New Bill Would Moderate the Dodd-Frank Whistleblower Provisions

News Brief

By Cydney Posner

They're at it again! H.R. 2483, the ‘‘Whistleblower Improvement Act of 2011,'' takes another stab at remaking Dodd-Frank, this time by modifying the whistleblower provisions set forth in Section 21F of the Exchange Act. The bill would require, as a prerequisite to receiving a whistleblower bounty, that the employee first report the matter to his or her employer. The bill was introduced at the end of last week by Representative Michael Grimm (R-NY) and is co-sponsored by four other Congressman, Reps. John Campbell (R-CA), Bill Flores (R-TX), Scott Garrett (R-NJ) and Steve Stivers (R-OH). The bill was referred to the House Committees on Financial Services and Agriculture.

The bill is designed to address the most contentious aspect of the SEC's final whistleblower rules – the SEC's decision not to mandate internal compliance reporting, prior to or contemporaneously with SEC reporting, as a prerequisite to eligibility for a whistleblower bounty. Critics charged that mandatory internal reporting would deter many whistleblowers, while advocates contended that allowing whistleblowers to bypass companies' internal compliance programs would have a corrosive effect on these programs (including those mandated by SOX) and undermine companies' ability to address the wrongdoing. The SEC's decision not to mandate internal reporting arose out of its concern that employees could be hampered in internal reporting if, for example, management were involved in the misconduct. <br> <br>The bill would amend Section 21F to require that, to be eligible for a whistleblower award, an employee who provides information relating to a violation of the securities laws that was committed by his or her employer (or by another employee of his or her employer), must first report the information to his or her employer before reporting to the SEC and then must report that information to the SEC within 180 days after internal reporting. <br> <br>However, the bill does attempt to address the SEC's concern regarding potential deterrents to internal reporting. Under the bill, whistleblowers who did not comply with the internal reporting requirement could still be eligible for awards if the SEC determined the following:

  • that the employer lacked either a policy prohibiting retaliation for reporting potential misconduct or an internal reporting system allowing for anonymous reporting; or
  • that internal reporting was not a viable option for the whistleblower based on either
    • evidence that the alleged misconduct was committed by or involved the complicity of the highest level of management, or
    • other evidence of bad faith on the part of the employer.

The bill would also amend Section 21F to make ineligible any whistleblower who had legal, compliance or similar responsibilities and had a fiduciary or contractual obligation to investigate or respond to internal reports of misconduct or violations (or to cause the entity to do so), if the information learned by the whistleblower in the course of duty was communicated to the him or her with the reasonable expectation that he or she would take appropriate steps to respond.

Currently, Section 21F requires that awards be at least 10% and no more than 30% of the total monetary sanctions collected on an action. The bill would eliminate the minimum award requirement and cap awards at 30% of the amount collected. Also, under Section 21F, any whistleblower convicted of a criminal violation related to the matter is ineligible for an award. The bill would expand the exclusion from eligibility for culpable whistleblowers to include civil liability or other determination by the SEC that the individual committed, facilitated, participated in or was otherwise complicit in the misconduct.

Under the bill, the SEC would be required to notify the entity prior to commencing any enforcement action related to a whistleblower complaint to enable the entity to investigate the alleged misconduct and take remedial action, unless, based on evidence of bad faith or complicity in the misconduct at the highest levels of management, the SEC determined that notification would jeopardize the investigation. If the notified entity responded in good faith, which may include conducting an investigation, reporting its results to the SEC and taking appropriate corrective action, the SEC would be required to treat the entity as having self-reported the information and its actions in response to the notification evaluated accordingly.

With regard to the anti-retaliation provisions of Section 21F, the bill would make clear that employers would not be prohibited from enforcing any established employment agreements, workplace policies or codes of conduct against a whistleblower, and that any adverse action taken against a whistleblower for violation of those agreements, policies or codes would not be considered retaliation, as long as enforcement was consistent with respect to other employees who were not whistleblowers.

The bill would also make corresponding changes to Section 23 of the Commodity Exchange Act.

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