Bloomberg’s coverage of an August 26, 2022 vote by the SEC Commissioners to modify two rules governing the Commission’s whistleblower program missed the real story. In its coverage, Bloomberg focused only on comments made by two dissenting SEC Commissioners who expressed “concerns” over the whistleblower program's “secrecy.” Oddly, those “concerns” were generated, not as part of the Commission’s rulemaking process, but instead by a Bloomberg news story that had nothing whatsoever to do with the final rules approved by the SEC.

On July 26th Bloomberg ran a story attacking the confidentiality provisions of the Dodd-Frank Act which protect the identity of whistleblowers. The SEC’s confidentiality provisions are required under law. Dodd-Frank mandated that the SEC treat corporate whistleblowers similar to the way the Justice Department treats other confidential informants. All confidential informant programs carefully guard any information that could result in identifying insiders. The well-established (and unchallenged) public policies that justify law enforcement’s use of confidential informants to build cases against criminals are the same policies that justify protecting the confidentiality of corporate whistleblowers who report criminal fraud and securities violations. Confidential informant programs work. They are essential law enforcement tools.

By coincidence, the SEC approved, in a 3-2 vote, two changes to the rules governing its whistleblower program. None of these changes related to the confidentiality provisions of the law.

Bloomberg missed the real story by focusing on the rules that protect a whistleblower’s confidentiality instead of what the Commission actually approved.

First, Bloomberg forgot to mention that the two dissenting Commissioners praised the overall effectiveness of the current program. Commissioner Hester M. Peirce was clear as to her overall position: “The Commission’s whistleblower program is successful, increasingly so in recent years.”

Similarly, Commissioner Mark T. Uyeda recognized that “economists” who have studied the SEC whistleblower program confirmed that its current award program is “effective at contributing to the discovery of violations.” He acknowledged that the overall “framework” of the Commission’s whistleblower program “is properly incentivizing claimants.”

The Bloomberg article did not mention these statements.

Second, the two rules approved by the Commission do not have anything to do with confidentiality or secrecy. Instead, the Commission responded to two very significant issues confronting the whistleblowers. First, the criteria for setting awards in large cases. The Commission made it clear that whistleblowers who provide the best evidence related to the largest violations will not suffer a decrease in the amount of their award simply because they successfully reported a large fraud. The Commission wanted to ensure that its reward structure incentivized reporting, even at the highest levels, among executives who earn large salaries and reasonably fear losing their jobs if they report corporate crimes.

The other issue addressed in the rulemaking concerned the “related action” rule. This rule is designed to incentivize whistleblowers to cooperate with other law enforcement agencies. By encouraging whistleblowers to work with other regulatory agencies the Commission’s new rule helps ensure that wrongdoers are held accountable for all their violations. The new rule provides clear guidance to whistleblowers regarding how they can work with other agencies without fearing that their Dodd-Frank reward will be reduced. This rule change was essential to ensure that the Commission’s regulations comported with Congress’ intent that Dodd-Frank whistleblowers be incentivized to fully cooperate with all federal law enforcement agencies, not just the SEC.

The Bloomberg article also failed to quote from the statement issued by Gary Gensler, the Chair of the SEC. Gensler, speaking on behalf of a majority of the Commissioners, put meat on the bone. He explained, in dollars and cents, why the public (and investors) greatly benefit from the current SEC whistleblower program – a program that strictly protects the confidential informant status of its whistleblowers.

He explained that the program “has greatly aided the Commission’s work to protect investors.” The reason was simple: “since the program was established, the SEC has used whistleblower information to obtain sanctions of over $5 billion from securities law violators.” Gensler went further: “harmed investors” who were ripped off from various frauds were able to recover “over $1.3 billion” from the whistleblower cases.

Bloomberg also ignored the Commission’s staff findings that discussed the merits of the two rule changes. These findings are essential to understanding the basis for the rule changes and further understanding why there is a consensus within the SEC to support its whistleblower program.

Here are the staff findings – none of which were included in Bloomberg’s article:

• “Over the past 10 years, the whistleblower program has been an important component of the Commission’s efforts to detect wrongdoing and protect investors in the marketplace, particularly where fraud is difficult to uncover.”
• “The program has received a high number of submissions from whistleblowers and it has also produced substantial awards.”
• “Whistleblower programs, including the SEC’s whistleblower program, have been studied by economists who report findings consistent with award programs being effective at contributing to the discovery of violations.”
• “[P]ublished research articles and current working papers report that the SEC’s whistleblower program deters aggressive (i.e., potentially misleading) financial reporting and insider trading.”
• “The final rules [approved by the Commission] could have a positive indirect impact on investment efficiency and capital formation.”
• “More effective enforcement [resulting from the new rules] could lead to earlier detection of violations and increased deterrence of potential future violations, which could improve price efficiency and assist in a more efficient allocation of investment funds.”

The SEC whistleblower program works exceptionally well. Bloomberg owes its readers balanced coverage on controversial topics, including whistleblowing. That’s the story.