“Whistleblower Improvement Act of 2011” Takes Aim at SEC Whistleblower Provisions

Representative Michael Grimm (R-NY) recently proposed 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.  The “Whistleblower Improvement Act of 2011” (H.R. 2483) primarily takes aim at the SEC’s decision not to require internal compliance reporting as a prerequisite to whistleblower eligibility, which was premised on the SEC’s concern that such a requirement would deter many potential whistleblowers.

The bill would amend Section 21F of the Securities Exchange Act (and Section 23 of the Commodity Exchange Act) to provide that, “[i]n 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 …the whistleblower, or any person obtaining reportable information from the whistleblower, shall – (A) first report the information … 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.”

Under the bill, however, whistleblowers who do not comply with these internal reporting requirements may still be eligible for an award if the SEC determines (1) that the employer lacks either a policy prohibiting retaliation for reporting potential misconduct or an internal reporting system allowing for anonymous reporting, or (2) that internal reporting as 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.

The bill would also expand Section 21F’s current exclusion of eligible whistleblowers (which currently excludes from eligibility any whistleblower convicted of a criminal violation related to the matter at issue). Under the bill, a person would be ineligible as a whistleblower if such person “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 of 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.”  The bill would also exclude whistleblowers who the SEC determines committed, facilitated, participated in, or were otherwise complicit in the misconduct at issue.

Further, under the bill, the SEC would be required to notify an entity prior to commencing any whistleblower-related enforcement action in order to allow the entity the opportunity to investigate and remedy the alleged misconduct—unless, based on evidence of bad faith or complicity at the highest level of management, the SEC determines that notification would jeopardize its investigation.  If a notified entity responds in good faith, the SEC would be required to treat the entity as having self-reported the information.

With respect to Section 21F’s anti-retaliation provisions, the bill provides that “[n]othing … 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 . . . provided such agreements, policies, or codes are enforced consistently with respect to other employees who are not whistleblowers.”

H.R. 2483 is co-sponsored by Reps. John Campbell (R-CA), Bill Flores (R-TX), Scott Garrett (R-NJ), and Steve Stivers (R-OH).

Read the proposed legislation here.

Posted in Dodd Frank, Financial FraudNo Comments


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