Being a Whistleblower Is Hard Enough. SEC Policies Make It Harder

Imagine that you discover your employer is committing massive shareholder fraud. The company has been lying to regulators and the public for years, and you realize that investors will lose tens of millions of dollars once the truth surfaces. You also understand that coming forward and reporting this might lead you to lose your job.

Despite these risks, you know you need to do the right thing. After a report to the company’s ethics hotline goes nowhere, you hire an attorney and submit a detailed tip to the Securities and Exchange Commission’s whistleblower program. When there is no update on whether the SEC plans to investigate, the uncertainty creates stress as you wonder if your employer will be held accountable, and how this might play out.

Right now, there are two ways to submit a tip to the SEC: either through a portal on the SEC’s website, or by direct communication such as mail or fax. In either case, the SEC confirms receipt and assigns a reference number. Increasingly, based on our experience and numerous discussions with fellow whistleblower attorneys, this is the last communication that many whistleblowers receive from the agency. While the SEC is required to provide an annual report to Congress on its whistleblower award program, there is little transparency into how the SEC evaluates tips or decides which whistleblowers to follow up with.

These annual reports to Congress confirm that the SEC whistleblower program has been a success since its creation 14 years ago, recovering more than $6.3 billion based on whistleblower tips and paying nearly $2 billion to whistleblowers as a reward for speaking up.

But to realize its potential and show those who come forward the respect their bravery deserves, the agency must do a better job of communicating with the people who have made the program thrive: whistleblowers.

Silence from the SEC, combined with the years of delay that investigations often take, creates a practical dilemma for whistleblowers and their counsel. Without any status updates from the SEC, it’s impossible to make an informed decision as to whether to sit tight or move on.

Whistleblowing is also extraordinarily difficult for individuals who come forward. A 2019 study from Tilburg University shares the negative effects of whistleblowing, finding that whistleblowers were significantly more at risk for severe mental health problems, worsening relationships, and poor or worsening health issues compared to nearly every other group, except for cancer patients in some physical metrics.

In our own practice, we’ve witnessed how stressful whistleblowing can be to clients and those around them. These are often people who care about and enjoy their work—and they choose to risk giving it up to do the right thing. Providing them with high-level updates and information recognizes the professional risk they’re taking.

The SEC’s whistleblower program is successful, but its poor tip communication creates needless stress and uncertainty for these brave individuals. This lack of communication extends to the award-application stage of the whistleblower program. When enforcement actions are made public, there is a brief 90-day window for whistleblowers to apply for awards after the SEC’s whistleblower office posts a covered action on its website.

Unfortunately, the SEC provides little to no communication about whether a whistleblower’s tip led to an enforcement action. If a whistleblower or their attorney miss the 90-day window to apply for an award, or if it’s unclear whether the commission used a whistleblower’s information in an enforcement action, whistleblowers may lose their opportunity to receive an award, and attorneys may be exposed to malpractice liability.

The SEC can fix this: The Equal Employment Opportunity Commission, for example, has a public portal that provides high-level information and a point of contact for pending matters. While the system is imperfect, it provides basic details and helps put people at ease. The SEC could implement a system that allows their investigations to remain confidential, while whistleblowers have more than the black box that many of them confront after filing a tip.

The SEC whistleblower program has seen significant growth since its inception, but even as the program has thrived, communication with whistleblowers is sorely lacking. We’ve seen this in our own practice. We urge the SEC to prioritize transparency and communication with whistleblowers, and not offer these brave people only silence.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Debra Katz and Michael Filoromo III are whistleblower attorneys for Katz Banks Kumin, a whistleblower and employment law firm.

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