In a battle over Dodd Frank, House Republican want whistle-blowers to go through compliance departments first, then the SEC. Democrats say that's backwards.
In another attempt to shape the implementation of Dodd-Frank, House Republicans are trying to modify a regulation designed to encourage people to report corporate malfeasance.
At a hearing of the House Financial Services Subcommittee on Capital Markets yesterday, Rep. Michael Grimm, R-N.Y., presented a discussion draft of legislation that would require whistle-blowers to report problems first to their firms' internal compliance systems before being eligible for a reward from the Securities and Exchange Commission.
Under the Dodd-Frank financial reform law, the SEC is authorized to pay people who provide information that leads to successful enforcement actions. The remuneration can range from 10% to 30% of fines that total $1 million or more.
Mr. Grimm said his bill, whose legislative language has not officially been released, would uphold corporate compliance programs that have been established at great cost.
“The Dodd-Frank Act disincentivizes employees from reporting suspected fraud internally,” he said.
In a statement submitted for the hearing record, the Investment Company Institute asserted that the SEC's proposed whistle-blower rule, which was issued last fall, runs roughshod over corporate compliance mechanisms, despite the agency's professed goal of upholding such systems.
The final whistle-blower rule was expected in late April but has been delayed until this summer.
Under an SEC rule approved in 2003, investment firms are required to establish compliance programs to adhere to securities laws.
“There is absolutely nothing in the [Dodd-Frank] rule's text that speaks to reporting through internal compliance programs,” the ICI said in its testimony. “We find this disconnect between the commission's public statements and its proposed rules to be very troubling.”
Democrats on the House financial committee, however, expressed concern that Republicans were trying to undo a Dodd-Frank provision that would protect sources who could be the first line of defense against rogue activities that rip off investors.
California Rep. Maxine Waters, the ranking Democrat on the subcommittee, said that whistle-blowers face the risk of being fired, demoted, ostracized and blacklisted in their profession.
“The bounties and systems set-up under Dodd-Frank were crafted precisely to combat these tremendous disincentives,” Ms. Waters said.
Her colleague from New York illustrated his opposition to Mr. Grimm's measure by offering a blunt analogy.
“If you're going to turn on the Mob, you shouldn't tell the Mob,” said Rep. Gary Ackerman, D-N.Y.
Mr. Grimm said that he is willing to work with Democrats on his bill, which he said is designed to ensure that employees who report problems such as “front-running” of brokerage accounts or insider trading first turn to their company's compliance system. Those who have found fraud that involves corporate executives would be allowed to go straight to the SEC.
“I really want this to be bipartisan,” Mr. Grimm said.
Marcia Narine, former global compliance officer at Ryder System Inc., a global transportation firm, testified in support of modifying the Dodd-Frank whistle-blower provision, which she said “treats all companies like criminals.”
Reuben Guttman, a director at Grant & Eisenhofer PA and founder of Voices for Corporate Responsibility, asserted that Mr. Grimm's proposal goes too far, characterizing it as an attempt to “gut” the whistle-blower provision.
Company directors have demonstrated, especially during the financial crisis, that they put their own interests over those of shareholders, Mr. Guttman said.
“We need a check on the system,” Mr. Guttman said on the sidelines of a Washington conference on the whistle-blower rule on Tuesday. “The government needs to know. [Companies] shouldn't be able to maintain a veil over their wrongdoing internally [so] that it really isn't addressed.”
Christopher Robertson, a partner at Seyfarth Shaw LLP, endorsed Mr. Grimm's notion that corporate compliance programs should be given a chance to work before whistle-blowers go to the SEC. He's also pleased that the SEC has delayed its final rule.
“They completely underestimated the level of comments they got,” Mr. Robertson said. “I'm glad that they're taking the time to put in a program that addresses what people's concerns are. If either side [plaintiffs or corporate counsels] doesn't have confidence in the system, it won't work.”
Stephen Cohen, associate director of the SEC Division of Enforcement, said the agency is weighing all the feedback it's received about the whistle-blower rule.
“The real challenge is getting it right,” Mr. Cohen said at the Voices for Corporate Responsibility event Tuesday. “Clearly, there's a balance that you have to achieve.”
Jason Zuckerman, a principal at The Employment Law Group, said he hopes that the SEC will come out with strong whistle-blower protections.
“In order to put your job on the line, there has to be a real financial incentive,” Mr. Zuckerman said.
