Today, the House Financial Services Committee heard testimony regarding its draft legislation rejecting the SEC and CFTC’s proposals to bypass internal compliance and reporting systems when rewarding prospective whistleblowers.
ACC filed a letter with the Committee, approving of the draft legislation (read the letter here). In-house counsel who supervise internal compliance and reporting systems need whistleblower tips to make those systems work. As we note in our letter, the SEC and CFTC deny such tips to internal systems, even when those systems are robust and effective. The obvious result will be an overwhelmed enforcement staff at the agencies and underinformed compliance staff at the companies. Not a good outcome for any stakeholder.
The wonderful Marcia Narine (formerly in charge of compliance issues at Ryder, but not testifying on its behalf) decried the lack of information that will be available to compliance officials, because whistleblowers will likely go directly to the SEC and CFTC with their useful tips. Compliance officials, in charge of effective and robust compliance systems, won’t be able to address underlying misconduct while it festers. As Marcia asked, “Is that in the best interest of the shareholder? I’m not sure.” Marcia, we’re not either.
Marcia then distinguished between companies with functioning compliance systems, as envisioned by the Federal Sentencing Guidelines, and those with no compliance systems or otherwise completely infected with corruption from top to bottom. The former situation should be encouraged, the latter punished harshly. Companies with good systems should be permitted to have a first crack at investigating the allegations. Employees at companies with nonexistent systems should be free to go straight to the SEC. However, both types of companies should not be treated the same. Incredibly, the SEC and CFTC are proposing to do just that.
We expect the SEC to finalize its whistleblower regulations by the end of the month. If the SEC does not modify its proposed approach to internal compliance and reporting systems, Congress looks interested in corrective legislation. Watch this space for further developments.