By Ronald Fink
A little-noted provision of the financial reform bill about to be signed into law could go a long way to encourage corporate whistleblowers, though there is concern among some experts that the bill could undermine companies' internal compliance programs.
The new legislation has four provisions strengthening whistleblower rights, including financial incentives and legal protection against retaliation.
"Congress has hit a home run for whistleblowers," Tom Devine, legal director of the Government Accountability Project (GAP), a Washington, DC, watchdog, said in a statement issued late last week. "This reform has teeth, because Congress wisely is protecting frontline witnesses who are critical to enforcing it." But Devine still thinks the legislation doesn't go far enough in some respects.
The anti-retaliation rights the bill provides for financial industry employees are modeled after those in the Consumer Products Safety Improvement Act. Whistleblowers would have the right to a jury trial governed by modern legal burdens of proof to challenge ensuing retaliation.
Also, the bill would expand whistleblower protection rights provided by the Sarbanes-Oxley Act, which gave whistleblowers at all publicly-traded corporations access to jury trials in court when they fail to obtain a timely ruling at the Department of Labor.
However, most cases filed since have been dismissed as a result of a 90-day statute of limitations and exemptions for employees of a parent company's subsidiaries and affiliates.
The bill specifies that there is a three year statute of limitation for retaliation claims under the False Claims Act, and that this provision should be applied to such cases.
The bill also includes provisions providing payments to whistleblowers for disclosures of violations to the Securities and Exchange Commission and the Commodities Future Trading Commission.
But Laurence Weiss, a partner in the law firm of Hogan Lovells, warned in a statement sent by email to CFOZone that the incentives are misguided. While Weiss acknowledged that the bounties may promote enforcement, he added that "they have the potential to undermine corporate internal reporting and compliance mechanisms that are designed to identify and correct improper conduct before it rises to the level of enforcement activity."
Weiss noted that such programs depend on employees' voluntary and often anonymous reporting of suspected problems. By giving those employees what he called "a substantial financial incentive" to reveal their suspicions to government agencies rather than their own company management, Weiss said, "the bounties hold the potential both to reduce the ability of companies to monitor their own compliance and to flood the agency with reports of potential misconduct that turn out to be unfounded or that would have been more easily and effectively addressed through internal compliance programs."
But such concerns may be overblown, according to Devine. He complained that the incentives are modeled after a similar program at the IRS, and that agency has only delivered token compensation in practice.
The bill also extends anti-retaliation rights to SEC employees. At present, the only government employees who have court access to jury trials are those of the Nuclear Regulatory Commission and Department of Energy.
But Devine also expressed concern that these rights extend only to SEC employees and not to those of the CFTC, calling the move "piecemeal reform" in the direction of rights that corporate employees already enjoy. "It is long past time to extend that accountability to the government," he insisted.