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Last week, a House Subcommittee "marked-up" a bill that would seriously undercut the strength of the whistleblower protections in the Dodd-Frank Act.  This Subcommittee is the Capital Markets and Government Sponsored Enterprises Subcommittee of the House Financial Services Committee. Their mark-up of H.R. 2483 sends it to the full Committee for consideration.

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H.R. 2483 would add a requirement for Dodd-Frank awards that the whistleblower first make disclosures to company management before disclosing them to the Securities and Exchange Committee (SEC). Regular readers here will remember the intense campaign last year and earlier this year over whether the SEC would impose such a requirement in its Dodd-Frank regulations. Stephen Kohn, Executive Director of the National Whistleblowers Center (NWC), met with each SEC Commissioner to explain why a requirement for internal disclosures would subject some whistleblowers to retaliation and deter them from reporting violations. We submitted a 16-page letter with 36 pages of attachments about the importance of encouraging whistleblowers to make reports through whatever channels they believe will be best in their circumstances. The NWC released a report showing that the qui tam provisions of the False Claims Act have not diminished internal reports of fraud. Corporations led their own campaign to set up hurdles and loopholes to trip up whistleblowers with a requirement to tell company management first. They sought exclusions to disqualify some whistleblowers altogether. NWC opposed the corporate campaign.

In the end, the SEC issued final regulations that largely sided in favor of whistleblowers.  Internal reporting was encouraged, but not required. Whistleblowers could judge for themselves whether internal channels would be effective.  If they reported internally, that report could still protect their status as the first to disclose the violation. The SEC cited NWC’s comments 44 times in explaining its final decisions on the regulations.

The corporate lobby was not happy. They have now turned to Rep. Michael Grimm (R-NY) to push through the bill to mandate that whistleblowers make their reports internally. This freshman, elected with Tea Party support, has introduced H.R. 2483. He cynically calls this bill the "Whistleblower Improvement Act of 2011."  To be clear, this bill will not improve the rights of whistleblowers.  It will improve the ways in which company managers can discover who is blowing the whistle, and it can block Dodd-Frank awards to whistleblowers who fail to expose themselves to their managers.  Rep. Carolyn Maloney (D-NY) calls the bill the “Throw the Whistleblowers to the Wolves Act.”

Would company managers really use the internal reports to discover who is blowing the whistle and then retaliate against them? Rep. Grimm introduced an amendment last week that will specifically remind managers that they are not allowed to retaliate. Apparently, the 2002 Sarbanes-Oxley Act (SOX) was not quite enough to stop retaliation.  Corporate managers needed not just a law, but the law and a reminder to follow the law.  Will whistleblowers now feel safe that they can report their boss’ violations without fear of retaliation? I don’t think so.

Is there really any problem with the SEC whistleblower program that has to be fixed? Not according to SEC Chairman Mary Schapiro. The Wall Street Journal’s Market Watch reports that Schapiro has sent a letter to Rep. Barney Frank (D-MA) saying that the SEC’s whistleblower program is  already providing "significant benefits." She asked that the whistleblower program be allowed to work to show its effectiveness, and that attempts to change it are premature. She notices the obvious in saying that requiring internal reports would have a "chilling effect." Our friends at the Project on Government Oversight (POGO) agree. POGO’s Michael Smallberg says H.R. 2483 would, "chill the flow of high-quality insider tips, imperil the safety and livelihood of whistleblowers, and give law-breaking companies an accountability escape hatch." Market Watch says that while Rep. Grimm’s bill may advance in the House, it has "zero chance" in the Senate.  There, Senators on both sides of the aisle have recognized the value whistleblowers provide to law enforcement, investors, taxpayers and the public interest.

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