Explaining her dissent from the party-line vote, commissioner Allison Herren Lee said the SEC had concluded that it has always had the authority to lower bounties based on the perceived appropriateness of the dollar amount paid to whistleblowers. Lee said the assertion of that legal authority went beyond the 2018 proposal, which would have limited the SEC's ability to lower awards for cases that netted more than $100 million in sanctions.

In those cases, the proposal would have prevented the SEC from reducing bounties below $30 million. While an undoubtedly weighty sum, whistleblower lawyers and other advocates expressed concern that such a limit could dissuade corporate insiders with knowledge of massive frauds from risking their careers and reporting wrongdoing.

"We claim a new discretion to consider dollar amounts—in the setting of award amounts—that is broader than the discretion we proposed to write into the rule [in 2018], because it is applicable to all awards, no matter their size," Lee said, adding that there is "no transparency" in the use of that discretion.

"It provides whistleblowers no way to contest its application," she said.

Defending the SEC's move, Clayton said, "it is dollars, not percentages, that motivate behavior."

Lee was joined by Commissioner Caroline A. Crenshaw in opposing the amended whistleblower rules.

Phillips & Cohen partner Sean McKessy, who stepped down in 2016 as the first chief of the SEC's whistleblower program, described the commission's rollout of the changes as "slick."

"The spin is just remarkable," McKessy said. "Overall, this is a net-negative for whistleblowers. Even though it's spun as providing more transparency and clarity, it does none of those things."

Sean McKessy of Phillips & Cohen, former SEC whistleblower division leader. Courtesy photo.

McKessy said the SEC's assertion of authority to lower awards was "actually more nefarious than what they proposed to do in the first place," because the 2018 proposal came with a $30 million floor for the largest awards."Now, we have all of the worst of the proposal and none of the best," McKessy said.

Another whistleblower lawyer, Jason Zuckerman, said the SEC's move Wednesday "seems to be a sleight of hand."

"The SEC is withdrawing the proposal to adopt a soft cap," he said, referring to the $30 million floor in the 2018 proposal, "but is now adopting some vague and subjective standard that permits it to lower large awards."

"The lack of transparency is troubling and could dissuade whistleblowers from coming forward," he added.

The rules package also came with provisions supported by whistleblower advocates, including steps to expedite the reviews of award applications. For instance, the SEC created a summary disposition process to more quickly deny applications that are clearly deficient, and it codified the commission's practice of permanently barring applicants who repeatedly make frivolous award claims.

And the SEC established a presumption that whistleblowers should receive the maximum percentage when potential bounties fall under the $5 million mark. SEC officials said the rule change would drive up the sums paid to the majority of whistleblowers who come to the commission, while also helping to streamline the approval process for bounties.

"In addition to providing greater transparency and certainty, this presumption will reduce the time the commission would otherwise spend determining the precise award amounts," Clayton said. "[B]ased on our experience, we can add more certainty around time and amount in the substantial majority of cases, enhancing the effectiveness of the program for the commission and increasing incentives for whistleblowers, all with no meaningful countervailing cost."

The SEC also made it possible for whistleblowers to be rewarded for helping the Justice Department reach alternative settlements—known as non-prosecution and deferred prosecution agreements—with companies. Previously, those types of settlements were not included among the "related actions" that could provide the basis for an SEC whistleblower award.

But, in the immediate aftermath of Wednesday's votes, those benefits for whistleblowers were overshadowed by the commission's assertion of broad authority to lower awards.

"They're saying they have the discretion. They're saying, 'Trust us; we're going to use our discretion appropriately,'" said Jordan Thomas, a Labaton Sucharow partner who represented the Merrill Lynch whistleblowers who shared in a record-breaking $83 million bounty from the SEC.

"Like most Americans, whistleblowers distrust the government regardless of administration. And for whistleblowers, whose risk of retaliation and black-listing is so high, that distrust is even higher," he said.

"What there can be no dispute about is: The more uncertainty there is in the whistleblower program, the fewer people there are who will want to participate in it."

From: National Law Journal