December 3, 2010
Dear Sir or Madame-
In reply to the SEC's request for comments, I propose that the final rule be revised so as not to give standing to potential whistleblowers to recover monies and be protected against retaliation if their companies had codes and hotlines, provided annual training and posted notices about their codes and hotlines, unless 1.) each employee desiring to be a whistleblower, first made a call on the hotline or otherwise made an internal report at or near the time when he or she became aware of the matter in question, and 2.) his or her company failed to: (i) acknowledge his or her report about the matter in question, (ii) if founded, commence an investigation, or (iii) if an investigation was commenced, continue to bring this investigation to completion, including having timely taken all required actions in this regard in compliance with applicable law. Moreover, where and to the extent applicable [i.e., the timing of the matter and each employee's knowledge of it reach back to these prior period(s)], I further propose that the rule should restrict standing for receipt of monies and protection against retaliation, to only those employees who identified the matter in question on his or her prior annual compliance questionnaire(s), or in connection with the company's (where a public company) certification and sub-certification processes, as and to the extent applicable.
As this rule is written there is a misalignment of incentives. Employees are incentivized: 1.) to disregard their companies' codes of business conduct and ethics and associated training, annual compliance questionnaires and certification/sub-certification processes 2.) not to report matters in violation of such codes/training/questionnaires/certification and sub-certification processes, whether by hotline or other means; and all so as to better their prospects at receiving a larger payment. With absolute protection against retaliation the rule encourages making as many reports as possible increasing one's odds for a recovery. The earlier one reports outside to the SEC or other government agency, rather than using the established reporting process within the company, the less likely that the company may have begun its own investigation to remedy the matter in question.
For some time companies have been expected to expend the resources that allow them to police themselves and self-report. This aids government agencies whose resources are finite in order that they are better able to fulfill their responsibilities. Unintended consequences are likely to flow from this rule if it is not appropriately revised to remove uncertainty and reflect the important ongoing role of employer companies in ensuring compliance.To not only provide employees an "end around" the internal compliance processes their employer companies have built to satisfy regulators' expectations of companies' compliance processes, but to also monetarily encourage and reward non-compliance by these employees with these established processes at their employer companies, all in a protected manner for such employees (no retaliation even if report is unfounded and no charges are brought against the company), is unfair to these employer companies (and their investors). How can these employees really have standing to be "whistleblowers" with the prospect of receiving monies and protection against retaliation for unfounded and/or vexatious reports, if they have violated their clearly communicated employers companies' expectations in this regard?