Addressing the Unintended Consequences of an Enhanced SEC Whistleblower Bounty Program
The phrase “bounty hunter,” for most people, conjures up images of gun fights with dangerous fugitives. For the truly geeky, “bounty hunter” will forever bring to mind the beloved character Boba Fett from Star Wars.However, Congress recently brought bounty hunting from a long time ago in a galaxy far, far away to the front and center of securities law enforcement.
On July 21, 2010, President Obama signed into law the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank, or the Act), the most sweeping overhaul of the nation’s financial regulatory system since the Great Depression. Among the Act’s hundreds of provisions is § 922. Section 922 significantly enhances the Securities and Exchange Commission’s (SEC’s) existing whistleblower bounty program, requiring that a person who reports any securities law violation to the SEC be paid between 10% and 30% of the monetary sanctions imposed upon the violator in any resulting SEC action in which the sanctions exceed one million dollars. The new bounty program is considerably more robust than the one it replaces. Previously, the whistleblower award was dispensed solely at the SEC’s discretion, was capped at 10% of the sanctions, and was available only for tips regarding insider trading. In addition to—or perhaps because of—these structural weaknesses, the former bounty program was rarely used in practice.
After a review by the SEC’s Office of Inspector General revealed its infrequent utilization and problematic design and implementation, SEC Director of Enforcement Robert Khuzami stated that the SEC supported a wholesale congressional rewriting of the program. The SEC has certainly gotten what it wished for in § 922, which is likely to lead to a greater number of tips regarding securities law violations. In light of the accounting scandals at the turn of the millennium, the global financial crisis, and the Bernard Madoff debacle, a program that will provide the SEC with more information on illegal financial activities is certainly a positive development as a matter of general public policy.
This is not to say, however, that § 922 has no drawbacks or unintended consequences. A greater number of tips to the SEC is not equivalent to greater compliance with the federal securities laws. As several early commentators have noted, the enhanced bounty program drastically alters the incentive structure that operates on persons who become aware of potential securities law violations. While in one sense this merely states the obvious intent of § 922, in another sense it begins to reveal the more problematic aspects of the new bounty program. The financial incentive of a large bounty encourages those who become aware of a securities law violation at a company to turn first to the regulators rather than the company’s internal securities compliance program, even in “borderline” cases where the informant’s knowledge of the wrongdoing is underdeveloped. This risks undermining the role of corporate compliance programs in detecting and preventing securities law violations. Moreover, persons who discover potential securities law violations are likely to be public company employees or financial professionals whose fiduciary or professional ethics obligations may come into conflict with the incentive to directly reveal potential wrongdoing to the SEC that § 922 provides.
This Comment will explore these potential drawbacks of the SEC’s enhanced whistleblower bounty program in detail. Part I will more fully explain the mechanics of § 922, will investigate its legislative history, and will examine the performance of a similar bounty program in place at the IRS for tax law violations. Part II will address whether and how the new bounty program might undermine the role of internal corporate compliance programs in achieving conformity with the federal securities laws and will assess the potential conflicts the new bounty program might create with the professional ethics obligations of whistleblowers who are employees or third party financial consultants of the violator. Finally, Part III will recommend certain SEC rules intended to preserve the value of the new bounty program while ensuring that financial professionals and internal compliance programs continue to play a central role in securities law compliance. Part III will also comment on the SEC’s recent Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934 (Proposed Rules).