Financial regulation provision bears scrutiny.

• Author: Weiss, Laurence A.
• Position: LEGAL ISSUES

Public company executives and directors should be alert to a provision in the pending financial reform legislation that could provide substantial monetary incentives for employees to disregard internal corporate reporting procedures and instead report suspected securities law violations directly to federal authorities.

A portion of the legislation in H.R. 4173, which was passed by the House of Representatives last December, would authorize the U.S. Securities and Exchange Commission, in instances where original whistleblower information contributes to an enforcement action resulting in monetary sanctions exceeding $1 million, to pay whistleblowers up to 30 percent of the total amount recovered. The funds would be generated from the proceeds of all SEC enforcement actions not otherwise distributed to investors.

Though the SEC currently has authority to compensate sources in insider-trading cases, this provision would greatly extend its power to pay whistleblowers who bring evidence of securities law violations and greatly increase the amount of the bounty. Similar provisions are incorporated in Sen. Christopher Dodd's (D-Conn.) financial reform legislation that was approved by the Senate Banking Committee in March.

Paying bounties may promote enforcement, but it risks devaluing recent enhancements to internal corporate compliance procedures. The Sarbanes-Oxley Act of 2002 requires public company audit committees to establish internal procedures to receive and respond to suspected accounting problems or internal control deficiencies. Sarbanes-Oxley also includes whistleblower protections...