Anti-Whistleblower Bill Aims at Dismantling New SEC Whistleblower Program

Rep. Michael Grimm (R-N.Y.) introduced a bill last year to enact a so-called “Whistleblower Improvement Act (H.R. 2483),” which would require employees to alert their management before blowing the whistle on corporate misconduct to regulators at the Securities Exchange Commission (SEC) or the Commodities Futures Trading Commission (CFTC).  The Grimm bill presents a direct threat to the new SEC and CFTC programs that Congress created through passage of the Dodd-Frank Act.  Both programs provide significant monetary awards to individuals who provide original information about violations of securities or commodities-trading laws that lead the regulators to take enforcement action resulting in more than $1 million in sanctions. The Grimm bill has attracted recent attention because the House Capital Markets Subcommittee approved the bill in January 2012, paving the way for consideration by the House Financial Services Committee.

Katz, Marshall & Banks partner David J. Marshall, who represents whistleblowers before the SEC in tips pointing to a wide range of securities violations, Foreign Corrupt Practices Act violations and broker-dealer misconduct, said that passage of the Grimm bill would significantly hamper the SEC’s ability to root out wrongdoing in the financial markets.  Since the passage of the Sarbanes-Oxley Act and its corporate whistleblower protections in 2002, Marshall has represented dozens of corporate employees who have faced retaliation after reporting unlawful conduct to their employers.

“The great majority of whistleblowers already use internal compliance programs first,” Marshall said.  “They look to law enforcement only when their employers slam the door in their face.”  Marshall said Congress would be making a big mistake to require employees to first report internally. “It would be a very naïve farmer,” he said, “who would require his chickens to speak with the fox before telling the farmer about the theft of hens from the henhouse.  The chickens would just keep going missing, and the farmer’s investment would always be at risk. That’s the problem with requiring employees to report internally first.”  Marshall also pointed out that the SEC had established a number of important incentives to encourage employees to report their concerns to management first where practicable, including a provision in the program rules that gives the whistleblower credit for any violations the company discovers through its investigation.

Marshall added, however, that the Grimm bill stood little chance of passage.  He noted that Congress had rejected the idea of requiring whistleblowers to report internally when it passed the Dodd-Frank, and that the SEC had again considered and rejected the requirement in the comprehensive rule-making process for the new program, much to the disappointment of corporate interests who insisted that such a requirement was absolutely necessary for the survival of whistleblower hotlines and other internal-compliance programs.