Wednesday, May 25, 2011

Corporate Secretaries Society Testifies at House Hearings on Draft Legislation Amending Dodd-Frank Whistleblower Provisions

Draft legislation in the House requiring initial internal reporting to the company by a prospective whistleblower as a condition of eligibility for an award is supported by the Society of Corporate Secretaries and Governance Professionals. In testimony before the House Capital Markets Subcommittee, the Society said that corporate tip lines or hot lines are an integral part of compliance programs, functioning as valuable mechanisms for revealing and remedying securities law violations, and should be the first line for reporting violations and potential violations. Accordingly, persons seeking to be eligible for a whistleblower bounty should be required to first report the information to the company, so long as the company has an effective corporate compliance program.

The draft legislation was introduced by Rep. Michael Grimm (R-NY) and is designed to improve the Dodd-Frank whistleblower provisions to preserve the viability of internal reporting regimes established by Sarbanes-Oxley and to prevent employees who are responsible for wrongful acts from receiving an award from the program.

Recognizing that not all companies have effective compliance programs, the Society allowed that in certain circumstances it may be appropriate for an individual to report first to the SEC. Thus, the Society supports an exception in the draft legislation recognizes that in cases where a whistleblower is not afforded an anonymous internal reporting hotline or anti-whistleblower retaliation protection, it may be necessary for the employee to report directly to the SEC. Specifically, the draft provides an exception from the requirement for internal reporting if a whistleblower alleges, and the SEC determines, that the employer lacks either an anti-retaliation policy or a system of anonymous reporting, or if the SEC determines that internal reporting is not viable for the whistleblower due to alleged misconduct at the highest level of management or bad faith by the company.

The draft legislation provides that in order to be eligible for an award, a
whistleblower must report to the SEC not later than 180 days after reporting the information to the employer. The Society supports this provision.

Moreover, the draft would require the SEC to notify any company before commencing an enforcement action unless the Commission determines in the course of a preliminary investigation of the alleged misconduct, not exceeding 30 days, that such notification would jeopardize necessary investigative measures and impede the gathering of relevant facts based on evidence that the alleged misconduct involved the complicity of the highest level management or bad faith by the company. The Society supports this provision in the case where the company has not been notified of the whistleblower tip to the SEC as a result of an allegation that the company has no anonymous reporting mechanism or anti-retaliation policies or that the highest level of management was involved.

The Society also supports a provision in the Grimm legislation clarifying that a company has authority to enforce existing policies that require employees to report violations and potential violations internally. The draft would allow companies to enforce any established employment agreements, workplace policies or codes of conduct against a whistleblower; and any adverse action taken against a whistleblower for any violation of such agreements, policies, or codes will not constitute retaliation for purposes of this provision provided such agreements, policies, or codes are enforced consistently with respect to other employees who are not whistleblowers. This provision would maintain a company’s ability to take the necessary action against employees who fail to report internal violations.

Similarly, the Society supports the draft’s exclusion of any whistleblower that is found civilly liable, or is otherwise determined by the Commission to have committed, facilitated, participated in, or otherwise been complicit in misconduct
related to a violation. The Society believes that individuals who actively participated or facilitated the violation, even if they did not substantially direct,
plan or initiate the misconduct, should not be awarded a whistleblower’s bounty.

Finally, the draft legislation would eliminate the minimum award requirement from the Act to give the SEC flexibility to grant no monetary award. The Society supports this provision since it would allow for bounties smaller than 10 percent in cases where the recovery is very large and the award or potential award could create perverse incentives for employees. The Society believes that the SEC should have the discretion to award any amount up to 30 percent given the facts and circumstances of each case.

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