Rejects Industry Demand for “Obstruction of Justice” Clause Requiring Advance Warning to Wrongdoers
(Washington, D.C.) — The Securities and Exchange Commission (SEC) yesterday formalized new rules implementing section 922 of last year’s Dodd–Frank Wall Street Reform and Consumer Protection Act, which compensates whistleblowers whose disclosures lead to successful law enforcement recovery of over one million dollars.
Government Accountability Project (GAP) Legal Director Tom Devine commented, “Yesterday the SEC took the high road to strengthen the role of whistleblowers against corporate fraud. It rejected demands by a big business ‘fraud lobby’ and House Republicans to twist whistleblowing into obstruction of justice.”
Business lobbyists had demanded an SEC eligibility requirement that whistleblowers first share evidence of corporate fraud with their companies. They also pushed for a “job duties” loophole that would disqualify company employees who are responsible for detecting and acting on illegality. GAP, Voices for Corporate Responsibility, the Project on Government Oversight (POGO) and other good government organizations briefed SEC staff and every commissioner to protest. In a February 18, 2011 comment after staff briefings, GAP argued that there was no rational public policy basis for the demands, which would weaken law enforcement rather than strengthening it.
To resolve the issue, the SEC issued “win win” rules that provide extra compensation for those who work within good faith corporate accountability programs, in advance or simultaneously with the SEC. But the Commission declined to require advance company warnings. Whistleblowers will have the choice of where to bring their evidence to maximize effectiveness. The new rule also permits disclosures by auditors, compliance officers, and others with relevant job duties against corruption. But the rule requires those whistleblowers either to demonstrate imminent serious consequences, corporate bad faith, or inaction for 120 days on internal reports on illegality.
The Commission acted a day after groups representing the rights of consumers, investors, taxpayers, employees, and whistleblowers urged the House Committee on Financial Services to oppose a draft bill by Rep. Michael Grimm (R-N.Y.) that would silence would-be Wall Street whistleblowers. Grimm’s proposal would undermine investigations and hamstring the SEC and the Commodity Futures Trading Commission by requiring whistleblowers to report internally, prior to reporting wrongdoing to the designated government agencies. GAP’s Devine has characterized the Grimm proposal as an “Obstruction of Justice Act.”
According to a letter signed by 22 organizations, including GAP, POGO, Taxpayers Against Fraud, Taxpayer Protection Alliance, and Americans for Financial Reform, a coalition of more than 250 national and state organizations working together for strong Wall Street reform, the Grimm proposal requires the whistleblower to in essence “tip off lawbreakers:”
This would permit lawbreaking companies to thwart SEC enforcement actions by intimidating witnesses and destroying or altering evidence. Most companies acting in good faith with strong compliance programs can expect employees to report internally first without such requirements. These requirements only serve lawbreakers.
Further, if passed, Grimm’s bill would undo many of the whistleblower protections called for in the Dodd-Frank financial reform legislation that was passed last year.
In the letter, the groups stated:
The Grimm draft bill would gut the whistleblower programs before they begin, and resembles the proposals made by industry without consideration for the stakeholders the whistleblower rules are designed to protect: investors and taxpayers.