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REVISITING THE DODD-FRANK ACT WHISTLEBLOWER INCENTIVES

05.17.11

In a February post, we talked about the SEC’s proposed rules to implement the “Securities Whistleblower Incentives and Protection” provisions (PDF) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Under the Dodd-Frank mandate, the proposed rules establish procedures for whistleblower award claims.  While the SEC has not yet adopted final rules, the Dodd-Frank requirement again was the subject of Congressional debate last week.

As reported by The Deal Pipeline on May 11, 2011, business leaders testified before the House Subcommittee on Capital Markets and Government Sponsored Enterprises that the “new whistleblower rewards program threatens to wreak havoc on corporate accountability systems, slowing fixes and burdening” the SEC.  Consistent with that message, Representative Michael G. Grimm (R-N.Y.) has drafted a proposed amendment  to make internal reporting a requirement for an award—before or at the same time as reporting to the SEC.  It also would exclude from awards employees who have a fiduciary duty or contractual obligation to investigate or respond to internal reports, as well as someone guilty of wrong-doing themselves.

In his testimony before the subcommittee, Ken Daly, President and CEO of the National Association of Corporate Directors, supported the changes proposed by Representative Grimm.  Mr. Daly added that the proposed “independent knowledge” requirement should exclude attorney communications, even when the attorney-client privilege has been waived, and companies should have appropriate recourse against employees who make false allegations.  NACD previously submitted its formal comment letter with respect to the proposed rules on Dec. 17, 2010.  Noting that the Sarbanes-Oxley Act of 2002 already mandates a whistleblower system for public companies, Mr. Daly encouraged Congress to study the issue further and ask the SEC to delay the proposed rulemaking.

Robert J. Kueppers, Deputy CEO of Deloitte LLP, and Marcia Narine on behalf of the U.S. Chamber of Commerce also testified about the potential harm of the Dodd-Frank requirement.

OUR TAKE:  The SEC is required to implement the Dodd-Frank whistleblower provision, even though it must recognize the fine line between the resulting harm and benefit.  While the SEC discarded the idea of requiring internal reporting in its proposed rules—to preserve anonymity and investigative flexibility—it did recognize that it might undercut the existing, well-established whistleblower programs that have appropriate protections.  The SEC also understands, however, that not all companies have met their obligation to create solid programs.  Both the business concerns and the enforcement objectives are real, and in any additional review Congress must attempt a balancing act.

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