UPDATE 1-Republicans seek changes to SEC whistleblower rule

Wed May 11, 2011 5:02pm EDT

* House Republicans holding hearing on whistleblower rule

* Industry wants whistleblowers to report internally first

* SEC not planning sweeping changes to rules

* Republicans have draft bill to change whistleblower rule

* Sen. Grassley takes opposing view of House GOP (Adds comments from House Republican lawmakers, Senator Grassley letter to the SEC)

By Sarah N. Lynch

WASHINGTON, May 11 (Reuters) - U.S. House Republicans mounted a last-ditch effort on Wednesday to influence a corporate whistleblower rule that companies fear will drive cash-hungry tipsters directly to the government, undermining internal compliance programs.

The lawmakers trotted out a panel of experts, including one speaking on behalf of the U.S. Chamber of Commerce, to warn on potentially damaging effects in how the Securities and Exchange Commission has crafted the proposal.

The SEC's proposal, called for in last year's Dodd-Frank financial oversight law, would reward people who provide original substantive tips leading to enforcement actions that result in sanctions exceeding $1 million.

The whistleblower reward has become one of the most contentious parts of Dodd-Frank, as companies from Google Inc (GOOG.O) and Microsoft Corp (MSFT.O) to General Electric Co (GE.N) and JPMorgan Chase & Co (JPM.N) have asked the SEC to change the proposal by requiring whistleblowers to report company problems internally before going to regulators.

Failing to do so, they say, will undermine internal compliance programs because employees will be enticed by the prospect of a reward of between 10 percent to 30 percent of the total monetary sanctions.

"These corporations are not all the mob," said Representative Scott Garrett, the chairman of the House Financial Services capital markets subcommittee. "They are not all engaged in illegal conduct."

SEC officials told Reuters last week that the agency is not likely to agree to the demands for mandatory internal reporting, and that a vote on the plan could come as early as May 25. [ID:nN05263709] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Take a Look: Backlash brews on U.S. whistleblower awards

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Reuters Breakingviews:

New snitch rules may not nab more corporate crooks

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House Republicans are exploring ways to force legislative changes to the whistleblower compensation program.

Representative Michael Grimm has drafted a bill that would amend Dodd-Frank by making internal reporting a requirement before a whistleblower can get a financial reward.

The bill would also change the law so that a whistleblower would not be guaranteed a reward, an effort to address concerns that the law as currently written may lead to an influx of frivolous tips.

"The whistleblower provisions in the Dodd-Frank Act put these internal reporting systems in danger of becoming obsolete," Grimm said.

But the future of the draft bill is highly uncertain, especially because at least one Senate Republican has warned against emphasizing internal reporting.

"The SEC should not throw whistleblowers to the wolves by forcing them to take this step," Republican Senator Charles Grassley wrote in a letter to the SEC dated May 10. "The proposed rule makes a number of statements favoring internal compliance and corporations over investors."

Wednesday's panel of witnesses mostly supported corporate America's position on the whistleblower rule.

A whistleblower may "choose not to report internally because he or she believes that the company could then rectify the problem, and therefore be subject to lesser or no monetary sanctions upon which an award would be paid," said Deloitte Deputy CEO Robert Kueppers in prepared testimony.

Only one witness on Wednesday testified that he is concerned about the changes to the law proposed in Grimm's draft bill.

Geoffrey Rapp, a professor at the University of Toledo College of Law, told lawmakers that the whistleblower provisions in Dodd-Frank are vital and that whistleblowers are still likely to report wrongdoing internally first anyway because they see themselves as "loyal employees." (Reporting by Sarah N. Lynch; editing by Tim Dobbyn and Andre Grenon)