The SEC's Whistleblower Bounty Program Needs Reform

Similarly, the number of tips resulting in awards represents a very small fraction of the total number of enforcement actions brought by the SEC. With 70 awards since 2012, the SEC averages 10 awards per year. The Enforcement Division files about 820 enforcement actions every year.

Roughly speaking, then, in any given year a little over 1% of newly filed enforcement actions resulted from an award-worthy tip.

The low quality of the incoming tips becomes even more pronounced when one considers how few of the tips the SEC's Enforcement Division investigates. Of the roughly 5,000 tips received in any given year, only about 300 (or about 6%) result in an enforcement investigation. Put another way: More than 4,500 tips received by the SEC every year are not ever investigated by the Enforcement Division.

The low quality of the incoming tips should be a cause of great concern for the SEC (not to mention the private parties impacted by meritless tips). Stanford Law Professor David Freeman Engstrom, who has analyzed the SEC's bounty program along with other similar programs, observed:

A budget-constrained agency that receives additional tips must either ignore some of them, using a triage approach to focus its efforts on a subset of tips, or else allocate fewer investigative resources to examining each tip, thus degrading the agency's screening accuracy. Paradoxically, a bounty regime with a robust mix of incentives and protections that yields more whistleblower reports may overwhelm the agency.

By reducing the likelihood the agency detects and sanctions misconduct, such a regime may yield less overall deterrence compared to a regime with a less robust mix of incentives and protections.

Unfortunately, SEC efforts to reform the whistleblower program begun in 2018 have recently faltered. The SEC had proposed rules that would have given SEC staff the discretion to reduce certain rewards, but those proposals have met with political resistance.

SEC Chairman Jay Clayton said the SEC would consider final rules in the future, adding that he wanted to encourage more tips.

However, the whistleblower data suggest that the SEC has no shortage of tips. The goal for reforming the whistleblower bounty program should be increasing the quality — rather than the quantity — of tips. Professor Engstrom points out a reform the SEC should consider in order to improve overall tip quality.

Rather than reducing the amount of rewards for tips that have merit, the SEC should have the ability to "fine whistleblowers who submit frivolous tips or even require whistleblowers to post a bond along with their tip."

Increasing the number of meritless tips ultimately wastes the SEC's resources and reduces deterrence. Improving the quality of tips by providing a disincentive to those contemplating a making a frivolous tip would be a step in the right direction.