Thank you, Chairman Clayton, and thank you to the wonderful Staff in the Office of General Counsel and the Office of the Whistleblower for all of your work on this proposal. Our colleagues Bob Stebbins, Michael Conley, Connor Raso, Brian Ochs, Laura Jarsulic, Brooks Shirey, Jeff Finnell, and the Office of the Whistleblower's incredible Jane Norberg and her staff were especially thoughtful and patient with me and my office throughout this process, and we are very grateful for their work.
Whistleblowers are crucial to our enforcement efforts, and experts of all stripes have said that this program—which rewards those who make the difficult decision to come forward to help us expose fraud—is among our Staff's most successful endeavors.[1] In addition to certain necessary fixes, the proposal before us today empowers the five of us Commissioners to reduce certain larger whistleblower awards and increase smaller ones.[2]
Today's proposal risks harming investors by adding two things to this exceptionally successful program that don't belong in the world of whistleblowers: uncertainty and politics. Because I believe that American investors are already dealing with plenty of both, I respectfully dissent.
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Let's start from the perspective of an employee who is witnessing a significant corporate fraud. Especially if she is a high-ranking insider at a large public company—the whistleblowers who are most valuable to us in protecting our markets—there are major risks for the employee if she comes forward.[3] She may lose her job and her salary, but worse, she faces the very real prospect of never working in a senior position in her field again.
When whistleblowers take these risks for the benefit of all investors, what they need from us is certainty. They are, in the parlance of economics, risk-averse individuals, and we're asking them to put their livelihood on the line to help us enforce the law. Less than one percent of whistleblower tips actually lead to any award, so when they do, the rewards must be significant and clear.[4] Adding uncertainty to that process risks that would-be whistleblowers will stay quiet.
Suppose, for example, we gave a whistleblower a choice between an absolutely certain award of $100 and a 50% chance to receive an award of $200. Even though those two propositions have the same expected value, we can expect an overwhelmed and risk-averse potential whistleblower to choose certain payments over risky ones.[5] Put another way, by increasing the uncertainty associated with the amounts of our awards, we decrease the value of those payments[6] to whistleblowers at the moment when they decide whether to come forward—so we can expect that, under this proposal, fewer will come forward, and fewer frauds will be discovered in time to protect investors.[7]
Even worse, the uncertainty that today's proposal injects into our whistleblower process is political uncertainty.[8] I don't know what the subjective views of future Commissioners will be about whistleblower awards, whether large or small. Perhaps future Members of this Commission will view awards favorably; perhaps not. The point is that it doesn't matter what their views will be. The simple fact that those views cannot now be known, and that political risk infects the value of future awards, decreases whistleblowers' incentives to come forward. At the end of the day, in light of the risk that whistleblowers are being asked to take to protect investors, the size of their awards should not depend on who occupies the Membership of this Commission.
I urge commenters to come forward and provide us with their views regarding today's proposals, and in particular data that might help us understand the proposal's effects on whistleblowers' incentives to help us uncover frauds and protect investors. In the meantime, I am deeply grateful for the Staff's hard work on the proposal, and look forward to learning more about commenters' reactions.
[1] See, e.g., Securities and Exchange Commission Investor Advisory Committee Testimony Spotlight, John C. Coffee, Jr., Hobson's CHOICE: The Financial CHOICE Act of 2017 and the Future of SEC Administrative Enforcement (June 22, 2017) ("The SEC has had great success with its program to pay bounties to whistleblowers"); Amanda M. Rose, Better Bounty Hunting: How the SEC's New Whistleblower Program Changes the Securities Fraud Class Action Debate, 108 Nw. U. L. Rev. 1235-1300 ("[T]he uptick in the number of high-quality tips the SEC has received in the wake of the [whistleblower program] indicates that [financial awards for whistleblowers] are working in the securities context."); see also James Cox, Robert W. Hillman and Donald C. Langevoort, Securities Regulation: Cases and Materials 44 (7th ed. 2016).
[2] Securities and Exchange Commission, Proposing Release, Proposed Amendments to the Commission's Whistleblower Program (Exchange Act Rules 21F-1 et. seq.), Release No. 34-____ (June 28, 2018).
[3] Congress foresaw such risks when constructing the whistleblower program. See 156 Cong. Reg. S5929 (daily ed. July 15, 2010) (statement of Sen. Dodd) ("The Congress intends that the SEC make awards that are sufficiently robust to motivate potential whistleblowers to share their information and to overcome the fear of the loss of their positions. Unless the whistleblowers come forward, the Federal Government will not know about the frauds and misconduct."); see also generally 15 U.S.C. § 78u-6(h) (protecting whistleblowers against "demot[ion], suspen[sion], harass[ment and] other . . . discriminat[ion]" by employers").
[4] See Proposing Release, supra note 2, at 8.
[5] For the seminal economic explanation why this is so, see, e.g., John W. Pratt, Risk Aversion in the Small and in the Large, 32 Econometrica 122-136 (1964).
[6] One way to address this problem, of course, is to increase the total amounts of awards. Nothing in today's proposal or my conversations with the Staff, however, provides any assurance that awards will be increased in order to compensate for the political uncertainty would-be whistleblowers will face under the proposal.
[7] It is tempting to assume that the discretionary increase of smaller awards contemplated by the proposal will offset this effect. The temptation is especially strong because of the declining marginal utility of wealth. In light of that fact, increasing a small award by a dollar while decreasing a large award by a dollar should, all else equal, enhance the utility of whistleblowers ex ante. The idea is that, for this reason, whistleblowers overall are left better off on balance by the changes outlined in the proposal.
There are two reasons that this casual assumption. First, it's far from clear to me, or frankly anyone else, what the overall effect of these changes will be on the total value of whistleblower awards, since we cannot and do not know the views of future Members of the Commission with respect to those awards, see infra text accompanying note 8. Second, the purpose of the whistleblower program is not to maximize the utility of whistleblowers, but instead to maximize deterrence. I suspect that, given the well-known incentive effects of significant prizes, see, e.g., Thomas A. Garret & Russell S. Sobel, Gamblers Favor Skewness, Not Risk: Further Evidence from United States' Lottery Games, 63 Econ. Letters 85-90 (1999), decreasing large awards may reduce the deterrence of fraud in the long run, even if we increase small awards at the same time.
[8] It might be argued that today's proposal does not change the presence of politics in whistleblower awards, because a future Commission can always reverse today's decision and give up its Members' power to change awards. But that hope is contrary to the history of human behavior that has ordinarily shaped our law, which assumes, not without basis, that once federal appointees have arrogated more power to themselves, they are unlikely to give it up. As Justice Scalia explained in his dissents relying on the wisdom of Lord Acton, "no government official is tempted to place restraints on his own freedom of action." See Scalia Dissents 44 (Kevin King ed. 2016); see also Letters of Lord Acton to Bishop Creighton ("Everybody likes to get as much power as circumstances allow, and nobody will vote for a self-denying ordinance.").