Reps. Grimm, Garrett, Campbell, and Stivers Introduce Whistleblower Improvement Act

Jul 12, 2011 Issues: Financial Services

WASHINGTON, DC - Today, Representative Michael G. Grimm (R,C-NY) was joined by House Financial Services Capital Markets Subcommittee Chair Scott Garrett (R-NJ), Rep. John Campbell (R-CA), and Rep. Steve Stivers (R-OH) in introducing the Whistleblower Improvement Act of 2011 (H.R. 2483).  The bill improves provisions in Dodd-Frank by preserving the internal reporting standards used by companies to catch criminal activity early, before it spirals out of control.

“If we are serious about putting a stop to fraud and wrongdoing, we should continue encouraging companies to remain vigilant,” said Rep. Grimm. “For decades, companies have maintained effective internal reporting mechanisms to help them stop criminal activity early with the help of tips from anonymous whistleblowers. The overreaching provisions in Dodd-Frank make these internal programs obsolete, open the floodgates of claims to an already overburdened SEC, and delay action on escalating crimes within a company. The Whistleblower Improvement Act corrects these provisions in Dodd-Frank that have the potential to cause more harm than good.”

When Sarbanes-Oxley (SOX) was enacted in 2002, it mandated that companies have an internal mechanism to report criminal activity, such as an anonymous tip-line. These internal compliance programs are important as they protect shareholder and investor interests and can save time and money by stopping a problem before it causes excessive damage. Dodd-Frank undermines these internal programs by incentivizing whistleblowers to go directly to the SEC, so H.R. 2483 makes internal reporting a prerequisite for such a reward.

The bill does carve out common sense exceptions, allowing whistleblowers to report directly to the SEC 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. These exceptions help protect the whistleblower from retaliation, as well as prevent an investigation from being compromised.

Under Dodd-Frank, whistleblowers are guaranteed a payout of 10%-30% in claims that lead to successful civil or criminal penalties exceeding $1 million. This provides an incentive for whistleblowers to allow a criminal act to go unreported in order to increase the penalty to a level that would bring in a reward. It also can cause an influx of frivolous claims from those seeking financial gain, causing the SEC to become overwhelmed. This bill changes the range from 0% to 30%, and thus drops the guarantee.

Lastly, Dodd-Frank allows those culpable, but not criminally charged, to receive a reward. Rep. Grimm’s bill changes the rules, so that someone guilty of wrongdoing who later becomes a whistleblower cannot benefit from his or her own malfeasants.

On May 11, 2011, the House Financial Services Committee held a hearing on a draft of Rep. Grimm’s bill. The draft has been modified to incorporate concerns expressed in the hearing, and the version introduced today has eliminated the provision on contingency fees from the original draft.