The SEC Ensures Banks Will Keep Getting Away With It

by: Jake Zamansky

The securities industry must be quietly muffling its glee over an astounding shortcoming in Dodd-Frank legislation that is meant to boost rewards to corporate whistleblowers. In fact, the rule, as currently proposed, could do little or nothing to incentivize those who take the huge risk of blowing the whistle on their employers.

An article in Monday’s New York Times titled “For Whistle-Blowers, Expanded Incentives,” glossed over the fact that this shortcoming or loophole in the legislation exists. Instead, the article focused on the potentially big rewards whistleblowers could collect.

Let’s back up a moment. On November 3, the SEC proposed a new whistleblower program under the Dodd-Frank Act. To date, the SEC has had almost no success in luring whistleblowers with rewards, paying out less than $160,000 over the past 20 years to a mere handful of tipsters, the Times reported.

The SEC wants to change that appalling record. The goal of the new program, the SEC states, is

to reward individuals who provide the agency with high-quality tips that lead to enforcement actions.

Included in the whistleblower rule proposals, and buried in the Times’ article, is the SEC’s desire to push potential whistleblowers into the arms of its own compliance programs BEFORE turning to the SEC.

This is where the whistleblower programs obvious shortcomings are revealed, and why numerous Wall Street executives are snickering up their sleeves, once again, at the SEC.

This step – whistleblower first reporting to their own employers - would obviously serve as a severe disincentive for an employee to blow the whistle on potential corporate malfeasance.

First, going to an investment bank’s compliance department is not “protected activity” and could result in an employee being fired. Second, who would want to report to the employer as opposed to the SEC, which is luring the employee with a potential payday?

However, the SEC thinks discouraging a potential whistleblower from bypassing their own company’s internal compliance department makes sense. After reporting information internally, the employee has 90 days to call the SEC and get in line for a potential award. The proposal also allows the SEC to consider giving a higher percentage award to those whistleblowers who chit chat with corporate compliance first.

What the SEC doesn’t realize is that the whistleblower’s head could get chopped off while waiting for the SEC to act.