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17 Dec. 2010 | Comments (0)

The SEC’s proposed rules to implement the whistleblower provisions of the Dodd-Frank Act has drawn its fair share of criticism in the form of public comment letters from business associations, companies, professors and a noted whistleblower from Lehman Brothers. The criticism from the business associations and companies essentially center on rewarding wrongdoers and the unintended consequence of the SEC program competing with or even undermining internal compliance programs. Meanwhile, Matthew Lee (former senior vice president of financial control for Lehman Brothers and whistleblower on Repo 105 accounting red flags leading up to the financial crisis and demise of the financial services company) writes that there is too much focus on the monetary reward for whistleblowers in the SEC rules instead of the “protection of the public from loss.” Lest you forget, the SEC rules would grant an award of 10-to-30 percent of the monetary sanctions obtained by the SEC against a party as long as it totals more than $1 million. The information would have to lead to the successful enforcement by the SEC in federal court or administrative action of a fraud crime. [If you need a primer on the proposed rules, whose public comment period expired today, click on my Nov. 8 blog post.] The proposed rules also address unintended consequences and those people who generally would not be considered for whistleblower awards. They include:
  • People who have a pre-existing legal or contractual duty to report their information
  • Attorneys who attempt to use information obtained from client engagements to make whistleblower claims for themselves
  • Independent public accountants who obtain information through an engagement
  • Foreign government officials
  • People who learn about violations through a company’s internal compliance program or who are in positions of responsibility for a company.
After looking over the 110 letters received as of Wednesday, I decided to highlight five that seemed to best depict the viewpoints of many of the commentators. One letter signed by the U.S. Chamber of Commerce, Americans for Limited Government, Financial Services Institute, Verizon, Ryder Systems and White & Case LLP represents the view of about 260 companies that are quite concerned about the proposed rules. Below are the comment letters that I think are worth reading…
  • Matthew Lee, former Lehman Brothers vice president of financial control and whistleblower), Dec. 15. Excerpt: My reading of the Draft indicated that too great a focus of the Draft is on monetary reward for certain types of information provided by a WB (whistleblower) and not enough focus appears in the Draft on “protection of the Public from loss.” … I recommend that the Draft include provisions to centralize in one Government organization the initial whistleblowing documentation process (to avoid duplication of effort at non-SEC Regulators) prior to delegating follow up to the appropriate Regulator in the Financial Services Industry…There should be a back-up process described in the Draft, which is independent of the SEC and other financial services industry Regulators, which secondary process allows a WB to be heard for Public global debate…I respectfully suggest that the Draft make it clear that robust Compliance mechanisms, therefore, cannot and should not always be relied upon. The real issue is not necessarily competence; it is independent fair honesty…Whistleblowing should include prescience and encourage early Alerts to possible future problems that may adversely affect the Public…
  • Americans for Limited Government, Ryder Systems, Financial Services Institute, U.S. Chamber of Commerce, Verizon, White & Case LLP, Dec. 7. Excerpt: We believe that the Proposed Rules can be improved through the following modifications:  Exclude culpable individuals from award eligibility; Exclude individuals with legal, compliance, audit, ethics responsibilities, or those who have a professional privilege from award eligibility, subject to a narrow exception; Condition award eligibility on the use of an available internal reporting system; Establish a policy under which the SEC will share information it receives with entities that are the subject of a complaint and provide those entities with an opportunity to fully investigate the allegations before they are reviewed by the Commission; Extend the 90-day grace period provided for whistleblowers to report information to the SEC after reporting it internally to 180 days; and Clarify that good-faith employment actions taken by a corporation that is the subject of a complaint are not retaliatory if based on factors other than an individual’s whistleblower status.
  • Wayne Watts, Sr. executive VP and general counsel, AT&T, Dec. 10. Excerpt: AT&T is concerned that the Proposed Rules will not only have a negative impact on critical aspects of its compliance programs, but that they may actually undermine AT&T's programs and encourage unethical conduct….AT&T believes that it is critical to any compliance program that an employee who is aware ofpotential misconduct, but who stands by silently, be barred from any award or bounty….It is especially critical that employees raise ethical and compliance concerns before a violation occurs. Unfortunately, the proposed rules now open the door for an employee who is involved in, or consulted on, a project where there is a potential for a future violation to hold his or her concerns until a particular matter ripens into a violation.
  • Michael H. Hickey, VP and general counsel, Rosetta Resources, Dec. 3. Excerpt: I propose that the final rule be revised so as not to give standing to potential whistleblowers to recover monies and be protected against retaliation if their companies had codes and hotlines, provided annual training and posted notices about their codes and hotlines, unless 1.) each employee desiring to be a whistleblower, first made a call on the hotline or otherwise made an internal report at or near the time when he or she became aware of the matter in question, and 2.) his or her company failed to: (i) acknowledge his or her report about the matter in question, (ii) if founded, commence an investigation, or (iii) if an investigation was commenced, continue to bring this investigation to completion, including having timely taken all required actions in this regard in compliance with applicable law. Moreover, where and to the extent applicable…As this rule is written there is a misalignment of incentives. Employees are incentivized: 1.) to disregard their companies' codes of business conduct and ethics and associated training, annual compliance questionnaires and certification/sub-certification processes 2.) not to report matters in violation of such codes/training/questionnaires/certification and sub-certification processes, whether by hotline or other means; and all so as to better their prospects at receiving a larger payment.
  • Michelle Davies, acting general counsel, Foster Wheeler, Dec. 13. Excerpt: We recommend adopting rules modeled after the Sarbanes-Oxley requirements that auditors first report violations internally and the Commission's similar rules defining attorneys' reporting obligations after discovering violations….If the Commission is concerned that some companies do not have sufficient compliance processes, we believe that the proposed rules will only exacerbate the problem. Moreover, the Commission's proposed rules do not provide any incentives for companies to strengthen their internal compliance programs….We recommend that the Commission adopt rules modeled after section l0A of the Securities Exchange Act' and the Commission's rules pertaining to attorneys who represent issuers of securities. Under Section l0A, if a registered public accounting firm conducting an audit required under the Securities Exchange Act discovers a potentially illegal act, the accounting firm is required to notify the company's audit committee or board of directors.
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin


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