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CFPHR Supports Whistleblowers to SEC and CFTC

The Center for Financial Privacy and Human Rights joined a group letter standing up for whistleblower protections regarding Congressional attempts to weak them at the Securities and Exchange Commission and the Commodity Futures Trading Commission. Whistleblowers are important tool to root out waste, fraud and abuse.

Group Letter Opposing Grimm Draft Bill to Weaken SEC and CFTC Whistle Blower Programs“>SEC Whistleblower letter

May 24, 2011
Chairman Spencer Bachus
Ranking Member Barney Frank
House Committee on Financial Services
Chairman Scott Garrett
Ranking Member Maxine Waters
Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises
House of Representatives
Washington, DC 20512
RE: Draft bill proposed by Representative Grimm to amend the whistleblower incentives andprotections programs at the SEC and CFTC

Chairman Bachus, Ranking Member Frank, Subcommittee
Chairman Garrett and SubcommitteeRanking Member Waters:
We are writing to express our opposition to the proposals in a draft bill by RepresentativeMichael Grimm (R-NY) to amend the whistleblower award programs at the Securities andExchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). The Grimm draft bill is an extreme approach that would silence would-be whistleblowers, endangercritical inside informants, undermine investigations, hamstring enforcement at the SEC andCFTC, and provide lawbreaking financial firms with an escape hatch from accountability.
The whistleblower programs the Grimm draft seeks to upend are based on America’s mosteffective anti-corruption statute, the False Claims Act, which has returned more than $27 billiontaxpayer dollars since 1987. Under sections 748 and 922 of the Dodd-Frank Wall Street Reformand Consumer Protection Act, the CFTC and the SEC can compensate whistleblowers whosedisclosures lead to enforcement actions with penalties of $1 million or more. Like the False Claims Act right to file lawsuits on behalf of taxpayers to challenge fraud in governmentcontracts and share the recovery, these programs are designed to allow the enforcement agenciesto create partnerships with insiders with critical knowledge of large-scale corporate misconductto better protect taxpayers.
Our groups strongly support the new whistleblower award programs at the SEC and CFTC enacted in the Dodd-Frank Wall Street Reform and Consumer Protection Act because incentivesand protections for whistleblowers are a solid investment in strengthening the SEC and CFTC’sability to monitor securities and commodities markets and enforce the law with their far toolimited resources. Indeed, these whistleblower programs are needed now more than ever to avertanother Wall Street collapse and to monitor speculation on today’s run-away oil prices.
The SEC and CFTC are on the verge of issuing their final rules to implement these programsafter carefully considering the concerns of all stakeholders—including the regulated industries—through a robust rulemaking process. Even though the agencies have not yet fully implementedthe programs, Chairman Schapiro recently noted that since creating the SEC whistleblower office, the SEC has seen a “significant increase in high-quality tips.” In other words, Section 922of the Dodd-Frank Act is already bearing fruit.
The Grimm draft bill would gut the whistleblower programs before they begin, and resemblesthe proposals made by industry without consideration for the stakeholders the whistleblowerrules are designed to protect: investors and taxpayers. There are no evidence-based improvements to investigations and enforcement or whistleblower program best practices to befound in the proposal. Instead, the Grimm draft bill would:
Tip off lawbreakers by requiring whistleblowers to report internally before going to theSEC or CFTC, and requiring the SEC to provide notification before taking enforcementaction based on a whistleblower disclosure. This would permit lawbreaking companies tothwart SEC enforcement actions by intimidating witnesses and destroying or alteringevidence. Most companies acting in good faith with strong compliance programs canexpect employees to report internally first without such requirements. These requirementsonly serve lawbreakers.
Disqualify many would-be whistleblowers by denying incentives and awards to anywhistleblower with a contractual obligation to cause the employer to investigate orrespond to the misconduct or violations. This provision would allow employers to denyaccess to the incentives and awards created by the new law to any and all employeessimply by having them sign an employment agreement containing language stating thisobligation. It also would give the SEC and CFTC the ability to claim a whistleblower wasculpable and deny an award without any specific criteria or due process for making thatdetermination.
Deny anonymity and counsel by prohibiting contingency fee representation of whistleblowers. According to Dodd-Frank, anonymity is only an option if thewhistleblower is represented by counsel, and most whistleblowers cannot affordrepresentation unless it is on contingency. Therefore the Grimm draft bill would denyanonymity to nearly all whistleblowers, and severely undermine the efficacy of theprogram.
Remove the incentive to inform regulators by eliminating a minimum awardrequirement and giving the SEC and CFTC the discretion to give whistleblowers nominalawards. Whistleblowers put their livelihoods at great risk and make enormous personaland financial investments in revealing the wrongdoing to regulators. The incentive to doso must be at least the minimum award of 10 percent already in the law, which is stillbelow the 15 percent minimums which have created adequate incentives forwhistleblowers to use the successful False Claims Act and IRS programs.
Strip protections for whistleblowers who face retaliation for contacting the SEC or CFTC. The Dodd-Frank Act includes protections against retaliation that are consistentwith several other laws that protect a host of private sector employees, including those infinancial services, manufacturing, food production and distribution, defense contracting,transportation, and healthcare. The Grimm draft would legalize retaliation whenever a company’s employment agreements, policies, or company manuals bar employees fromcommunicating with the government. This gives corporate criminals a blank check to gagemployees and eliminate whistleblowers at will.
Create an accountability loophole by allowing special treatment for “self-reporting” if an accused firm does an internal investigation and makes some corrective action oncenotified by the SEC and CFTC of the whistleblower tip and pending enforcement action.Under the Grimm draft bill, this is a complete loophole for lawbreakers. They would begranted special treatment under the law with reduced penalties—as though they had self-reported—just by virtue of conducting an internal investigation and taking “appropriatecorrective action.” Although this subsection comes under the title “Good Faith,” theloophole would in fact allow firms with bad faith to whitewash any allegations of misconduct and instantly reduce their liability.
Not only are the Grimm proposals the wrong approach, in any case it is far too early to determineif the SEC and CFTC whistleblower reward programs warrant modification. The Dodd-Frank provisions were thoughtfully crafted as state-of-the-art whistleblower incentive and protectionprograms. Additionally, Congress should not undermine the substantial investment of time andresources in the rulemaking process made by the public, stakeholders, and the SEC and CFTC. Instead, Congress should wait for full implementation and the SEC Inspector General’s full-scaleexamination of the functionality of these programs mandated by Dodd-Frank before arbitrarilyamending them without a demonstrated need to do so.
We strongly urge you to oppose the Grimm proposals, which would greatly harm the interests of investors, shareholders, whistleblowers, and taxpayers. We would welcome more discussion onthe SEC and CFTC whistleblower programs, which can be arranged by contacting Angela Canterbury at the Project On Government Oversight at 202-347-1122 or [email protected].
Americans for Financial Reform
Association of Research Libraries
Center for Financial Privacy and Human Rights
Center for Media and Democracy
Citizens for Responsibility and Ethics in Washington (CREW)
Common CauseConsumer Federation of America
Defending Dissent Foundation
Fund for Constitutional Government
Government Accountability Project (GAP)
New Jersey Action
OMB Watch
Project On Government Oversight (POGO)
Public Citizen
Service Employees International Union (SEIU)
Taxpayers Against Fraud
Taxpayers Protection Alliance
Voices for Corporate Responsibility
cc: Representative Michael G. Grimm
SEC Chairman Mary L. Schapiro
SEC Commissioners Casey, Walter, Aguilar, and Paredes

1 Melanie Waddell, “SEC’s Mary Schapiro Talks About Whistleblower Office, 12b-l: Exclusive Interview,” (April26 2011).
2 Department of Labor, Occupational Safety & Health Administration, “The Whistleblower Program,” March 29,2011. (Downloaded May 11, 2011)