The House Capital Markets Subcommittee hearings on legislation, introduced by Rep. Michael Grimm (R-NY), 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. The Dodd-Frank Act directs the SEC to reward whistleblowers between 10 and 30 percent of the monetary sanctions imposed. Prior to the Dodd-Frank Act, the SEC could reward whistleblowers but was not obligated to do so. The legislation would restore the status quo ante.
Sarbanes-Oxley mandated that companies have some type of mechanism to report criminal activity, such as an anonymous tip-line. However, said Rep. Grimm, most companies already had such procedures in place, as having an effective compliance program is not just good governance, but is recognized as a way to receive more lenient treatment by the federal government when criminal charges are brought up.
Dodd-Frank undermines the effectiveness of these programs, said Rep. Grimm, by incentivizing whistleblowers to go directly to the SEC, and does not require that the SEC notify the company once a claim has been made. This can lead to the escalation of a problem that could have been quickly addressed internally.
Rep. Grimm’s legislation makes internal reporting a prerequisite for reward, requiring it before, or simultaneously with, reporting to the SEC. Dodd-Frank also allows those culpable, but not criminally charged, to receive a reward. The Grimm proposal changes the rules, so that someone guilty of wrong-doing who later becomes a whistleblower cannot benefit from his or her own malfeasants.
In testimony before the House panel, University of Toledo Law Professor Geoffrey Rapp noted that the Grimm legislation would eliminate the mandatory nature of Dodd-Frank bounties, authorizing the SEC to award either no bounty even in cases where a tip led to a successful enforcement action meeting the $1 million threshold, or a bounty below 10 percent of the sanction collected. In his view, this part of the legislation would likely dull the incentives Dodd-Frank was meant to foster and flies in the face of Congress’ deliberate decision to make the bounty mandatory.
The primary concern of Professor Rapp with the Grimm approach is the SEC would award bounties on a regular basis if bounties were purely discretionary. He noted that when the payment of bounties in the tax fraud setting by the Internal Revenue Service was purely discretionary, prior to the Tax Relief and Health Care Act of 2006, the IRS had a rather dismal record of rewarding whistleblowers. The reformed IRS program, which served as a model for the Dodd-Frank provision, made bounties mandatory at a certain level of disputed tax liability. In addition, he noted that the Dodd-Frank Act already allows discretion in that the SEC can deny bounties to whistleblowers whose information is not original, who do not provide such information voluntarily, or who fall into one of the categories excluded from claiming a bounty.
The proposed legislation would also prohibit contingency fee arrangements for attorneys representing whistleblowers seeking SEC bounties. According to Professor Rapp, this provision, if enacted, would virtually guarantee that no whistleblowers would be represented by talented attorneys in connection with the application for a bounty. He also noted that no such prohibition on contingency fee arrangements exists in other federal bounty programs.
The legislation would also require that prospective whistleblowers raise their concerns with their company before going to the SEC. Whistleblowers failing to do so would be denied a bounty, unless they can demonstrate that their company lacks an internal reporting process or a policy prohibiting retaliation, or that the fraud involved high-level managers or bad faith. The SEC would be required to notify corporations of any investigation launched as a result of a whistleblower tip and give them an opportunity to take remedial action According to Professor Rapp, the proposed requirement for internal reporting would complicated both the process and the expected benefit of whistle blowing for a potential tipster. A potential whistleblower would have to make a judgment call about whether the high-level management and bad-faith exceptions applied before contacting the SEC, or else risk losing eligibility for a bounty. This added uncertainty would dull the incentives Dodd-Frank seeks to foster.
The National Association of Corporate Directors supports the provision in the legislation stating that in order to be eligible for an award, whistleblowers must first report the information to their companies before reporting such information to the SEC. The Grimm bill provision that an employee may still report to the SEC prior to the company if the company’s whistle blowing system is deficient in some way would be an exception in Corporate America today, said NACD.
NACD also supports the added clarifications of the Grimm legislation providing companies with an ability to remove employees who violate established employment agreements, workplace policies, or codes of conduct