Academic journal article Vanderbilt Law Review

Calculating SEC Whistleblower Awards: A Theoretical Approach

Academic journal article Vanderbilt Law Review

Calculating SEC Whistleblower Awards: A Theoretical Approach

Article excerpt

Introduction

After eight years in operation, the Securities and Exchange Commission's ("SEC") Whistleblower Program is undergoing retrospective review. Last summer, the SEc put out for public comment a lengthy release proposing a variety of amendments to the program's rules.1 Among the most controversial is a proposed amendment to Rule 21F-6, which sets forth the criteria for determining the amount of whistleblower awards. The Dodd-Frank Wall Street Reform and consumer protection Act, which created the whistleblower program, requires that the aggregate amount awarded to an eligible whistleblower or group of whistleblowers whose tip(s) led to a "covered action"-defined as an SEC action in which monetary sanctions in excess of $1 million are ordered-equal not less than ten percent and not more than thirty percent of the monetary sanctions collected in the covered action and certain related actions.2 Within this range, the statute grants the SEc discretion to determine the award amount while setting forth certain nonexclusive criteria that the SEc shall take into consideration in the exercise of its discretion.3 Rule 21F-6, in turn, lists factors (including but not limited to those specified in the statute) that the SEC may consider "[i]n exercising its discretion to determine the appropriate award percentage."4 These factors may cause the SEC to, in its discretion, "increase or decrease the award percentage."5

As written, Rule 21F-6 requires that the SEC consider these criteria in determining the appropriate award percentage, seemingly without regard to the total dollars the award would yield for the whistleblower. SEC Chairman Jay Clayton has dubbed this "the percentage formula" for determining whistleblower awards;6 this article will refer to it as "the percentage method." The proposed revisions to Rule 21F-6 would free the SEC to consider the dollar amount of an award, but only in circumscribed ways and under limited circumstances: when an award determined using the percentage method would be very small in dollar terms (in which case an upward adjustment may be warranted) and, more controversially, when it would be extremely large in dollar terms (in which case a downward adjustment may be warranted).7 Commissioner Jackson and former Commissioner Stein have expressed concern that affording the SEC discretion to adjust downward large dollar awards may jeopardize the goals of the whistleblower program.8

A fundamental question is lurking in this debate: Why should the percentage method be the baseline for determining SEC whistleblower awards in the first place? Congress did not debate this question before imposing the requirement that whistleblower awards must equal between ten and thirty percent of the amount of monetary sanctions collected in a covered action.9 Nor does it appear that the SEC thought hard about this question when it decided to restrict itself to the percentage method as a way of determining what an award should be within the statutory ten to thirty percent range. The only statement concerning the methodology the SEC made when adopting Rule 21F-6 was that it was "[s]imilar to the approach used by the Department of Justice and Internal Revenue Service" ("IRS") in their payment of whistleblower awards under the False Claims Act and IRS Whistleblowers Program, respectively.10 The percentage method also resembles the preferred approach for determining the fee award paid to class action attorneys. But these analogies, while superficially appealing, do not necessarily support use of the percentage method in the context of SEC whistleblower awards.

This Article returns to first principles, articulating what an award calculation methodology should strive to achieve in light of the purpose of the whistleblower program and exploring how well the percentage method lives up to these expectations. It proceeds in four parts. Part I provides a brief overview of the SEC's whistleblower program. Part II explains in greater detail the current method employed by the SEC for determining the amount of whistleblower awards, reports data on the whistleblower awards that the SEC has granted to date, and describes the recently proposed amendments to Rule 21F-6 and the controversy they have provoked. …

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