Aug. 20, 2018
The Proposed Rules should not and can not be implemented because they conflict with the plain language of the statute.
Specifically, the Proposed Rules attempt to add "Interpretive Guidance" to "help clarify the meaning of 'independent analysis' as that term is defined in Exchange Act Rule 21F-4 and utilized in award applications.
Under the proposed "Interpretive Guidance", in order to qualify as 'independent analysis,' a whistleblower’s submission must provide evaluation, assessment, or insight beyond what would be reasonably apparent to the Commission from publicly available information."
However, the statute was constructed to say that "independent analysis" is "examination and evaluation of information that reveals information that is not generally known or available to the public." (Emphasis added on "not generally known or available to the public.")
The SEC's proposed "Interpretive Guidance" attempts to re-write the statute to replace "not generally known or available to the public" with "not readily apparent to the Commission"
In essence, the Proposed Rules, as written would affect an illegal change of statutory language that also conflicts of Congressional Intent and Legislative History.
Indeed, as revealed in Senate Hearings and Congressional Testimony, large frauds such as the Bernie Madoff scam can be "readily apparent" if the SEC takes the appropriate action, such as checking if trades actually exist. However, the SEC often does not take this action, so it would be inappropriate and inconsistent with the enforcement goals to discourage Whistleblowers from submitting information.
Finally, the ambiguity in the statement "reasonably apparent to the Commission from publicly available information" is extremely frightening. Who in the Commission will make a decision if it is "reasonably apparent"?
If one employee of the 4,000+ SEC employees believes it is "reasonably apparent" but the other staff are unable to make the connections, would the Commission deny the Whistleblower the opportunity for an award?
If the goal of the SEC's Whistleblower program is to help stop fraud and increase the efficiency of the SEC's Enforcement program than the SEC should welcome all types of tips. Even if the SEC believes it is reasonably apparent, maybe the SEC wouldn't have analysed the publicly available data until years later.
Put bluntly, there is no reason to have this rule, the SEC already has a procedure to evaluate tips that relate to already ongoing investigations and presumably, if the information was readily apparent to the Commission then the SEC would already have an open investigation into the matter.
To elaborate further, there are so many ICO schemes that siphon off hundreds of millions of dollars from investors. If a Whistleblower reports the fraud based off an analysis of the ICO website years before the SEC would have conducted a similar analysis, would the SEC allow him to be eligible for an award?
The SEC's rules discount a time variable. If a Whistleblower reports a fraud years before the SEC would have independently discovered it, then the value that the Whistleblower is providing is enormous, however, the SEC rules entirely discount this time element.
The net result is, there is zero incentive for a Whistleblower to report a fraudulent ICO scheme (or other scheme) if he or she is able to determine that is is a growing fraud.
I can almost guarantee you that there are hundreds of ICO scam websites match characteristics of https://www.howeycoins.com/index.html. Furthermore, given the SEC's limited resources, it is unreasonable to believe that the SEC will locate all of these websites and analyze them before they grow.
Having the assistance of Whistleblower tips and properly motivating Whistleblowers to report these frauds before they continue to grow should be a cornerstone of the SEC's Enforcement policy - yet the rules as proposed provide zero incentive for Whistleblowers to report these types of fraud.
This creates a significant hazard and does not mesh well with the SEC's stated mission, the intent of Congress, statute, and the ability to inspire confidence in the financial system.