Rep. Grimm Proposes Changes to Negative Whistleblower Provisions in Dodd-Frank

May 11, 2011 Issues: Financial Services

WASHINGTON, DC - Today, Congressman Michael Grimm’s (R,C-NY) draft legislation on whistleblower reform will be the subject of a hearing in the House Financial Services Subcommittee on Capital Markets, entitled “Legislative Proposals to Address the Negative Consequences of the Dodd-Frank Whistleblower Provisions.”  Rep. Grimm’s proposal seeks to improve provisions in Dodd-Frank, by preserving the internal reporting standards used by companies as mandated  by Sarbanes-Oxley (SOX), to prevent those involved in wrong-doing from gaining rewards, and by removing incentives for bogus or frivolous claims to be reported to the SEC.

“For decades, companies have maintained effective internal reporting mechanisms to catch criminal activity early, helping them protect shareholder and company interests,” said Rep. Grimm. “The changes in Dodd-Frank open the floodgates to frivolous claims and costly penalties by allowing whistleblowers to go directly to the SEC. Companies can’t effectively address a problem if they don’t know about it. The provisions in Dodd-Frank will certainly keep them in the dark.”

When SOX was enacted in 2002, it mandated that companies have some type of mechanism to report criminal activity, such as an anonymous tip-line. However, 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. Internal compliance programs are important as they protect shareholder and company interests and can save money and time by stopping a problem before it escalates out of hand, causing more damage to the company.        
Dodd-Frank undermines the effectiveness of these programs 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 proposal 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.
Under Dodd-Frank, whistleblowers also have nothing to lose, as they are guaranteed a payout of 10%-30% in claims that lead to successful civil or criminal penalties exceeding $1 million. This can lead to potential whistleblowers allowing a criminal act to go unreported while waiting for the amount to increase to a level that would bring in a reward. It also can cause an influx of frivolous claims by those seeking financial gain, overwhelming the SEC. Rep. Grimm’s proposal addresses the incentive issue by dropping the guarantee and changing the range from 0% to 30%.

Rep. Grimm’s proposal is in “draft” form and will be introduced once feedback from the hearing is considered and incorporated.