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Bill sees problem in whistleblowing, aims to limit it

July 14th, 2011  |  Matt Pavich

Legislation that would amend introduced the whistleblower incentive provisions created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) by requiring employees to first report potential misconduct through their employer’s internal reporting system and stripping whistleblower protections from those who fail to do so.

Employees who give original information that leads the SEC to recover monetary sanctions of at least $1,000,000 in criminal and civil proceedings are, under the current law, entitled to receive between 10 and 30 percent of any monetary sanctions that are imposed. The SEC issued a final rule, in May of this year, governing these whistleblower protections, which does not require employees to first report, through their company’s internal channels, any violations in order to qualify for the SEC award.

Introduced by Representative Michael Grimm (R-NY), the Whistleblower Improvement Act of 2011 (H.R. 2483) aims to change that. Grimm’s bill would, in essence, force potential whistleblowers to first go to their company. According to Grimm, the measure is not aimed at assisting employers to evade Dodd-Frank. Instead, it is intended to ensure employer compliance.

“If we are serious about putting a stop to fraud and wrongdoing, we should continue encouraging companies to remain vigilant,” contends 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.”

According to Grimm, Sarbanes-Oxley (SOX) wisely included a provision requiring companies to have an internal mechanism to report criminal activity and those programs “protect shareholder and investor interests and can save time and money by stopping a problem before it causes excessive damage.” Grimm believes that  Dodd-Frank undermines these internal programs by incentivizing whistleblowers to go directly to the SEC.

You see, in Grimm’s view, the problem isn’t that employer violate the law, the problem is that they’re punished, when they should be allowed to correct their own mistakes, quietly and without attention.

This bill would force the SEC to notify the employer of the whistleblower’s allegations, thus allowing the employer to take remedial action.

It seems to this writer, that Grimm’s bill misses one of the points of encouraging whistleblowers. By allowing violators to escape publicity for their violations and by discouraging employees from reporting their employer’s wrongdoing, Grimm’s bill would go a long way towards pulling the curtain back over corporate wrongdoing.