The folks at the National Whistleblowers Center (yes, there is one) like to tell of Samuel Shaw and Richard Marven, two sailors who landed in the brig in 1778 in retaliation for blowing the whistle on the commander of the Continental Navy, who had “treated prisoners in the most inhuman and barbarous manner.” Their bravery was not in vain. In very short order, the Continental Congress enacted the new nation’s first whistleblower protection law. Now, some 223 years later, lawmakers are at it again.
The latest effort is less heroic: a problematic provision within the vast Dodd–Frank financial regulation statute to reward those who report corporate wrongdoing to the Securities and Exchange Commission (SEC). Whistleblowers who provide original evidence of fraud may be eligible to receive between 10 percent and 30 percent of recovered funds, including penalties and interest, if the information results in the recovery of at least $1 million.
The final rules, effective on August 12, leave employers between the devil and the deep blue sea.
The new Whistleblower Act encourages workers to circumvent internal company procedures and go straight to the feds to report suspected malfeasance. This might not be a problem if it weren’t for the complex and costly anti-fraud requirements previously imposed on publicly held companies under the Sarbanes–Oxley Act.
The new act increases the likelihood that whistleblowers will bypass these internal procedures in pursuit of a windfall reward from the feds. In so doing, corporate managers will lose the opportunity to act promptly and to limit damage from any wrongdoing. Meanwhile, baseless claims could embroil businesses in a costly and protracted federal investigation.
Although notified about these and other potential problems, a majority of the commission rejected calls for requiring employees to first consult internal auditors.
Requiring internal reporting first would more likely root out a problem faster—the goal of whistleblowing, after all—without precluding an employee’s right to also notify the SEC. As for the possibility of retribution, publicly traded companies by law can’t discharge, demote, or harass employees who report violations of securities rules or fraud against shareholders. Indeed, the new rules greatly expand whistleblower protections to those who report a “possible” violation that may be “about to occur.”
There’s also concern that the SEC, already overwhelmed with Dodd–Frank rulemaking, lacks the resources to investigate the flood of allegations likely to result from the prospect of a huge payout. As it is, the SEC has been faulted for ignoring Harry Markopolos, who tried to warn the agency about Bernard Madoff’s Ponzi scheme.
It is understandable that the commission would craft a whistleblowing rule that, in effect, bolsters its powers. But the action conflicts with the costly mandates already imposed on public corporations and threatens to overwhelm commission resources. Consequently, Congress would do well to reconsider the SEC’s whistleblower rules. The point is not to hinder reports of wrongdoing but to ensure that malfeasance is dealt with swiftly and most effectively.