Grassley Slams SEC Whistleblower Proposal
By Aruna Viswanatha | May 11, 2011 11:47 am

A top Republican lawmaker on Tuesday blasted the Securities and Exchange Commission for setting up a whistleblower program that potentially defers too much to business interests and said the agency’s current proposal risks violating the “spirit and intent of the law” that established the program.

Sen. Chuck Grassley (R-Iowa) in a letter to chairwoman Mary Schapiro asked the agency to reconsider the set of regulations it proposed last year, and make additional changes before it issues final rules,  expected later this month.

Originally scheduled to be released in April, the agency pushed back the release of the final rules without giving much explanation for the delay.

The public nudge by Grassley, one of the main movers in the Senate behind the new bounty program, may provide a window into behind-the-scenes wrangling as the agency puts the final touches on the rules.

The Dodd-Frank financial regulatory overhaul, enacted last July, authorized the SEC to reward individuals who report information about securities law violations with between 10 and 30 percent of any resulting recovery larger than $1 million.

But the details of how the program would be run were left up to the SEC. The business community spent huge amounts of money trying to convince the agency to require whistleblowers to first report any information through internal compliance channels before going to the SEC.

In a set of proposed rules released last November, the agency did not mandate the internal report, but said it would consider granting higher awards to those that did.

Such a requirement “is not found in the law and was never contemplated by Congress,” Grassley said.

He described the proposal’s “deference” to internal compliance programs as “very disconcerting.”

“The SEC”s primary purpose is to protect investors–not internal compliance programs–from potential harm caused by fraud and misconduct,” Grassley said.

In another nod to concerns raised by the business community, the SEC proposed to limit awards to lawyers, auditors and others who either gleaned information from clients or discover fraud through required audits.

But such rules go further than the law requires, Grassley said. Companies may try to game the system, by copying lawyers on all communications, for example, thus protecting them via attorney-client privilege, he said.

“By going above and beyond and exempting more classes of individuals than the law requires, the Proposed Rule appears to serve as little more than a means for the Commission to disqualify individuals who come forward and risk their necks to help the Commission better do its job,” Grassley said.

The final rules — which could be issued around May 25, according to people familiar with the matter, are expected to include additional incentives to encourage tipsters to first report concerns to their employers, but no requirement that they do.

Grassley has been a long-standing champion of whistleblower interests in Congress. He authored 1986 and 2009 amendments to the False Claims Act, which rewards those who blow the whistle on government contracting fraud, and helped create a similar program at the Internal Revenue Service.

The SEC came under fire for failing to catch Bernard Madoff’s massive Ponzi scheme and dismissing whistleblowers complaints about  him stretching back nearly two decades.

A 2010 report also found that a 20-year-old bounty program for tips about insider trading to the SEC had paid a little over $150,000 to five whistleblowers over the course of its existence.

The new provisions were designed in part to help plug those gaps.

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