December 13, 2010
As the General Counsel of a publicly held company, I am concerned that the SECs rule making under the Dodd-Frank Act does not adequately balance the interests of the SEC, whistleblowers and public companies (including their constituent stockholders, employees and customers).
First, the bounty provision, coupled with the requirement to provide original information, will create a race to file information with the SEC. That race could cause whistleblowers to inadvertently or purposefully submit incomplete or inaccurate information. This race to file will discourage employees from using the internal disclosure mechanisms that were required to be instituted by public companies under the Sarbanes-Oxley Act of 2002 (SOX). For example, most public companies already have a submission process for possible violations of their Code of Conduct or applicable law or policies, including a means for by-passing management and submitting a claim directly to the chair of Boards Audit Committee (an independent director).
The better approach would be to require the whistleblower to first disclose the alleged violation using the public companys internal Code of Conduct or SOX process. If the public company did not adequately remedy the violation (either internally or with the SEC) within a specified period of time, then the whistleblower could report the violation to the SEC and the date that the complaint was originally filed with the company would be deemed to be the date the original information was provided to the SEC. That way, the whistleblower would be able to preserve his or her priority, and not be prejudiced in any way if more than one whistleblower disclosed the same information. This would strike a better balance between the interests of the SEC and the reasonable need to permit public companies to self-regulate (self-regulation costs much less).
Second, permitting anonymous claim submissions to the SEC could encourage false, misleading or overstated claims. If not properly administered by the SEC, this new law will allow people to yell fire in a theater with no consequences when that person knows (or should know) there is no fire. If the SEC initiates an investigation of a public company, that public company (including its Board of Directors and Audit Committee) will likely spend hundreds or thousands of hours, and millions of dollars in legal and accounting fees investigating and responding to the claim. It is extremely expensive to prove a negative. When that happens, everyone loses, including investors, customers and employees. What is to prevent a salesperson for a competitor from making an anonymous whistleblower submission to the SEC with the goal of weakening their competitor?
The SEC needs to create and maintain a rigorous screening process for all claims. Otherwise these new whistleblower rules will significantly increase the cost of doing business for public companies, resulting in higher prices for customers of public companies and more jobs moving to overseas companies that are not subject to these ever expanding rules.
Lastly, the SEC needs to be cautious about continual efforts to pile on more and more. As an example, our annual proxy statement is three times longer than it was several years ago because of more and more new rules. We also have SOX compliance and will soon have the burdens of Dodd-Frank. At this pace, in a few more years, more and more companies will no longer be able to shoulder the burden of being public while remaining profitable and competitive. This could discourage the capital formation needed to fund innovation. On the front end, it is easier and faster to make something complex, and harder and more time consuming to make it simple. I suggest that the SEC focus on simplicity for all of its rules, and in the case of Dodd-Frank, avoid the unintended and expensive consequences of forcing public companies to investigate false or frivolous claims outside of the public companys internal Code of Conduct and SOX procedures.