SEC Whistleblower Mission Plagued by Secrecy, Commissioners Say

The SEC’s five commissioners have the power to regulate financial systems, protect investors and make rules impacting more than $100 trillion in securities trades each year.

They don’t, however, have the power to tell taxpayers or Congress why awards topping $100 million sometimes go to whistleblowers the commissioners feel shouldn’t get paid. They can’t detail their objections publicly or provide any facts not included in sparse, heavily redacted releases announcing the awards.

“We want to put the public in the position where they can ask these questions, where they can understand whether our decisions were appropriate. But we can’t,” Commissioner Hester Peirce said in an interview with Bloomberg Law. “I can’t tell you because I can’t tell you. It’s very frustrating.”

That frustration spilled out last month in response to two whistleblower awards totaling $122 million. Peirce and Commissioner Mark Uyeda penned an open letter alleging the agency’s excessive secrecy undermines faith in the program, and lamenting that they weren’t free to explain why the money shouldn’t have been awarded.

Created by the Dodd-Frank financial reform law of 2010, the whistleblower program forbids the Securities and Exchange Commission from releasing any information that would identify tipsters. A 2022 Bloomberg Law investigation found that the secrecy went far beyond that mandate, making it virtually impossible for Congress to provide oversight of a program that’s now awarded about $2 billion. The story showed that the agency often waived its own rules to issue awards, and that more than $425 million went to clients of three former SEC attorneys, including one who helped create the program and one who ran it for years.

“Unnecessary redaction of final award determinations in the name of whistleblower confidentiality limits public information about the awards, and that, in turn, insulates the awards from scrutiny,” Peirce and Uyeda wrote in their Sept. 19 statement. “And the whistleblower program needs scrutiny.”

Uyeda didn’t respond to requests for comment.

Peirce, appointed by former President Donald Trump, and Uyeda, a President Joe Biden appointee, issued their statement almost one month after voting against two awards worth more than $122 million.

The SEC, in an emailed response to questions, said “protection of whistleblower confidentiality is a cornerstone of the SEC’s whistleblower program. Final orders are redacted in accordance with our statutory obligations and agency regulations.”

The commissioners’ votes came in final orders issued on Aug. 23 and Aug. 26 that were heavily redacted. The orders made no mention of any dissent, didn’t include any details of the underlying violation that prompted the investigation, and blacked out the percentage of recovery that was awarded. By law whistleblowers are awarded between 10 percent and 30 percent of any money recovered through their tips.

Peirce, in the interview, emphasized both her support for the program and the need for change.

“There were specific issues that I wanted to raise – I was opposed to those awards – but I couldn’t articulate my reasoning publicly. That’s not how this is supposed to work,” Peirce said.

In their September statement, Peirce and Uyeda said keeping so much information hidden made the agency “immunized from effective public scrutiny.”

Senator Chuck Grassley (R-Iowa), who helped write the whistleblower law, has reached out to the agency in response to the Peirce and Uyeda statement, his office said.

“There’s an important balance between protecting whistleblower confidentiality and releasing information in the public interest,” his office said in an email.

Questions surrounding secrecy have dogged the program for years. Whistleblowers who have been denied claims must sign non-disclosure agreements to look at records in their case, even if it involves information they supplied to the SEC. Often that information can’t be used during federal court appeals challenging the denials, attorneys specializing in whistleblower cases have said.

The lack of transparency can make it difficult for the public to understand “whether the Commission is applying its rules in a reasonable and consistent matter,” the commissioners wrote in their statement.

They didn’t mention any cases, and Peirce said she was prohibited from doing so.

But many have come under scrutiny from courts and attorneys. Last year a federal appeals court said the SEC’s decision to give a $14 million award to activist investor Carson Block “leaves something to be desired,” and said his contribution “had no ostensible impact on the investigation.” And in December 2022, the SEC awarded $20 million to a whistleblower who provided virtually no new information to an agency investigation that was more than a year old. Staff recommended the payment, and it became official 30 days later without a commission vote.

Peirce said she believes the agency can become more transparent without identifying whistleblowers if it has the will to change.

“I don’t think we need a formal rulemaking process, but we should be discussing this with attorneys and others to come up with something that will be more accountable to the public, and still protect the whistleblower’s identity,” she said.