Whistleblower Lawyers Recoil at SEC's New Rules

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 said.

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 awarded 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."