Groups face off over proposed whistle-blower rules

Dec 21, 2010 @ 4:06 pm

By Dan Jamieson

New whistle-blower rules proposed by the SEC have advocates and business interest groups going head-to-head over how — and when — tips should be reported to the agency.

Advocates for tipsters are concerned that the Securities and Exchange Commission will share some of the tips it gets with the very companies that are the subject of complaints. That will allow companies to identify and retaliate against an individual — and would ultimately discourage whistle-blowers from coming forward, advocates said.

Business interests, on the other hand, want the SEC to make whistle-blowers first report problems to internal compliance departments.

The proposed rule, required under Dodd-Frank, would allow the SEC to share 10% to 30% of fines it collected with a whistle-blower as a result of their tips.

The rule would cover both securities firms and investment advisers as well as publicly traded companies that pay SEC fines for securities law violations. Comments on the proposal were due last Friday.

In a comment letter, the Project on Government Oversight, a whistle-blower group, said it is worried that the SEC will adopt an idea, being pushed by the Chamber of Commerce and others, that the SEC require eligible whistle-blowers first to report problems internally before going to the SEC.

The SEC hasn't gone that far. But in the rule filing, the SEC said that in some cases, "our staff will, upon receiving a whistle-blower complaint, contact a company, describe the nature of the allegations and give the company an opportunity to investigate the matter and report back."

The SEC said it would keep the tipster confidential.

The agency also said it would consider larger awards for whistle-blowers who first reported violations through their compliance programs.

Running a complaint by the accused wrongdoer is consistent with current practices, SEC enforcement chief Robert Khuzami said at a law conference last month.

That policy, though, "would kill the interest of any whistle-blower in stepping forward" and "emasculate" the intent of Dodd-Frank to increase enforcement leads, said Gary Aguirre, a former SEC lawyer and himself a whistle-blower.

The tipster would be easily discovered by the company once the information was shared, "and their career would be over," he said in an interview.

Mr. Aguirre claimed he was fired from the SEC in 2005 after demanding to interview John Mack, who was then about to become chief executive at Morgan Stanley, concerning an insider trading case.

The Investment Company Institute and The Financial Services Institute Inc. both want employees to first report violations internally to qualify for a reward.

Mutual funds have an obligation to make sure they have policies and procedures to ensure complaince," said Tamara Salmon, a senior associate counsel at the ICI. "So it's incumbent on the whistleblower to alert the fund [so] it sees any material weaknesses to be addressed."

Employees shouldn't have to report internally if a firm did not have procedures in place to protect their anonymity, Ms. Salmon said.

The FSI is also worried that the potentially high payouts for whistleblowers could lead to a raft of allegations. "We are concerned that the bounty … will incentivize employees, particularly disgruntled employees, to report violations … to the SEC rather than to the appropriate personnel within the mutual fund's internal compliance system," the ICI said in a comment letter last Friday.

The company-first requirement would "ensure that corporations are informed of potential wrongdoing involving their employees or others," said the FSI in a comment letter submitted by the Chamber of Commerce and co-signed by a number of other business interests.

Internal compliance programs "have been built up and made robust over last few decades," said Alice Joe, a senior director at the Chamber, in an interview.

Requiring internal reporting will let a company take action qucikly, rather than let the problem fester while the SEC decides what to do with a tipt, Ms. Joe said.

Employee-tipsters can remain anonymous and are protected by law, she said.

The FSI also said the SEC should "clarify that good-faith employment actions taken by a corporation that is the subject of a complaint are not retaliatory."

A spokesperson for the FSI was not available for comment.

"We look forward to receiving and analyzing the public comments," said SEC spokesman John Nester. He declined to comment further.

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