Companies Prod SEC on Whistleblower Proposal

By JESSICA HOLZER

WASHINGTON—Large U.S. companies are asking the Securities and Exchange Commission to require that workers report wrongdoing to employers in order to be eligible for payments under the agency's new "whistleblower" program.

Google Inc. and General Electric Co. are among the more than two dozen companies that have written letters to the SEC, asking the agency to revise its proposed rules for awarding bounties to workers who report information about corporate fraud or wrongdoing

Several companies expressed worry that workers, lured by the prospect of a huge payday, will bypass hot lines and other internal reporting mechanisms. That could leave managers in the dark about potential violations and unable to act to fix them, undercutting the companies' internal efforts to encourage employees' compliance with the law.

"The earlier you can stop wrongdoing, the greater your likelihood you can minimize shareholder damage," said Best Buy Co. Chief Compliance Officer Todd Hartman.

Lawyers for whistleblowers counter that requiring internal reporting would kill the program by discouraging would-be tipsters from coming forward for fear of being identified.

"If mandated internal reporting were required, it would be like turning off the tap" of whistleblower tips, said Erika Kelton of law firm Phillips & Cohen LLP.

SEC Enforcement Division Associate Director Stephen L. Cohen said SEC staffers "are considering ways to foster internal compliance without discouraging whistleblowers."

The whistleblower bounty program was created by the Dodd-Frank financial-overhaul law enacted last year. The SEC has until April to finalize implementation rules. Under the law, the SEC offers awards of at least $100,000 and as much as 30% of the penalties and recovered funds to people who report knowledge of a fraud. To qualify for an award, the information must lead to a successful enforcement action with sanctions of at least $1 million.

Under the SEC's draft rules proposed in November, whistleblowers wouldn't be required to report suspected wrongdoing to their employers in order to win a bounty.

In an effort to address the companies' concern, the SEC proposed to encourage internal reporting by giving credit to informants for first reporting the wrongdoing through company channels in setting the size of the award. Also, people who first report a problem to their employers wouldn't be disqualified from receiving a bounty as long as they report the wrongdoing to the SEC within 90 days.

Some companies, such as Merck & Co. and Goodyear Tire & Rubber Co., suggested the SEC require most employees to report problems through internal corporate channels, but grant exemptions for workers at companies with weak compliance programs or those who have other compelling reasons.

Lawyers for whistleblowers argue that many large fraud schemes happen with the knowledge of people at the top of companies. Alerting companies about a whistleblower complaint early on could allow executives to destroy documents or otherwise obstruct an investigation, they said.

Raising additional hurdles to reward whistleblowers may not sit well with some lawmakers, particularly after the SEC was faulted for brushing off Harry Markopolos, who tried to warn the agency about Bernard Madoff's Ponzi scheme.

Sen. Charles Grassley (R., Iowa) said whistleblowers should be entitled to "an independent and impartial review without putting a target on their backs." He said mandating internal reporting "could give the next Bernie Madoff a chance to clamp down on dissension in the ranks or destroy evidence of the fraud."

Some companies also said the SEC doesn't have the staff or resources to investigate every allegation they will receive under the program. Moreover, SEC Chairman Mary Schapiro has said that budget constraints are hampering the regulator's ability to enforce securities laws. The companies said the prospect of a huge payout will tempt employees to dump too many complaints on the agency.

The proposed rules will cause "unjustified negative publicity about, and unnecessary SEC investigations of, a large number of innocent companies," the U.S. Chamber of Commerce argued in a letter to the SEC.

The companies said the SEC could wind up sifting through matters such as low-level theft or sexual harassment that are too small for the regulator to investigate or don't involve securities laws. But such information is valuable to the companies, which worry they won't receive it under the program.

"The whistleblower incentive program would take away from a company's efforts to foster an open and ethical culture and could have a long-term adverse impact on the level of corporate compliance," Target Corp. General Counsel Timothy R. Baer wrote in a letter.

Write to Jessica Holzer at jessica.holzer@dowjones.com