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Business Community Pushes To Change SEC Whistleblower Program

Published Thursday, 12th May 2011 01:51 am - © 2011 Dow Jones

By Jessica Holzer


WASHINGTON -(Dow Jones)- Members of the business community will appear before a U.S. House panel Wednesday to push for big changes to the Securities and Exchange Commission's new whistleblower program, which promises potentially huge financial awards to people who tip off the agency to large frauds.

The program, created by the Dodd-Frank financial law, has provoked an outcry from the business community, which argues the lure of huge paydays will spur employees to run to the SEC with allegations of corporate wrongdoing, undercutting the anonymous hotlines and other internal reporting channels companies put in place after the 2002 Sarbanes-Oxley law.

The program "creates a presumption that all companies operate at the lowest possible level of ethical and illegal behavior and provides every incentive for the whistleblower to bypass existing compliance programs," Marcia Narine, a former vice president of corporate compliance at Ryder System Inc. (R), said in prepared remarks before a subcommittee of the House Financial Services Committee. Narine is testifying on behalf of the U.S. Chamber of Commerce.

She argued that ethical companies were "being penalized because the SEC failed to pay attention to the whistleblower who repeatedly brought information to them about Bernard Madoff, who defrauded investors of $65 billion."

Companies are pushing the SEC to require people to first report a problem to their company before informing the SEC in order to be made eligible for an award. A measure introduced this week by Rep. Michael Grimm (R., N.Y.) would mandate such internal reporting for whistleblowers and give the SEC broad leeway to deny awards to people even if they meet the program's requirements.

Under the SEC program, people who supply original information about large frauds could net at least 10% and as much as 30% of the total sanctions and recovered funds collected by the SEC. The tip must lead to a successful enforcement action yielding at least $1 million in sanctions to qualify for an award.

Under Grimm's bill, there would be no minimum bounty for whistleblowers.

The SEC has yet to finalize its rules for the program. But it sought to address companies' concerns by proposing last fall that workers have 90 days to notify the SEC of alleged wrongdoing after first reporting the problem to their employer. The regulator also proposed to incentivize internal company reporting by including it as a factor in setting the size of awards for whistleblowers.

The business community says that doesn't go far enough.

"While the SEC may believe that its proposed rules do not provide a disincentive to internal reporting, the perceptions of the public may be quite different, leading to unintended consequences," Robert J. Kueppers, deputy chief executive of Deloitte LLP, said in prepared remarks at the hearing.

Advocates of the new program argue that requiring internal reporting will discourage would-be whistleblowers from coming forward at all or give unethical companies a chance to cover their tracks.

"By imposing a hard requirement of internal reporting, the proposed legislation may delay a regulatory response to serious fraud," Geoffrey Christopher Rapp, a University of Toledo College of Law professor, said in prepared testimony.

Rapp also took aim at another provision of Grimm's bill, which would bar lawyers representing whistleblowers under the program from collecting contingency fees. "This proposal would virtually guarantee that no whistleblowers were represented by talented attorneys in connection with the application for a bounty," he said.

-By Jessica Holzer; 202-862-9228;

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