Whistleblower Specialist: House Bill Would Gut Provisions of Dodd-Frank

December 19th, 2011
in econ_news

EconintersectHarry Markopolos is famous for having repeatedly reported Bernard Madoff misconduct  to The SEC (Securities and Exchange Commission) for years whistleblower5before action was finally taken.  He now is raising strong objections to proposed legislation that he says would make forthcoming whistleblowers much less likely.  H.R. 2483 is the bill, sponsored by Rep. Michael Grimm (R,NJ) and passed out of sub-committee with a vote along party lines (with one Republican defecting), that Markopolos says would "undermine fraud fighting efforts" passed by the last congress and expose whistleblowers to "isolation, humiliation and termination."  This legislation has also been opposed by a number of groups including several union groups and a number of non-profit watchdog organizations.

Follow up:

The Letters

First, here is the letter sent by Markopoulos before the subcommitte vote was taken:

 

whistleblower-2

 

whistlelblower-3

 

The following is a letter, also sent before the subcommittee vote, from a collection of unions and non-profit watchdogs:

December 12, 2011

Chairman Scott Garrett
Ranking Member Maxine Waters
Subcommittee on Capital Markets and Government Sponsored Enterprises
House Committee on Financial Services
2129 Rayburn House Office Building
Washington, DC 20512

RE: This week’s mark-up of legislation to amend the whistleblower incentive and protection programs at the SEC and CFTC

Dear Chairman Garrett and Ranking Member Waters:

On behalf of the undersigned organizations, we are writing to express our opposition to the "Whistleblower Improvement Act of 2011" (H.R. 2483), scheduled for markup on December 13, 2011, before the Subcommittee on Capital Markets and Government Sponsored Enterprises.

The passage of H.R. 2483 would result in sweeping changes to the whistleblower incentive and protection programs at the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). This legislation, introduced by Representative Michael Grimm (R-NY), is an extreme approach that would silence would-be whistleblowers, endanger critical inside informants, undermine investigations, hamstring enforcement at the SEC and CFTC, and provide lawbreaking financial firms with an escape hatch from accountability.

The whistleblower programs that would be upended by H.R. 2483 are based on America's most effective anti-corruption statute, the False Claims Act, which has returned more than $27 billion to taxpayers since 1987.[1] Under sections 748 and 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC and the SEC now have the authority to compensate whistleblowers whose disclosures lead to enforcement actions with sanctions of $1 million or more. At a time when these agencies are trying to overcome their limited staffing and resources to avert another Wall Street collapse, it is more important than ever to incentivize and protect whistleblowers who have inside information on egregious abuses in the securities and commodities markets.

Despite coming under significant pressure from industry groups seeking to undermine these initiatives, the final rules approved by the SEC and CFTC are largely favorable to whistleblowers, investors, consumers, shareholders, and taxpayers. Unfortunately, Representative Grimm’s legislation would eviscerate the whistleblower programs before they have a chance to bear fruit.

Specifically, H.R. 2483 would:

  • Tip off lawbreakers by requiring whistleblowers to report internally before going to the SEC or CFTC, and requiring the SEC to provide notification before taking enforcement action based on a whistleblower disclosure. This would permit lawbreaking companies to thwart enforcement actions by intimidating witnesses and destroying or altering evidence. Most companies acting in good faith with strong compliance programs can already expect employees to report internally first. Making internal reporting a requirement would only serve the interests of lawbreakers.
  • Disqualify many would-be whistleblowers by denying incentives and awards to any whistleblower with a contractual obligation to cause the employer to investigate or respond to the misconduct. Companies could simply require employees to sign an agreement that states this obligation, thereby denying access to the whistleblower programs. This provision would also make it easier for the SEC and CFTC to deny a whistleblower award without any specific criteria or due process for making such a determination.
  • Remove the incentive to inform regulators by eliminating a minimum award requirement and giving the SEC and CFTC the discretion to give whistleblowers nominal awards. Whistleblowers often put their livelihoods at great risk in order to provide regulators with evidence of wrongdoing. In order to incentivize whistleblowers to take this risk, the Dodd-Frank Act established a minimum award amount of 10 percent for tips that lead to successful enforcement actions with sanctions of $1 million or more. It is imperative that Congress maintain this 10 percent minimum, which is still below the 15 percent minimum that is generally available to whistleblowers who participate in the False Claims Act and Internal Revenue Service whistleblower programs.
  • Strip protections for whistleblowers who face retaliation for contacting the SEC or CFTC. The protections provided in the Dodd-Frank Act are consistent with several other laws that protect a host of private sector employees, including those in the financial services, manufacturing, food production and distribution, defense contracting, transportation, and healthcare sectors. H.R. 2483 would legalize retaliation whenever a company’s employment agreements, policies, or manuals bar employees from communicating with the government. Removing protections would provide corporate criminals with a blank check to gag employees and eliminate whistleblowers at will.
  • Create an accountability loophole by allowing special treatment for "self-reporting" if an accused firm conducts an internal investigation and takes “appropriate corrective action” once notified by the SEC and CFTC of the whistleblower tip and pending enforcement action. Although this subsection comes under the title "Good Faith," the loophole would in fact allow firms with bad faith to whitewash any allegations of misconduct and instantly reduce their liability.

It is far too early to determine if the SEC and CFTC whistleblower programs warrant any modification, to say nothing of the sweeping changes proposed in H.R. 2483. The SEC recently reported that it received 334 whistleblower tips on a wide range of issues between August 12 and September 30, 2011.[2] It could still be a long time before we see major enforcement actions resulting from these tips. Congress should let these investigations run their course before deciding to modify the whistleblower programs. In the case of the SEC, Congress should at least wait for SEC Office of Inspector General to conduct its Dodd-Frank-mandated review of the agency’s whistleblower program.

The whistleblower provisions included in the Dodd-Frank Act were thoughtfully crafted, and the SEC and CFTC have invested significant time and resources in the rulemaking process. Instead of rushing to overhaul these efforts without any demonstrated need, Congress should give the SEC and CFTC more time to fully implement their programs.

In sum, we strongly urge you to oppose H.R. 2483, which would greatly harm the interests of whistleblowers, investors, consumers, shareholders, and taxpayers. We would welcome more discussion on the SEC and CFTC whistleblower programs, which can be arranged by contacting Angela Canterbury at the Project On Government Oversight at 202-347-1122 or acanterbury@pogo.org.

Sincerely,

AFL-CIO
American Library Association
Americans for Financial Reform
Association of Research Libraries
Center for Financial Privacy and Human Rights
Center for Media and Democracy
Citizens for Responsibility and Ethics in Washington (CREW)
Common Cause
Consumer Action
Consumer Federation of America
Defending Dissent Foundation
FAA Whistleblowers Alliance
Fund for Constitutional Government
Government Accountability Project (GAP)
iSolon.org
OpenTheGovernment.org
Neighborhood Economic Development Advocacy Project (NEDAP)
New Jersey Action
OMB Watch
Project On Government Oversight (POGO)
Public Citizen
Service Employees International Union (SEIU)
Taxpayers Protection Alliance
U.S. PIRG
Voices for Corporate Responsibility
Whistleblowers Support Fund

cc: Representative Michael G. Grimm
House Financial Services Chairman Spencer Bachus and Ranking Member Barney Frank
SEC Chairman Mary L. Schapiro
SEC Commissioners Aguilar, Gallagher, Paredes, and Walter

[ 1] Department of Justice, Office of Public Affairs, "Department of Justice Recovers $3 Billion in False Claims Cases in Fiscal Year 2010: $2.5 Billion Health Care Fraud Recovery Largest in History—More Than $27 Billion Since 1986," November 22, 2010. (Downloaded December 12, 2011)

[ 2] Securities and Exchange Commission, Annual Report on the Dodd-Frank Whistleblower Program: Fiscal Year 2011, November 2011, p. 5. (Downloaded December 12, 2011)

The Bill

The following is the complete bill H.R. 2483:

H.R.2483 -- Whistleblower Improvement Act of 2011 (Introduced in House - IH)

HR 2483 IH

112th CONGRESS 1st Session H. R. 2483

To amend the Securities Exchange Act of 1934 and the Commodity Exchange Act to modify certain provisions relating to whistleblower incentives and protection.

IN THE HOUSE OF REPRESENTATIVES

July 11, 2011

Mr. GRIMM (for himself, Mr. GARRETT, Mr. STIVERS, and Mr. CAMPBELL) introduced the following bill; which was referred to the Committee on Financial Services, and in addition to the Committee on Agriculture, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned


A BILL

To amend the Securities Exchange Act of 1934 and the Commodity Exchange Act to modify certain provisions relating to whistleblower incentives and protection.

    Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the `Whistleblower Improvement Act of 2011'.

SEC. 2. AMENDMENTS TO THE SECURITIES EXCHANGE ACT OF 1934.

    (a) Exclusion of Certain Compliance Officers and Internal Reporting as a Condition of Award- Section 21F of the Securities Exchange Act of 1934 (15 U.S.C. 78u-6) is amended--
    • (1) in subsection (b), by redesignating paragraph (2) as paragraph (3) and inserting after paragraph (1) the following:
    • `(2) INTERNAL REPORTING REQUIRED- In the case of a whistleblower who is an employee providing information relating to misconduct giving rise to the violation of the securities laws that was committed by his or her employer or another employee of the employer, to be eligible for an award under this section, the whistleblower, or any person obtaining reportable information from the whistleblower, shall--
      • `(A) first report the information described in paragraph (1) to his or her employer before reporting such information to the Commission; and
      • `(B) report such information to the Commission not later than 180 days after reporting the information to the employer.'; and
    • (2) in subsection (c)(2)--
      • (A) in subparagraph (C), by striking `or' at the end; and
      • (B) by redesignating subparagraph (D) as subparagraph (F) and inserting after subparagraph (C) the following:
      • `(D) to any whistleblower who fails to first report the information described in subsection (b)(1) that is the basis for the award to his or her employer before reporting such information to the Commission, in the case where the misconduct giving rise to the violation of the securities laws was committed by such employer or an employee of the employer, unless the whistleblower alleges and the Commission determines that the employer lacks either a policy prohibiting retaliation for reporting potential misconduct or an internal reporting system allowing for anonymous reporting, or the Commission determines in a preliminary investigation not exceeding 30 days that internal reporting was not a viable option for the whistleblower based on--
        • `(i) evidence that the alleged misconduct was committed by or involved the complicity of the highest level of management; or
        • `(ii) other evidence of bad faith on the part of the employer;
      • `(E) to any whistleblower who has legal, compliance, or similar responsibilities for or on behalf of an entity and has a fiduciary or contractual obligation to investigate or respond to internal reports of misconduct or violations or to cause such entity to investigate or respond to the misconduct or violations, if the information learned by the whistleblower during the course of his or her duties was communicated to such a person with the reasonable expectation that such person would take appropriate steps to so respond; and'.
    (b) Elimination of Minimum Award Requirement- Subsection (b)(1) of such section is amended--
    • (1) by striking `shall' and inserting `may'; and
    • (2) by striking `in an aggregate amount equal to--' and all that follows and inserting `an amount determined by the Commission but not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions.'.
    (c) Exclusion of Whistleblowers Found Culpable- Subsection (c)(2)(B) of such section is amended by inserting `, is found civilly liable, or is otherwise determined by the Commission to have committed, facilitated, participated in, or otherwise been complicit in misconduct related to such violation' after `violation'.
    (d) Rule of Construction Relating to Other Workplace Policies- Subsection (h)(1) of such section is amended by adding at the end the following:
      • `(D) RULE OF CONSTRUCTION- Nothing in this paragraph shall be construed as prohibiting or restricting any employer from enforcing any established employment agreements, workplace policies, or codes of conduct against a whistleblower, and any adverse action taken against a whistleblower for any violation of such agreements, policies, or codes shall not constitute retaliation for purposes of this paragraph, provided such agreements, policies, or codes are enforced consistently with respect to other employees who are not whistleblowers.'.
    (e) Notification to Employer- Paragraph (2) of subsection (h) of such section is amended--
    • (1) in the paragraph heading, by striking `CONFIDENTIALITY' and inserting `NOTIFICATION TO EMPLOYER AND CONFIDENTIALITY';
    • (2) by redesignating subparagraph (A) through (D) as subparagraphs (B) through (E), respectively;
    • (3) by inserting a new subparagraph (A) as follows:
      • `(A) NOTIFICATION OF INVESTIGATION-
        • `(i) NOTIFICATION REQUIRED- Prior to commencing any enforcement action relating in whole or in part to any information reported to it by a whistleblower, the Commission shall notify any entity that is to be subject to such action of information received by the Commission from a whistleblower who is an employee of such entity to enable the entity to investigate the alleged misconduct and take remedial action, unless the Commission determines in the course of a preliminary investigation of the alleged misconduct, not exceeding 30 days, that such notification would jeopardize necessary investigative measures and impede the gathering of relevant facts, based on--
          • `(I) evidence that the alleged misconduct was committed by or involved the complicity of the highest level management of the entity; or
          • `(II) other evidence of bad faith on the part of the entity.
        • `(ii) GOOD FAITH- Where an entity notified under clause (i) responds in good faith, which may include conducting an investigation, reporting results of such an investigation to the Commission, and taking appropriate corrective action, the Commission shall treat the entity as having self-reported the information and its actions in response to such notification shall be evaluated in accordance with the Commission's policy statement entitled `Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Statement of the Relationship of Cooperation to Agency Enforcement Decisions'.'; and
    • (4) in the heading of subparagraph (B) (as redesignated by paragraph (3)), by striking `IN GENERAL' and inserting `CONFIDENTIALITY'.

SEC. 3. AMENDMENTS TO THE COMMODITY EXCHANGE ACT.

    (a) Exclusion of Certain Compliance Officers and Internal Reporting as a Condition of Award- Section 23 of the Commodity Exchange Act (7 U.S.C. 26) is amended--
    • (1) in subsection (b), by redesignating paragraph (2) as paragraph (3) and inserting after paragraph (1) the following:
    • `(2) INTERNAL REPORTING REQUIRED- In the case of a whistleblower who is an employee providing information relating to misconduct giving rise to the violation of the securities laws that was committed by his or her employer or another employee of the employer, to be eligible for an award under this section, the whistleblower, or any person obtaining reportable information from the whistleblower, shall--
      • `(A) first reported the information described in paragraph (1) to his or her employer before reporting such information to the Commission; and
      • `(B) report such information to the Commission not later than 180 days after reporting the information to the employer.'; and
    • (2) in subsection (c)(2)--
      • (A) in subparagraph (C), by striking `or' at the end; and
      • (B) by redesignating subparagraph (D) as subparagraph (F) and inserting after subparagraph (C) the following:
      • `(D) to any whistleblower who fails to first report the information described in subsection (b)(1) that is the basis for the award to his or her employer before reporting such information to the Commission, in the case where the misconduct giving rise to the violation of the securities laws was committed by such employer or an employee of the employer, unless the whistleblower alleges and the Commission determines that the employer lacks either a policy prohibiting retaliation for reporting potential misconduct or an internal reporting system allowing for anonymous reporting, or the Commission determines in a preliminary investigation not exceeding 30 days that internal reporting was not a viable option for the whistleblower based on--
        • `(i) evidence that the alleged misconduct was committed by or involved the complicity of the highest level of management; or
        • `(ii) other evidence of bad faith on the part of the employer;
      • `(E) to any whistleblower who has legal, compliance, or similar responsibilities for or on behalf of an entity and has a fiduciary or contractual obligation to investigate or respond to internal reports of misconduct or violations or to cause such entity to investigate or respond to the misconduct or violations, if the information learned by the whistleblower on the course of his or her duties was communicated to such a person with the reasonable expectation that such person would take appropriate steps to so respond; and'.
    (b) Cap on Award in Certain Circumstances and Elimination of Minimum Award Requirement- Subsection (b)(1) of such section is amended--
    • (1) by striking `shall' and inserting `may'; and
    • (2) by striking `in an aggregate amount equal to--' and all that follows and inserting `in an amount determined by the Commission but not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions.'.
    (c) Exclusion of Whistleblowers Found Culpable- Subsection (c)(2)(B) of such section is amended by inserting `, is found civilly liable, or is otherwise determined by the Commission to have committed, facilitated, participated in, or been complicit in misconduct related to such a violation' after `violation'.
    (d) Rule of Construction Relating to Other Workplace Policies- Subsection (h)(1) of such section is amended by adding at the end the following:
      • `(D) RULE OF CONSTRUCTION- Nothing in this paragraph shall be construed as prohibiting or restricting any employer from enforcing any established employment agreements, workplace policies, or codes of conduct against a whistleblower, and any adverse action taken against a whistleblower for any violation of such agreements, policies, or codes shall not constitute retaliation for purposes of this paragraph, provided such agreements, policies, or codes are enforced consistently with respect to other employees who are not whistleblowers.'.
    (e) Notification to Employer- Paragraph (2) of subsection (h) of such section is amended--
    • (1) in the paragraph heading, by striking `CONFIDENTIALITY' and inserting `NOTIFICATION TO EMPLOYER AND CONFIDENTIALITY';
    • (2) by redesignating subparagraph (A) through (D) as subparagraphs (B) through (E), respectively;
    • (3) by inserting a new subparagraph (A) as follows:
      • `(A) NOTIFICATION TO EMPLOYER-
        • `(i) NOTIFICATION REQUIRED- Prior to commencing any enforcement action relating in whole or in part to any information reported to it by a whistleblower, the Commission shall promptly notify any entity that is to be subject to such enforcement of information received by the Commission from a whistleblower who is an employee of such entity to enable the entity to investigate the alleged misconduct and take remedial action, unless the Commission determines in the course of a preliminary investigation not exceeding 30 days of the alleged misconduct, that such notification would jeopardize necessary investigative measures and impede the gathering of relevant facts, based on--
          • `(I) evidence that the alleged misconduct was committed by or involved the complicity of the highest level management of the entity; or
          • `(II) other evidence of bad faith on the part of the entity.
        • `(ii) GOOD FAITH- Where an entity notified under clause (i) responds in good faith, which may include conducting an investigation, reporting results of such an investigation to the Commission, and taking appropriate corrective action, the Commission shall treat the entity as having self-reported the information and its actions in response to such notification shall be evaluated accordingly.'; and
    • (4) in the heading of subparagraph (B) (as redesignated by paragraph (3)), by striking `IN GENERAL' and inserting `CONFIDENTIALITY'.

SEC. 4. STUDY.

    The Comptroller General shall conduct a study to determine what impact, if any, the whistleblower incentives program established under section 21F of the Securities Exchange Act of 1934 (15 U.S.C. 78u-6) and section 23 of the Commodity Exchange Act (7 U.S.C. 26) has had on shareholder value. The Comptroller General shall transmit to Congress a report on the study not later than 18 months after the date of enactment of this Act.

Hat tip to Roger Erickson









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