aug. 26, 2022, 10:24 PM

The SEC’s decision on Friday to reverse Trump-era restrictions on its whistleblower program divided the five-member body, with its newest member citing concerns about the program’s secrecy that were outlined in a recent Bloomberg Law investigation.

“The Whistleblower Program has come under increasing scrutiny from some on the basis that it operates with a lack of transparency. These concerns are understandable, given that the Whistleblower Program has paid out more than $1.1 billion in awards since inception from funds that would have otherwise benefitted taxpayers,” Securities and Exchange Commissioner Mark T. Uyeda wrote in a statement.

Uyeda’s statment linked to last month’s Bloomberg Law investigation with a footnote that “SEC whistleblower decisions are inconsistent, cloaked in secrecy, often go to clients of agency ex-officials.”

The whistleblower program has come under increasing scrutiny from some, including Alex Platt, a University of Kansas law professor who studied the program’s lack of transparency and whose work was also cited by Uyeda.

Uyeda opposed the two measures, which went into place only about 18 months ago. One change takes away the commission’s ability to reduce the highest awards, while the other expands a whistleblower’s ability to get paid for work done for other federal agencies.

“To the extent that the Commission seeks to improve the Whistleblower Program and its rules, it should perhaps consider promoting greater visibility into its claims and award determinations, and increasing the number of high-quality tips from unrepresented persons,” Uyeda said.

Uyeda, who was appointed by President Joe Biden and sworn in on June 30, also said the commission’s practice of quickly changing new rules undercuts the program’s impact. Friday’s decision “sets a bad precedent, risks eroding the Commission’s regulatory credibility, and increases costs for market participants by requiring frequent reevaluations of compliance obligations.”

Uyeda was joined by Commissioner Hester Peirce, appointed in 2018 by former President Donald Trump.

“The amendments … are particularly troubling because they introduce a needlessly complex analysis that rests on poorly defined terms,” Peirce wrote.

She also said the rules are overly complicated, favoring attorneys over whistleblowers who seek to “report corporate wrongdoing to the commission on their own.

“While this result may end up working in favor of whistleblowers with legal representation to assist them in crafting the most effective narrative, whistleblowers who valiantly try to navigate our rule-maze on their own will not fare so well,” Peirce wrote.

The decision makes good on a promise made last year by Chairman Gary Gensler to revisit the rules following a lawsuit and complaints by attorneys for whistleblowers.

Attorney Jordan A. Thomas filed a lawsuit in January 2021 seeking to have the rule reversed. The SEC never filed a formal reply but quickly asked the court to delay the case while it worked out a solution with Thomas, according to court records.

On Aug. 5, the commission and Thomas asked the court to keep the case on hold and hinted that new rules were imminent.

“The Commission continues to make progress on this rulemaking and is far along in the process,” attorneys wrote. “In light of anticipated rulemaking regarding the rules at issue in this matter and the time necessary for approval of a final rule … it is appropriate to continue to stay this action to allow for completion of the Commission’s rulemaking.”

To contact the reporter on this story: John Holland at jholland1@bloombergindustry.com

To contact the editor responsible for this story: Bernie Kohn at bkohn@bloomberglaw.com