July 29, 2018
The proposed amendments to SEC Whistleblower rule Section 21F appears to be a genuine attempt to clarify the situations which will result in monetary awards as well as the amounts awarded to those whistleblowers whose tips are actionable. The basis for this policy is embedded in the idea that we as the investing public benefit from full information when making decisions to invest in publicly traded securities. Whether we do so directly or simply are beneficiaries of such investments including mutual funds, ETFs, or pension funds, our best interests are served as owners of these entities when management practices ethical financial reporting. History seems to predict that ultimately these nefarious activities will be discovered. Many times, it is too late for the average investors, since they are not usually active participants in the market. Thus, it makes sense for several reasons to widen the discretion of the SEC to award whistleblowers serving the public good.
First, it decreases the uncertainty which whistleblowers are faced with when deciding to pursue a claim. The downside risk of an unsuccessful claim can be loss of job, career, even professional peers. Should the SEC choose to take an administrative action not resulting in an award, this leaves the whistleblower likely worse off. Giving the SEC more flexibility in determining an award based on mutually agreed upon actions taken by the subject company and the SEC removes some of the uncertainty faced by the whistleblower.
Second, the flexibility in amount awarded helps bolster actions taken which the whistleblower might not otherwise engage in due to lower expected claims. While smaller actions against smaller companies may be less beneficial from an award perspective, the investors money is no less important than that of a Fortune 500 investor.
Third, the clarifications show that the SEC is becoming more active in adopting the whistleblower program. This means that companies must not only be concerned with government agencies investigating questionable practices, but now every individual involved with such an action can be a potential liability. Board members who are conferenced about shareholder wellbeing would be more conscientious of this liability and therefore encourage ethical practices by management, even surprise audits by objective third parties. This cost would likely not be impactful given the tradeoff for downside risk.
Fourth, when employees become incentivized like this, the economic incentive of pay for performance substitutes for more agency employees who may or may not be efficiently contributing to a better investing environment. Opponents of excessive government spending should embrace a policy that does not add a dollar to the agency budget but instead focuses the taxing mechanism on companies that are behaving badly. This should provide some relief of tax burden which would traditionally be distributed over all taxpayers.
In conclusion, penalizing immoral behavior and awarding ethical behavior should lead to a more transparent and lawful investing market which serves the greater good of both society and the organizations which rely on these capital markets to fuel the engine of the economy.