The President entered office promising to “do a big number on Dodd-Frank,” but at least one part of the statute seems to be thriving. The whistleblower provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act appears to be alive and well, based on the record award of $83 million that the SEC just handed out under its authority. The massive award, along with other recent legal developments, could spur additional would-be whistleblowers in the financial services industry to beat a path to the SEC.
The $83 million bounty was split between three different whistleblowers – one receiving $33 million and two splitting a $50 million prize. The SEC rewarded the trio for alerting the agency to the misuse of customer funds by Bank of America’s Merrill Lynch brokerage unit. Back in 2016, Merrill Lynch agreed to a $415 million settlement for its misdeeds, which involved taking money that should have been held in reserve for customers – up to $58 billion a day – and putting it to use elsewhere. Specifically, Merrill Lynch had been holding it in a clearing account. Also, according to the SEC, Merrill Lynch cooked up complex options trades to artificially reduce the amount of reserve cash it was supposed to hold for customers.
Under Dodd-Frank’s whistleblower provision, anyone whose information nets the SEC more than $1 million can be awarded 10-30 percent of the recovery. Since the SEC began issuing awards in 2012, it has paid 53 whistleblowers more than $250 million, but no payday has equalled what the whistleblowers got here.
By cutting the massive check, the SEC is rolling out the red carpet for other Wall Street whistleblowers. A group of Arent Fox attorneys calls the award “a clear message from the SEC to would-be whistleblowers that coming forward with helpful information about securities law violations can be extremely lucrative.” They go on to predict, quite reasonably, that the awards could lead to a spike in the number of SEC enforcement actions.
While the SEC’s financial incentives are likely to prove effective, they contrast with attempts by others in Washington to shrink the effect of Dodd-Frank and its whistleblower program. Taking their lead from the White House, House Republicans passed a “Financial CHOICE Act” that, among other things, gutted the Dodd-Frank whistleblower program. The Senate never acted on the legislation, however, and it now appears doomed.
The Supreme Court, too, has taken a swing at Dodd-Frank recently. In a unanimous opinion, the Court said that whistleblowers could not be eligible for Dodd-Frank’s anti-retaliation provision unless they reported directly to the SEC (as opposed to superiors at their own firm). While the ruling was a loss for the whistleblower in question, the ruling only adds to the incentive for whistleblowers to take their information to the SEC.
So, while some corners of Washington may be trying to kill Dodd-Frank and its whistleblower program, it’s clear that news of its death has been greatly exaggerated.