SEC

As New Whistleblower Rules Kick In

With two weeks to go, corporate unease still reflects concerns over whether this part of Dodd-Frank undermines internal compliance.

By Karen M. Kroll

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act -– increasing the protection for  whistleblowers -- amends the Securities and Exchange Act of 1934 by allowing the Securities and Exchange Commission to offer awards to individuals providing original information about a violation of federal securities regulations. Next Friday, on Aug. 12, these whistleblower provisions go into effect.

For that individual to receive the award, the information submitted must lead to the successful enforcement of an SEC action resulting in monetary sanctions of more than $1 million. The award then would equal 10% to 30% of the sanctions, with SEC determining the amount based on, among other factors, the significance of the information provided.

One of the most contentious issues within the provision has been how it allows employees who believe they’ve seen wrongdoing to report directly to the authorities, without going through internal channels first, says Hal Garyn, vice president of North American services with the Institute of Internal Auditors. The IIA doesn’t have an official position on the provision, because it falls outside the discipline of internal auditing, he says. But his own view is that “you want to leave corporate governance as much as possible within the organization.” While a few dramatic cases of wrongdoing capture headlines, many internal whistleblower programs never make the news because they work effectively and quietly, he adds.

But  part of the theory behind the provision is that it should “put more cops on the street,” says Geoffrey Rapp, professor of law at the University of Toledo College of Law. The scandals surrounding Ponzi-schemer Bernard Madoff and, others like him were “a huge egg on the face of the SEC,” he says. The commission wants more people to come forward, and then to persist if there is some corporate backlash. “With the bounty out there,” he says, “it may not affect the decision to blow the whistle, but may affect the decision to stick with it.”

Superseding Company Efforts?

Supporters of the provision say it provides needed protection to whistleblowers, who may be subjected to retaliation for speaking up. Were internal reporting to be required, some might be forced to come forward with their allegations to the wrongdoers themselves. Opponents say that the provision encourages whistleblowers to bypass internal compliance programs, often established by companies at great cost.

“Our concern is this: we have an internal system that’s in place and that’s meant to identify and address problems as quickly as possible,” says Tom Deas, vice president and treasurer with $3 billion chemical company, FMC Corp. in Philadelphia. FMC has implemented a number of procedures to facilitate whistle blowing, such as an anonymous tip line and a pledge that management won’t retaliate, he says. “Now comes a new system that’s competing, and competing with a big monetary award.”

Investors also have concerns about the provision, says James Allen, head of capital markets policy with the CFA Institute. While the Institute supports exposing any problems or irregularities, it wants the internal processes used. “The whole point of creating whistleblower programs is to protect shareholder value,” James says. The original proposal created an incentive for whistleblowers to “go for a home run instead of trying to stop some corruption from occurring.”