Wednesday, December 14, 2011

House Panel Approves Legislation Changing Dodd-Frank Whistleblower Provisions to Require Initial Internal Reporting to Company

The House Capital Markets Subcommittee approved legislation amending SEC and CFTC whistleblower provisions in the Dodd-Frank Act to preserve internal company reporting standards and mechanisms. The legislation would require the whistleblower to first report the information to the company before reporting it to the SEC or CFTC. The whistleblower must report the information to the SEC or CFTC within 180 days of reporting it to the company. The overreaching provisions in Dodd-Frank make internal corporate programs obsolete, open the floodgates of claims to an already overburdened SEC, and delay action within a company, said Rep. Michael Grimm (R-NY), sponsor of the Whistleblower Improvement Act (H.R. 2483). The legislation is co-sponsored by Capital Markets Subcommittee Chair Scott Garrett (R-NJ).

The original legislation directed the GAO to conduct a study and report to Congress to determine what impact, if any, the whistleblower incentives program established by Dodd-Frank, codified as Section 21F of the Securities Exchange Act and Section 23 of the Commodity Exchange Act, has had on shareholder value. During the markup of HR 2483, the Subcommittee approved an amendment offered by Rep. Maxine Waters (D-CA) expanding the GAO study to include the impact on market integrity, taxpayer protection, and the SEC’s ability to issue enforcement actions.

The Subcommittee rejected an amendment offered by Rep. Gary Ackerman (D-NY) that would have dropped the requirement of initial internal corporate reporting but would have increased the reward if the whistleblower does report to the company first before going to the SEC. According to Rep. Ackerman, the amendment would have replaced a requirement with a market-based incentive to report internally first. In opposing the amendment, Rep. Grimm and Chairman Garrett noted that the Sarbanes-Oxley Act required companies to have internal reporting and established a culture of compliance at companies that Congress should support. Companies have spent millions of dollars to set up internal reporting programs, said the Chairman.

Sarbanes-Oxley mandated that companies have an internal mechanism to report criminal activity, such as an anonymous tip-line. According to Rep. Grimm, these internal compliance programs are important as they protect shareholders and investors and save time and money by stopping a problem before it causes excessive damage. In his view, Dodd-Frank undermines these internal company programs by incentivizing whistleblowers to go directly to the SEC. H.R. 2483 makes internal reporting a prerequisite for such a reward.

The legislation carves out exceptions allowing whistleblowers to report directly to the SEC or CFTC in situations when the wrongdoing is conducted by compliance officers or the highest level of management. It also makes an exception for whistleblowers reporting on activity in a company that does not have a robust internal reporting mechanism in place. Rep. Grimm said that these exceptions help protect the whistleblower from retaliation, as well as prevent an investigation from being compromised.

Thus, internal reporting is required initially unless the whistleblower alleges, and the Commission determines, that the company lacks either a policy prohibiting retaliation for reporting potential misconduct or an internal reporting system allowing for anonymous reporting, or the Commission determines that internal reporting was not a viable option based on evidence that the alleged misconduct was committed by, or involved the complicity of, the highest level of management or other evidence of company bad faith.

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