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Has the Dodd-Frank Whistleblower Program limited the effectiveness of SEC enforcement?

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The short answer appears to be “yes.”

The SEC’s Division of Enforcement filed 734 cases in fiscal 2012, but only 686 in fiscal 2013, a 7% decrease. Comapare http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171485830#.UrNBU3mu4fw with http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540503617#.UrNAJnmu4fw. Various explanations have been offered. For example: http://clsbluesky.law.columbia.edu/2013/11/25/sec-enforcement-talking-the-talk-but-walking-the-walk/; http://www.nybooks.com/articles/archives/2014/jan/09/financial-crisis-why-no-executive-prosecutions/. What seems plain is that the SEC has brought fewer cases and opened fewer new investigations this year, See http://online.wsj.com/news/articles/SB10001424052702304403804579264293892648268?KEYWORDS=SEC+Enforcement, than it has in the recent, post-Madoff past.

The Dodd-Frank Whistleblower program offers a partial explanation of the decline in SEC enforcement actions. The numbers don’t lie. The SEC has received over 6,200 Whistleblower complaints in 2012 and 2013. http://www.sec.gov/about/offices/owb/annual-report-2013.pdf, p. 8. The Commission’s Inspector General audited the whistleblower program and reported its results in a report dated January 18, 2013. Evaluation of the SEC’s Whistleblower Program http://www.sec-oig.gov/Reports/AuditsInspections/2013/511.pdf Among other findings, the Inspector General determined that 69% of the randomly sampled whistleblower tips were analyzed and designated “No Further Action” within 30 days of their receipt by the Office of the Whistleblower. Evaluation, p. 16. Some of those designated NFA related to cases already under investigation. Consequently, the Whistleblower Program appears to be generating at least 930 new tips that require further investigation every year. But since the SEC can only push somewhere around 550 cases through to conclusion each year (excluding follow-on administrative proceedings, de-listing proceedings and assorted contempts, See http://www.secactions.com/sec-enforcement-statistics-a-work-in-progress/), the 930+ new cases per year generated by the Whistleblower program appears to be creating a back-log of unfinished work that may be degrading the efficiency of the agency.

The promise of the Dodd-Frank Whistleblower Program was two-fold: it would speed up investigations and find significant cases that would be otherwise undiscovered. So far the evidence doesn’t support either premise.

While the lure of a ‘pot of gold’ at the end of a successful complaint remains attractive in the abstract, the reality is otherwise. The SEC, as it is currently constituted, does not have the resources to both follow its traditional leads and investigate the new matters that that come in as Whistleblower tips.

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