Plans for Legislation Requiring Whistleblowers to Report Wrongdoing to their Employer

Representative Michael Grimm, R., N.Y. plans to introduce legislation whereby employees would not be eligible for a Securities and Exchange Commission (SEC) bounty program unless they first report the wrongdoing to their company.

If the SEC determines evidence indicating that the employer's top management participated in the fraud or showed bad faith, the requirement for internal reporting to one's employer would not be necessary. Additional factors that would exempt employees from the internal-reporting requirement include the absence of an anonymous internal reporting system or hotline as well as the lack of human resource policies that prohibit retaliation against employees who report abuses and potentially fraudulent activities.

Following the implementation of the 2002 Sarbanes-Oxley law, corporations put into place hotlines and internal reporting channels. The fear is that with the lure of a multimillion-dollar bounty, these internal reporting channels would be ignored. The bounty program that was included in the Dodd-Frank financial reform law provides that employees reporting "original" information regarding possible SEC violations can collect as much as 30% of the sanctions greater that $1 million obtained by the SEC.

Conversely, whistleblower lawyers express concern that the internal-reporting requirement could be an impediment to the communication of tips to the government investigators. Additionally they fear that the requirements could provide companies the opportunity to get rid of any evidence of wrongdoing.

The SEC continues to work to complete the rules for the new regulations imposed by the Dodd-Frank legislation.

US Lawmaker Wants To Require Whistleblowers To Report Internally, The Wall Street Journal, May 5, 2011