Under Chair Gary Gensler, the U.S. Securities and Exchange Commission (SEC) has been on a transparency rampage – proposing extensive new disclosure obligations on public companies, activist investors, private funds, and (maybe soon) so-called “unicorn” startups. When it comes to sharing information about its own operations, however, the Commission has been less enthusiastic.
Take the SEC Whistleblower Program. When Congress created this program in 2010, it sensibly barred the commission from disclosing “any information . . . which could reasonably be expected to reveal the identity of a whistleblower.” But concerns have been mounting that the SEC has abused this justification – invoking “whistleblower anonymity” as a carte blanche to shield from disclosure all sorts of information without any remote link to whistleblower identities and undermining the efficacy of the program in the process. Last summer, Commissioner Mark Uyeda observed that the whistleblower program “has come under increasing scrutiny from some on the basis that it operates with a lack of transparency,” and called on the commission to “consider promoting greater visibility into its claims and award determinations.”
But instead of taking steps to increase transparency, the SEC has done exactly the opposite. I show in a new paper that the whistleblower program’s annual report for fiscal year 2022 is the least transparent in agency history, omitting critical information about the program’s operations that the SEC had previously disclosed in every prior annual report since the earliest days of the program, including the following:
- Insiders vs. Outsiders – Although policymakers tend to emphasize the program’s role in getting individuals to come forward with actionable information about their corporate employers, no employment or other direct connection to the target is necessary to qualify for an award. For instance, in March 2022 the SEC reportedly issued a $14 million bounty to activist short-seller Carson Block. Every prior Annual Report since FY 2014 disclosed the proportions of awards made to “insiders” and “outsiders,” respectively. The FY 2022 Report does not.
- Internal Reporting – Because whistleblowers within companies are not required to report an alleged fraud internally before coming forward to the SEC, many have worried that the program would undermine corporate compliance programs. Every annual report since FY 2014 disclosed the proportion of insider awardees who had reported internally before coming forward to the SEC. The FY 2022 report does not.
- New Investigations – Although policymakers tend to emphasize the role of whistleblowers in helping the SEC detectfrauds, a tipster may also receive a bounty for providing information useful for an existing investigation. Every annual report since 2015 disclosed the proportions of awards issued to tipsters whose information led to the opening of a new investigation and to tipsters whose information helped with existing investigations, respectively. The FY 2022 report does not.
- Geography – Every prior annual report disclosed the number of tips received from each U.S. state and each foreign country. The FY 2022 feport does not.
- Staff – Every prior annual report disclosed the number of attorneys assigned to the SEC’s Office of the Whistleblower, which administers the program. The FY 2022 Report does not.
- Active Investigations – Many tips are used in SEC investigations but do not result in an award because the investigation never turns into an enforcement action that results in a recovery of at least $1 million. Every prior annual report since FY 2014 disclosed the number of active tip-related investigations. The FY 2022 report does not.
The FY 2022 report does not acknowledge, much less explain, these omissions. Perhaps they’re a casualty of the SEC’s aggressive rulemaking agenda which, according to an October 2022 Office of Inspector General report, has compromised “other mission-related work,” with the SEC “borrow[ing] staff from other organizational areas to assist with rulemaking activities.” Or perhaps they’re another manifestation of the SEC’s apparent lack of concern for traditional mechanisms of participation and accountability, as recently reflected in its controversial move to shorten public comment periods on major rules.
Or perhaps the SEC is hiding something. Have too many awards been issued to activist short-sellers or to insiders who skipped over their firm’s compliance programs? Or too few awards to individuals who helped detect new frauds?
Speculation aside, one message comes through loud and clear: Calls for greater transparency about the whistleblower program are not being taken seriously by commission leadership. Transparency for thee, not for me.
Alexander I. Platt is an associate professor at the University of Kansas School of Law and the author of “The Whistleblower Industrial Complex.” This post is based on his recent working paper, “Going Dark(er): The SEC Whistleblower Program’s FY 2022 Report is the Least Transparent in Agency History,” available here.