House to address whistleblower protections

May 17, 2019
Bill would protect those who report alleged misconduct internally but not to the SEC

Corporate whistleblowers may have an easier decision to report concerns in-house with the full House of Representatives set to consider a bill that would expand the scope of their protections.

If approved, HR 2515 would make clear that whistleblowers who raise concerns about alleged misconduct internally to their employers - but not to the SEC - are protected by the Dodd-Frank Act’s anti-retaliation provisions. Rep Al Green, D-Texas, introduced the bill earlier this month and it was passed by the House Committee on Financial Services. It now goes to the full House.

Dodd-Frank expanded the protections for whistleblowers and broadened prohibitions against retaliation. Under the law, the SEC implemented rules that enabled the agency to take legal action against employers who retaliate against whistleblowers. Broadly speaking, this means that companies cannot fire, demote, suspend, harass or in any way discriminate against an employee because they reported conduct that they reasonably believed violated the securities laws.

Dodd-Frank also created a private right of action enabling whistleblowers to file a retaliation complaint in federal court.

The SEC is authorized by Congress to provide monetary awards to eligible individuals who come forward with high-quality original information that leads to an SEC enforcement action in which more than $1 million in sanctions is ordered. The range for awards is between 10 percent and 30 percent of the money collected. The SEC has awarded roughly $376 million to 61 individuals since issuing its first award in 2012.

When the whistleblower rules were introduced, chief compliance officers and other corporate representatives were concerned that the prospect of securing a reward would encourage employees to avoid in-house hotlines and other methods for relaying tips about potential misconduct. Companies in general would prefer to investigate such tips internally without – or before – having to go to the SEC.

For example, the Securities Industry and Financial Markets Association (Sifma) wrote in a 2010 comment letter on the SEC’s then-proposed whistleblower rules: ‘We believe that individuals, at least in the financial services industry if not more broadly, should be required to report potential misconduct to effective internal compliance reporting systems and allow those systems a chance to work in order to be eligible for a whistleblower award.’

In a letter to House Financial Services Committee chair Maxine Waters, D-California, and ranking member Patrick McHenry, R-North Carolina, Sifma expresses support for HR 2515 and states that reporting to the SEC should not be a requirement for protection under the anti-retaliation provisions of Securities Exchange Act.

‘[W]e support this legislation because it extends protection to whistleblowers who report internally at privately-held companies (specified in the legislation), such as non-public broker-dealers,’ writes Mark Schuermann, managing director and head of federal government and international affairs at Sifma.

‘Protection for internal whistleblowers has been a policy goal of the SEC since the outset of its whistleblower program, and we support efforts by Congress (and the SEC) to make clear that the anti-retaliation provisions extend to these whistleblowers as well as any other efforts to encourage internal reporting.’

He adds: ‘Sifma continues to believe that the first and best line of defense against violations of the securities laws is a robust internal compliance program responding to internal reporting of whistleblower claims.’

‘Whistleblower complaints generally can be resolved most quickly, effectively and efficiently by allowing the company itself to investigate and respond in the first instance (although in many cases the SEC staff then will want to validate the conclusions of the company’s internal investigation),’ Schuermann writes. ‘We believe that extending the anti-retaliation provisions to internal whistleblowers would further the important policy goal of reporting potential violations of the securities laws.’

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