Critics say SEC whistle-blower plan pays lip service to Dodd-Frank
Claim provision was written by litigators who don't want the law to work; ‘disqualification office'
By Dan Jamieson, Investment News
An advocacy group says a rule proposal from the Securities and Exchange Commission would harm whistleblowers instead of reward them as the law intended.
Earlier this month, the SEC proposed the >rule under whistleblower provisions of the Dodd-Frank legislation.
But instead of offering whistleblowers a reward, the SEC's rule throws up barriers to collecting, said Stephen Kohn, executive director of the National Whistleblowers Center.
The rule "was clearly written by experienced False Claims Act litigators [who wanted to] make the law not work," he said.
Whistleblower provisions in Dodd-Frank were modeled after the Civil War-era False Claims Act, which gives a cut of any recoveries to tipsters who turn in fraudulent government contractors.
Dodd-Frank extends similar rewards to those who blow a whistle on federal securities law violators if those tips lead to a successful enforcement action in a case involving $1 million or more.
Tipsters can get from 10% to 30% of the amount under Dodd-Frank, Mr. Kohn said.
Mr. Kohn is upset that the SEC wants to exclude from eligibility some attorneys, accountants and compliance people who are engaged or employed by suspected wrongdoers.
Compliance officers, for example, are not covered if they learn of wrongdoing with the expectation that the company will fix the problem.
Companies would have 90 days to act. If they didn't, a whistleblower could still file a claim with the SEC without missing a proposed 30-day deadline for filing a claim.
The exclusion for compliance people is "intended to prevent company personnel from 'front running' legitimate internal investigations," the SEC said in a press release announcing the rule earlier this month.
SEC spokesman John Nester declined comment on the whistleblower center's charges.
“We look forward to receiving and considering the public's comments on this important rulemaking,” he said in a statement.
The center filed a comment letter with the SEC yesterday. Comments are due no later than December 17.
Mr. Kohn says the filing deadlines for whistleblowers, together with the three separate forms a whistleblower would have to file — including an application to get a reward — make the proposal unworkable.
Under the False Claims Act and other whistleblower laws, a tipster normally works with investigators all the way through a case, Mr. Kohn said, and then negotiates a reward with prosecutors.
"Instead of [creating a] whistleblower's office as intended [under Dodd-Frank], the SEC has converted it into a disqualification office," Mr. Kohn said.
"The proposed rule reflects the consideration of a number of potentially competing interests," the SEC said in its release this month. The plan "balances the need to encourage whistleblowers to come forward without promoting unintended consequences" such as adversely affecting internal compliance.