[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                    LEGISLATIVE PROPOSALS TO ADDRESS

                    THE NEGATIVE CONSEQUENCES OF THE

                  DODD-FRANK WHISTLEBLOWER PROVISIONS

=======================================================================



                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 11, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-29



                  U.S. GOVERNMENT PRINTING OFFICE
66-867                    WASHINGTON : 2011
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas                BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan       DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri         ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan              JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin             GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York         JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio

                   Larry C. Lavender, Chief of Staff
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking 
    Chairman                             Member
PETER T. KING, New York              GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
KEVIN McCARTHY, California           ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico            JAMES A. HIMES, Connecticut
BILL POSEY, Florida                  GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK,              AL GREEN, Texas
    Pennsylvania                     KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 11, 2011.................................................     1
Appendix:
    May 11, 2011.................................................    31

                               WITNESSES
                        Wednesday, May 11, 2011

Daly, Ken, President and CEO, National Association of Corporate 
  Directors (NACD)...............................................     9
Kueppers, Robert J., Deputy Chief Executive Officer, Deloitte LLP     5
Narine, Marcia, on behalf of the U.S. Chamber of Commerce........     6
Rapp, Geoffrey Christopher, Professor of Law, University of 
  Toledo College of Law..........................................    10

                                APPENDIX

Prepared statements:
    Daly, Kenneth................................................    32
    Kueppers, Robert J...........................................    42
    Narine, Marcia...............................................    50
    Rapp, Geoffrey Christopher...................................    57

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Written statement of Darla C. Stuckey, Senior Vice President-
      Policy & Advocacy, Society of Corporate Secretaries and 
      Governance Professionals...................................    64
Waters, Hon. Maxine:
    Grimm legislative proposal (discussion draft)................    72


                    LEGISLATIVE PROPOSALS TO ADDRESS


                    THE NEGATIVE CONSEQUENCES OF THE


                  DODD-FRANK WHISTLEBLOWER PROVISIONS

                              ----------                              


                        Wednesday, May 11, 2011

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 3:24 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Schweikert, 
Royce, Biggert, Posey, Hayworth, Hurt, Grimm, Stivers; Waters, 
Ackerman, Sherman, Maloney, and Green.
    Chairman Garrett. Good afternoon. The Capital Markets 
Subcommittee will come to order.
    Thank you to the panel for waiting through our votes and 
what have you that we had before. We will begin today with our 
opening statements.
    I will yield myself 3 minutes. And then, after opening 
statements, we will hear from the panel.
    So, first of all, I want to thank the panel of witnesses 
for joining us all today to offer their thoughts and input on 
the whistleblower provisions of the Dodd-Frank Act, as well as 
the SEC's proposed rulemaking to implement some of those 
provisions.
    It is appropriate that we convene this hearing today to 
have a discussion about the whistleblower provisions, 
appropriate in a better-late-than-never kind of way.
    What would have been more appropriate is if this 
subcommittee, and actually the full House Financial Services 
Committee, had prior to this a full and robust discussion about 
the potential adjustments to the SEC whistleblower program. And 
if they had done that before the provisions were signed into 
law.
    Unfortunately, too much of the Dodd-Frank Act was 
implemented in a way that we have here today: rushed to meet a 
political deadline; passed to check off a long-standing agenda 
of a certain constituency, rather than to address issues that 
actually contributed to the cause of the financial crisis; and 
not enough of a thoughtful analysis on some of the unintended 
consequences that might arise from certain policies in that 
bill.
    So, the goal of providing an environment where 
whistleblowers can be most effective in helping to right the 
wrongs and where they have proper safeguards is a laudable one. 
The details of writing into law the proper incentives and rules 
to create such an environment, however, are very important.
    We must be careful not to do more harm than good. It is 
always the rule.
    Several of our witnesses here today, as well as scores of 
others who have participated in the comment letter process to 
the SEC, have raised concerns about the unintended consequences 
of the Dodd-Frank whistleblower rules.
    Foremost among those concerns are the following:
    First, will the incentive structure created by the Dodd-
Frank provisions exacerbate violations by encouraging them to 
fester and become more serious problems over time?
    Second, does the legislation and the proposed rulemaking 
allow those complicit in violations to not only--this is 
important--escape punishment, but potentially receive massive 
rewards in spite of their own malfeasance?
    Third, if internal compliance programs are bypassed, isn't 
good corporate citizenship discouraged, and won't there be 
greater likelihood that companies will have less accurate 
financial statements and that companies will need to restate 
those financials upon which investors had already made reliance 
upon?
    So, I am pleased that one of our freshmen here, Congressman 
Michael Grimm, has put forward a discussion draft of 
legislative proposals meant to address some of these concerns. 
Having this proposal in front of the subcommittee today will 
basically enhance the discussion and lead to a more positive 
outcome to the efforts of this Congress and to the SEC and to 
their whistleblower issues.
    So once again, I would say thank you to the witnesses for 
the testimony we are going to receive, and I look forward to a 
full discussion on this issue.
    And with that, I yield to the ranking member of the 
subcommittee.
    Ms. Waters. Thank you, Mr. Chairman, for holding this 
hearing.
    Under the Dodd-Frank Act, Congress recognized that robust 
whistleblower protection is critical to preventing another 
financial crisis.
    Prior to Dodd-Frank, the inducements for whistleblowers to 
step forward were inadequate when balanced against the 
tremendous countervailing social and economic disincentives.
    Contrary to some of my colleagues on the opposite side of 
the aisle, I don't believe that whistleblowers are eager to run 
to the SEC and put their jobs, their 401(k)s, and sometimes 
even their friendships on the line. Significant evidence 
suggests that whistleblowers are often fired, quit under 
duress, or are demoted.
    Additionally, whistleblowers are often blacklisted from 
working in the industry and experience severe social ostracism 
and personal hardship.
    The bounties and systems were set up on the Dodd-Frank 
legislature precisely to combat these tremendous disincentives. 
And it is important to note that we did not set up these 
systems merely to provide payout to whistleblowers for the sake 
they were examined. In fact, we set up these systems to help 
empower the SEC.
    Wall Street's problem would be to recover money owed to 
taxpayers.
    Additionally, this bill would further weaken Dodd-Frank by 
making bounties paid by the SEC to whistleblowers discretionary 
rather than mandatory. I think that would amount to a step 
backward.
    Between 1988 and 2000, the SEC had the authority to pay 
bounties under the Insider Trading and Securities Fraud Act and 
paid just $160,000 to 5 whistleblowers over that entire period. 
And ironically, I should note that one of the criticisms of the 
whistleblower award provisions in Dodd-Frank is that it will 
cause the SEC to be overwhelmed with debts from individuals 
trying to collect big rewards.
    I would have great sympathy for this argument if the same 
folks who are making it were also trying to cut the funding the 
Commission needs to do its job.
    I would also say that I am deeply concerned with corporate 
crimes being treated less seriously than street crimes. For 
instance, when in comes to street crime, investigators are 
required to first alert the subject of the investigation. Why 
should corporate crime be held to a lower standard?
    Lastly, I would point out that yesterday, Senator Charles 
Grassley of Iowa issued a press release saying that the SEC's 
proposed rule of whistle-blowing is too weak. He is deeply 
concerned that House Republicans will try to weaken Dodd-Frank 
further in this legislative draft.
    Thank you, Mr. Chairman.
    I yield back the balance of my time.
    Chairman Garrett. And the gentlelady yields back.
    The gentleman from California?
    Mr. Royce. Thank you, Mr. Chairman.
    Chairman Garrett. For 2 minutes.
    Mr. Royce. Thank you.
    We have had many failures at the SEC over the years. And 
despite hearing from people like Harry Markopolos about what he 
called the ``overlawyered culture,'' the investigative 
ineptitude that was part of the culture at the SEC, despite 
this, last year we had a Dodd-Frank bill that rewarded the SEC 
with additional authority without looking at the fundamental 
problems within that agency.
    And for nearly a decade--I am just thinking about the 
conversations we had here with Mr. Markopolos, actually over a 
decade--he tried to bring the Madoff case to the attention of 
the SEC, but he was repeatedly turned away. Clearly, something 
needs to change.
    And while not nearly enough to solve the SEC's problems, 
the Office of the Whistleblower was simply a small step 
developed, by the way, by Mr. Markopolos, pushed by us here in 
an effort to hold the SEC more accountable. It is unfortunate 
that a broader effort to reform this agency was not undertaken, 
but I hope that Congress can take up this cause of reforming 
the SEC.
    Now, the focus of this hearing is with respect to the other 
provisions within the whistleblower section of Dodd-Frank, most 
notably, the whistleblower reward program.
    Because of the skewed incentives, greater wrongdoing and 
less timely reporting by whistleblowers may be the end result 
of the way that thing is set up. So I commend Mr. Grimm and the 
chairman here for their work to correct this provision and make 
it efficient and workable.
    And I look forward to today's hearing.
    I yield back, Mr. Chairman.
    Chairman Garrett. The gentleman yields back.
    The gentleman from New York for 2 minutes.
    Mr. Ackerman. I don't know a lot of things about a lot of 
things. Maybe it is just because I am from New York.
    Chairman Garrett. That is true.
    Mr. Ackerman. But what I do know is that if you are going 
to turn on the mob, you shouldn't first tell the mob.
    Chairman Garrett. And the gentleman yields back the 
remainder of his time.
    The other gentleman from New York for 2 minutes.
    Mr. Grimm. First of all, I want to thank Chairman Garrett 
for holding this hearing, and thank our witnesses for 
testifying about ways to improve the whistleblower provisions 
of Dodd-Frank.
    In response to accounting scandals, early in the last 
decade, Congress passed the Sarbanes-Oxley Act of 2002. The Act 
required, among other things, a robust internal reporting 
system for whistleblowers to anonymously report suspected 
misconduct occurring in their company.
    These systems were set up at considerable cost. Internal 
reporting systems serve the valuable purpose of assisting the 
firm in detecting fraud early and putting a stop to it before 
it can spiral out of control.
    The whistleblower provisions in the Dodd-Frank Act put 
these internal reporting systems in jeopardy of becoming 
obsolete.
    By creating a system where whistleblowers can get a 
guaranteed reward by bypassing internal reporting systems and 
going directly to the SEC, the Dodd-Frank Act disincentivizes 
employees from reporting suspected fraud internally. This could 
lead to long delays in fraud detection that will result in the 
cost of fraud increasing and depleting shareholder value.
    While we all recognize the important role whistleblowers 
can play in helping to protect investors from fraud, we must 
ensure that we do not allow the pendulum to swing too far, that 
laws and regulations inhibit the ability of the honest firms to 
quickly weed out a dishonest employee.
    That is why I present the draft legislation for 
consideration today that I believe will bring balance back to 
the process of fraud detection.
    I look forward to hearing the witnesses' comments on this 
important topic and I yield back the balance of my time.
    Thank you.
    Chairman Garrett. And with that, we now can turn to our 
panel. Each member of the panel will have 5 minutes. Their 
complete statements have been made a part of the record and we 
appreciate the panelists' indulgence for having to wait a 
little bit.
    Mr. Kueppers, for 5 minutes?

    STATEMENT OF ROBERT J. KUEPPERS, DEPUTY CHIEF EXECUTIVE 
                     OFFICER, DELOITTE LLP

    Mr. Kueppers. Thank you, Mr. Chairman.
    Chairman Garrett. And as always, pull your microphone as 
close as you can so it doesn't mess up your papers.
    Mr. Kueppers. Okay. Thank you.
    Chairman Garrett. And you are all set.
    Mr. Kueppers. Chairman Garrett, Ranking Member Waters, and 
members of the subcommittee, I am pleased to be here today to 
share my views on the whistleblower provisions of the Dodd-
Frank Act.
    I am appearing on behalf of Deloitte LLP, one of the 
largest accounting and professional services firms, as well as, 
more broadly, a member of the public company auditing 
profession.
    I have 35 years experience in the auditing profession, all 
with Deloitte or its predecessors, with two breaks in service: 
one time when I worked at the SEC; and another time when I 
served as CFO of an SEC reporting company.
    First, I would like to emphasize that, because we value the 
integrity of financial reporting and are committed to investor 
protection through the provision of high-quality audits, we 
support efforts to help ensure strong controls are in place, 
both to deter and to detect any wrongdoing. We also respect the 
important role that a robust system of enforcement plays in 
maintaining public and investor confidence in the financial 
markets.
    My comments support implementation of a whistleblower 
program in a way that will help maintain, rather than 
circumvent, the robust systems in place at most public 
companies.
    Congress and the SEC have appropriately fostered these 
systems in recent years, principally, as a result of Section 
301 of Sarbanes-Oxley almost 10 years ago.
    I will address the potential impact of the proposed 
whistleblower rules on the efficacy of public companies' 
internal compliance procedures. There is a risk that investors 
could be harmed if reporting companies are unaware that a 
whistleblower has come forward.
    We are concerned that the rules proposed by the SEC could 
create a monetary incentive for whistleblowers to bypass 
companies established in effect of internal compliance 
mechanisms.
    A rule that rewards whistleblowers who disregard internal 
compliance procedures might result in the unintended 
consequences of less accurate financial statements.
    In this proposed rule, the SEC appropriately seeks to 
reassure whistleblowers that they will not lose their first-in-
line status if they report to the company. While that is 
helpful, we believe that these measures will not be sufficient. 
And, if whistleblowers report their information directly and 
only to the SEC, the opportunity for management, audit 
committees, and external auditors to ensure accurate financial 
reporting may be delayed or even lost unless allocations are 
promptly communicated to companies as they become known.
    Let me give you an example. Consider a situation where an 
employee sees a problem late in the fourth quarter of the year 
but chooses to go around internal channels and report his or 
her concerns only to the SEC. That creates a risk that the 
report would not be timely reviewed by the SEC staff or even 
brought to the attention of company management before year-end 
results are announced or before financial statements are 
released. As a result, the company may have to restate those 
errant financials after investors have already relied upon 
them.
    In this example, the proposed rules would not serve the 
interest of the very investors that the rules are intended to 
protect.
    Even if the SEC's intent is to notify companies of 
whistleblower allegations promptly, the potential increase in 
volume of reports may make choosing that objective difficult 
for the SEC staff.
    I note that if a whistleblower does fear retaliation, the 
Dodd-Frank Act has already taken that into consideration by 
including very strong anti-retaliation provisions. Companys' 
whistleblower hotlines and another means of confidential 
reporting are designed to detect and deter securities fraud and 
other violations.
    Such controls are considered what we call entity-level 
controls and are among the very few controls that can be 
effective in reducing the risk that management could override 
these other internal controls.
    So if the new whistleblower program resulted in a shift, 
that is if employees no longer reported internally, management 
and external auditors may not be able to conclude that such 
controls are effective.
    In light of these concerns, we believe that the SEC's 
whistleblower program should require as a condition of 
eligibility to receive a monetary award that whistleblowers 
first report their concerns through company-sponsored complaint 
and reporting procedures.
    If the SEC determines that it will not make internal 
reporting a requirement for eligibility, we think that at a 
minimum, it should require what I will call concurrence of 
mission to the company and to the SEC.
    And finally, we appreciate the fact that the SEC has 
indicated its willingness to consider the existence and expense 
of a whistleblower's internal reporting as one of several 
permissible considerations in making an award. However, we 
don't believe that the standard which does not even require 
that the SEC do this will be strong enough to countervail the 
motivation through reports of the SEC first.
    Thank you for allowing me to make my statement here today.
    [The prepared statement of Mr. Kueppers can be found on 
page 42 of the appendix.]
    Chairman Garrett. I thank you for your testimony.
    Ms. Narine?

 STATEMENT OF MARCIA NARINE, ON BEHALF OF THE U.S. CHAMBER OF 
                            COMMERCE

    Ms. Narine. Good afternoon, Chairman Garrett, Ranking 
Member Waters, and members of the subcommittee. My name is 
Marcia Narine, and I am here on behalf of the U.S. Chamber of 
Commerce.
    Until May 1, 2011, I served as the vice president of global 
compliance and business standards, deputy general counsel, and 
chief privacy officer of Ryder, a Fortune 500 global 
transportation and supply chain management solutions company 
serving 28,000 employees worldwide. Prior to that role, I spent 
almost 18 months as the group director of human resources for 
Ryder's supply chain solutions division. I began my career at 
Ryder in 1999.
    Before joining Ryder, I worked at two law firms, and prior 
to that I worked for Supreme Court New Jersey Justice 
Garibaldi.
    I left Ryder to pursue my career as an academic, where I 
plan to write on corporate governance and compliance issues.
    And the basis of my testimony stems in large part from my 
experience at Ryder establishing its global compliance program 
under the direction of its board, CEO, and two general 
counsels.
    I have also deposed and prepared a number of witnesses, 
spoken to people who consider themselves to be whistleblowers, 
and developed training programs and policies.
    The views expressed are entirely my own and should not be 
attributed to any of my former employers.
    There are at least five ways in which this legislation will 
adversely affect compliance programs.
    First, the bill creates a presumption that all companies 
operate at the lowest possible level of ethical and illegal 
behavior and provides every incentive for the whistleblower to 
bypass existing compliance programs.
    Treating all companies like criminals and assuming that we 
will all retaliate and that we will all destroy documents or 
shred documents if a whistleblower brings us a tip is wrong and 
unfair.
    Under the current legislation, employees can go straight to 
the SEC to report their suspicions without even alleging that 
the existing company reporting mechanism is not a viable, 
functioning, credible or legitimate option.
    Law-abiding companies which have spent years and millions 
of dollars investing in compliance programs and building strong 
ethical cultures since the Federal sentencing guidelines were 
enacted are being penalized because the SEC failed to do its 
job and failed to pay attention to the whistleblower who 
repeatedly brought information to them regarding--the 
sentencing guidelines have steps for an effective compliance 
program. That is what boards of directors look at when they 
assess compliance programs under their responsibilities.
    I have oversight over compliance programs. And as a 
compliance officer, my role is to conduct risk assessments, 
develop policies, travel the world conducting training, 
interviewing employees, and interviewing our agents to make 
sure that our liability is not going to be affected, and 
raising awareness.
    When I first started traveling the world, we were told in 
many countries that no employee would ever call a hotline. They 
prefer to go to regulators.
    So after years when we started getting calls in the 
hotlines from Brazil, China, and Asia, we started to know that 
our compliance program was working. That is an effective 
compliance program.
    Programs like Dodd-Frank which tell people you don't need 
to call the hotline erodes the hard work that companies have 
been doing.
    Not every company does this or companies that follow the 
sentencing guidelines. This is the kind of work that we do 
every day. Dodd-Frank is assuming that no company does this.
    Those companies that retaliate against employees or shred 
documents need to be punished because those are the companies 
that we use as examples to tell our executive employees you 
will go to jail, you are penalized under Sarbanes-Oxley, you 
are penalized under the law if you retaliate against employees 
or if you shred documents.
    Those are the examples that we point to, but you should not 
assume that all companies are bad and all companies break the 
law.
    And the 2010 revisions of the sentencing guidelines provide 
important clarifications and important direction for companies 
which Dodd-Frank now turns on its head. The 2010 sentencing 
guidelines tell companies that you will continue to get credit 
from the Department of Justice sentencing judges if you 
voluntarily disclose to the government after you find out 
yourself internally that there has been malfeasance and 
wrongdoing. What the SEC is doing with Dodd-Frank is saying, 
``Don't bother to use internal compliance program; come 
directly to us.''
    So how will companies be able to follow the guidance under 
the 2010 revisions in the sentencing guidelines if the internal 
people don't have the incentive to come to us?
    And the irresponsible or smaller companies that aren't 
doing the new compliance programs will have no incentive to do 
so because they will assume that the whistleblowers will go 
external anyway.
    The SEC has indicated that they do not plan to 
automatically share information with the company. Publicly 
traded companies and the SEC have this same goal to protect the 
shareholder. If the SEC wants to protect the shareholder, the 
presumption should be, the whistleblower should report 
internally first, but if not, the SEC informs the company at 
the same time so that the company and the SEC can work together 
to get to the bottom of the issue.
    There are--or capable individuals have the ability to get 
the balance sheet. This means that if an agent or someone is 
terminated or fired because they have done something wrong, 
they actually have the ability to collect on the bounty. This 
is bizarre--although that cannot be intended by the legislation 
as written.
    The anti-retaliation provisions aren't clear so if someone 
is a whistleblower, under the law as written, if they commit an 
act of workplace violence, they steal from the company, they 
don't show up to work, it is not true that under a consistently 
followed clearly written policy, that whistleblower can never 
be fired. Of course, they should not be fired for coming 
forward and bringing forth wrongdoings, but if they commit a 
violation of company policy, they should be fired.
    So, again, there are a number of issues, a number of tweaks 
of the law.
    We are not saying that a whistleblower who has no viable 
option, no viable legitimate complaint mechanism within the 
company should not be able to get a bounty. That is not what we 
are saying.
    So to be clear, if there is clear malfeasance at the top of 
the organization, if there is no credible reporting mechanism, 
if there is no general counsel, internal auditor, or board of 
directors that the whistleblower can go to, they should be able 
to go directly to the SEC and collect their bounty.
    But if there is a viable reporting mechanism that is 
functioning, that is using the sentencing guideline, that a 
board of directors has oversight, we believe that the 
whistleblower should go internally first, and that if they go 
to the SEC, the SEC should let the company know so that the 
company can work in good faith to ferret out the problem and 
remedy it.
    Thank you for your time.
    [The prepared statement of Ms. Narine can be found on page 
50 of the appendix.]
    Chairman Garrett. Thank you for your testimony.
    Mr. Daly?

STATEMENT OF KEN DALY, PRESIDENT AND CEO, NATIONAL ASSOCIATION 
                 OF CORPORATE DIRECTORS (NACD)

    Mr. Daly. Good afternoon.
    Thank you, Mr. Garrett, and members of the subcommittee for 
giving us this opportunity.
    I am Ken Daly, president and chief executive officer of the 
National Association of Corporate Directors.
    The NACD, with more than 11,000 members, is the membership 
organization of America's boards of directors.
    We believe that capitalism is premised on decency, honesty, 
and trust. And consequently, it is no surprise that we support 
and encourage internal systems aimed at enhancing business 
functions.
    In 2002, Sarbanes-Oxley encouraged effective internal 
compliance systems with the key provisions of required 
whistleblower systems and protocol, up-the-ladder reporting for 
attorneys, and prohibiting companies from retaliating against 
whistleblowers. These systems were built at great cost, 
reportedly millions of dollars.
    And much has been learned over the past decade about how 
these systems work and how these systems don't work.
    Today, we believe these systems are working. We have 
several concerns about the Dodd-Frank whistleblower legislation 
and the implementing rules.
    One of our primary concerns is that Dodd-Frank 
whistleblower bounties do not encourage the use of these 
systems, as has been pointed out by many other folks. Arguably, 
the perverse incentive systems actually conspired a cause of 
delay in fixing problems.
    We have three additional concerns.
    First, the definition of independent knowledge. We think it 
shouldn't exclude not only external auditors but also 
government employees, attorneys, internal auditors, and other 
professionals like those assisting in audits and those 
assisting directors as envisioned by Sarbanes-Oxley.
    Second, companies should be allowed time to cure reported 
violations prior to government enforcement action. A reasonable 
time should be a minimum of 90 days.
    Third, employers should have the ability to use existing 
disciplinary measures to respond to employees who circumvent 
company compliance systems or make false allegations against a 
company.
    We believe there are significant unintended consequences as 
already noted today in this incentive program and the more 
important ones are, as already noted, the existing 
whistleblower systems that were recently established at 
substantial cost will probably not be used.
    During a time when expectations of directors and the 
complexity of business is greater than ever, the records may be 
in fact disincentive for using outside resources to gain 
additional perspective on corporate issues. Sarbanes-Oxley was 
really meant to encourage the use of such resources.
    By setting up the SEC as a central repository and processor 
of claims, thousands if not tens of thousands of claims both 
valid and otherwise will result in a near and possible test we 
are trying to separate the important matter.
    Finally, corporate culture depends upon shared values from 
the top down. In our view, a wildcard has been inserted in the 
culture. It changes the emphasis from problems solving--the 
culture of American business--to getting paid for problem 
identification.
    The proposed Grimm bill helps correct some but not all of 
these issues.
    We are particularly pleased with those matters requiring 
internal reporting and in following up with reporting to the 
SEC no later than 180 days, the preventing of awards to 
whistleblowers who at certain exceptions do not first report 
internally, removing the minimum reward requirement of 10 
percent of monetary sanctions collected, and finally, 
clarifying the provisions or retaliations against 
whistleblowers, providing employers with the ability to remove 
employees who violate a established employment agreements, 
workplace policies and codes of conduct.
    However well-intentioned, we question a need for the entire 
Dodd-Frank whistleblower incentive program. We understand there 
are strong opinions for and against the inclusion of 
incentives, but there has been insufficient study in our view 
to determine if cash incentives and a centralized repository of 
claims are needed or if the existing systems are working well.
    We propose to delay the effectiveness of Dodd-Frank 
whistleblower incentive provisions for 1 year. This would allow 
time for a comprehensive study of the effectiveness of existing 
whistleblower processes pursuant to Sarbanes-Oxley.
    Thank you very much for your time.
    [The prepared statement of Mr. Daly can be found on page 32 
of the appendix.]
    Chairman Garrett. And I thank you for your testimony.
    Professor Rapp? You have to push the little button and pull 
the plastic.
    You got it.

   STATEMENT OF GEOFFREY CHRISTOPHER RAPP, PROFESSOR OF LAW, 
              UNIVERSITY OF TOLEDO COLLEGE OF LAW

    Mr. Rapp. Good afternoon, Chairman Garrett, Ranking Member 
Waters, and members of the subcommittee.
    Thank you for the opportunity to discuss the proposed 
legislation modifying the whistleblower provisions of the Dodd-
Frank Wall Street Reform and Consumer Protection Act.
    Whistle-blowing is the single most effective method of 
detecting corporate and financial fraud. In recognition of this 
fact, the Sarbanes-Oxley Act of 2002 for the first time created 
a uniform Federal protection for financial fraud 
whistleblowers.
    The central idea was to motivate employees to blow the 
whistle by protecting them from retaliation in the workplace.
    Unfortunately, Sarbanes-Oxley failed to offer any sort of 
financial incentive for whistleblowers who bring fraud to 
light.
    Section 922 of the Dodd-Frank Act answered the glaring need 
for a bounty provision for financial fraud whistleblowers.
    In short, under Dodd-Frank, whistleblowers who voluntarily 
provide original information on securities fraud violations 
would be entitled to 10 to 30 percent of the sanctions obtained 
by the Securities and Exchange Commission in a successful 
enforcement action.
    The legislation under discussion in today's hearing would 
modify the Dodd-Frank approach.
    First, the proposed legislation would require that employee 
whistleblowers raise their concerns internally before going to 
the SEC. Whistleblowers failing to do so would be denied a 
bounty unless they demonstrate that their employer lacks an 
internal reporting process or a policy prohibiting retaliation 
or demonstrate that the fraud involved high-level managers or 
bad faith.
    The question of whether whistleblowers should be required 
to report internally is one that the SEC considered in detail 
in connection with its proposed rules. The SEC concluded in its 
proposed rules that an internal reporting requirement was 
unnecessary.
    The main argument that has been advanced in favor of such a 
requirement is that Dodd-Frank would damage existing internal 
reporting structures adapted by corporations after the passage 
of Sarbanes-Oxley.
    In response to this argument, the SEC made several 
observations.
    First, it noted that not all employers have robust and 
well-documented internal reporting procedures. Moreover, the 
SEC expressed its view that even without imposing a requirement 
of internal reporting, internal reporting structures are 
unlikely to be bypassed.
    The SEC noted that in most cases, upon receiving a 
whistleblower tip, its staff would contact the corporation and 
describe the allegations, giving the firm the chance to 
investigate the matter itself. The SEC did not expect that 
Dodd-Frank's structure would minimize the importance of 
effective company processes for addressing allegations of 
wrongful conduct.
    In addition, even without a hard requirement of internal 
reporting, many whistleblowers will likely report internally 
anyway. Most whistleblowers see themselves as loyal employees 
and they often blow the whistle out of a desire to help their 
firms.
    The proposed requirement for internal reporting would 
complicate both the process and the expected benefit of 
whistle-blowing for a potential tipster.
    A potential whistleblower would have to make a judgment 
call about whether the high level management or bad faith 
exceptions apply before contacting the SEC or else risk losing 
her eligibility for a bounty. This added uncertainty would dull 
the incentives Dodd-Frank seeks to use to put more cops on the 
beat.
    A second aspect of the proposed legislation would eliminate 
the mandatory nature of Dodd-Frank bounties. Again, this 
proposal would likely dull the incentives Dodd-Frank was meant 
to foster.
    The primary concern that would arise if bounties were 
purely discretionary is whether the SEC would in fact award 
bounties on a regular basis. The SEC was given a purely 
discretionary authority to pay bounties by the Insider Trading 
and Securities Fraud Enforcement Act of 1988.
    Between 1988 and 2010, the Commission reportedly paid just 
$160,000 to only 5 whistleblowers. Similarly, when the payment 
of bounties in the tax fraud setting by the Internal Revenue 
Service was purely discretionary prior to the Tax Relief and 
Health Care Act of 206, the IRS had a rather dismal record of 
rewarding whistleblowers.
    The reformed IRS program serves as a model for the Dodd-
Frank provision and made bounties mandatory at a certain level 
of disputed tax liability.
    In addition, the Dodd-Frank Act already involves a fair 
amount of discretion. The SEC can deny bounties to 
whistleblowers whose information is not original, who do not 
provide such information voluntarily, or who fall in to one of 
the categories excluded from claiming of bounty.
    Making bounties discretionary in all cases as the proposed 
legislation would do simply increases the likelihood that the 
Commission will direct its energies to other priorities rather 
than respond to and reward whistleblower tips.
    Thank you, and I would be happy to answer any questions you 
may have.
    [The prepared statement of Professor Rapp can be found on 
page 57 of the appendix.]
    Chairman Garrett. Thank you Professor. And I thank the 
entire panel.
    So, at this time, I yield myself 5 minutes for questions.
    Ms. Narine, one of your opening comments was the fact 
that--you said that the language in Dodd-Frank paints all 
businesses as criminal going into it. I am not quoting you 
exactly.
    But I absolutely heard my colleague from New York when he 
said, ``You do not tell the mob when you are doing an 
investigation.'' And that is exactly the case. Not all 
corporations are the mob; they are not all engaged in illegal 
conduct. I got your point that we are doing a broad brush 
approach with this language with the legislation.
    Ms. Narine. That is correct.
    Chairman Garrett. And I can probably even step back further 
here.
    And as we go into this discussion on this one particular 
piece of Dodd-Frank, and I know we have heard this from the 
other side already, a comment that we are trying to undo from 
the good language that is in that legislation that anytime we 
try to make any changes of what we would call improvements to 
it--we were trying to totally undo a rollback in all, what have 
you, the Dodd-Frank legislation--that basically has been the 
rhetoric that we have heard no matter what we have had in this 
committee so far to date.
    We try to improve upon something, a 2,300 page bill where 
we have not had a full and complete discussion and disclosures 
and look at the unintended consequences and where we are charge 
with being--trying to repel legislation.
    And actually, you can comment on this, that is really not 
what is--done here with the gentleman from New York, Mr. 
Grimm's legislation, is it not? What we are trying to do is 
trying to take both the existing whistleblower laws and the 
requirements that we had first under SOX basically that are 
already in place--on that and then what came through Dodd-Frank 
and basically making it in a way that it actually gets to the 
end result which is what they try to improve corporate culture 
and to try to rectify, to end those bad conducts that are going 
on within a particular company.
    Mr. Kueppers. I think that is fairly stated.
    One way to think about it, Mr. Chairman is there is some 
tension between protecting whistleblowers which I think is very 
important and whistleblowers themselves play an important role 
in protecting the broader group of investors.
    So, there are tradeoffs here. And my own experience is that 
I happen to have had the pleasure and benefit of working with 
clients who are quite well established in investigating any 
wrongdoing that might come to their attention.
    And I think Mr. Grimm's draft legislation--the part that I 
focused on was this notion that you have to report first to the 
SEC because I believe, whether it is first or concurrently, 
then the company has the ability to have knowledge to get to 
the bottom of what the issue is.
    And, of course, if they don't do so there should be some 
severe consequences for that company.
    Chairman Garrett. Right.
    And so, there is language in Dodd-Frank, I think it is a 
90-day period of time in which they can go to their--go to the 
corporation and say, I see such and such go on. If they all are 
outside of that then, professor, I understand there, you are 
beginning to listen to a couple of areas where then you would 
as the whistleblower fail to comply with the provisions and say 
you fail to be able to be compensated by the SEC. Is that 
correct?
    Mr. Rapp. Both the statute and the proposed rules do 
provide certain conditions that a whistleblower must meet in 
order to be eligible for a bounty.
    Chairman Garrett. Is there something in Dodd-Frank that 
says that is one of the conditions that could put you outside 
of receiving compensation? Is there something in Dodd-Frank 
that would say that a whistleblower who has engaged himself in 
malfeasance would be prohibited from collecting?
    Where is that? Is that in Dodd-Frank?
    Mr. Rapp. I would have to look back at the statute.
    Chairman Garrett. Okay.
    Even better yet, how about within the proposed rule from 
the SEC?
    Mr. Daly. I believe, Mr. Chairman, that there is nothing 
that would stop that person from being rewarded.
    Chairman Garrett. Yes.
    So, if that is the case, there is nothing in Dodd-Frank and 
there is nothing in the rule, I appreciate the fact that they 
tried to set some parameters within how many days you have--90 
days, 3 months--to comply.
    That seems to be a glaring problem, why the sponsor of the 
underlying legislation and also the SEC did not grab on that to 
say that if you have someone engaged in illegal activity, they 
may have been the one who actually started it, but now it is a 
year down the road and I realized this thing has spun out of 
control or something like that and now it is the time to rein 
it in.
    But under the way that it is currently written and under 
the rules, Mr. Daly, that individual is not prohibited by 
statute or the proposed rule from the receiving end of this--
    Mr. Daly. That is correct.
    Chairman Garrett. --Dodd-Frank. Yes.
    Professor, is that just a glitch in the legislation that 
should probably have been addressed in some way, shape or form?
    Mr. Rapp. My own view is that it is very unlikely that such 
a person would be deemed eligible for a bounty because of the 
other structures that are built into the proposed rules.
    Chairman Garrett. And what would they be based on--what are 
the other structures in it that would prevent them from getting 
it?
    I am going to say my time is up. So I close on this.
    Mr. Rapp. I believe the proposed rules do cover something 
about individuals who are convicted in connection with a fraud.
    Chairman Garrett. Yes.
    Mr. Rapp. In addition to common law obligations that such 
an employee would have to their employer--
    Chairman Garrett. Right.
    Mr. Rapp. --would likely make them liable to the employer 
for any damages--
    Chairman Garrett. So basically, they have to have a 
conviction on--in essence, but if the person is not convicted 
by it then they could still--thank you.
    The gentlelady from California.
    Ms. Waters. Thank you very much.
    To Professor Rapp, my colleagues on the other side of the 
aisle seem to think that now that Dodd-Frank is law, employees 
of financial companies will be racing to the SEC to blow the 
whistle hoping to win the lottery with a claim.
    Based on your research on whistle-blowing programs then, 
incentives historically, is this an accurate expectation? And 
can you elaborate on what your research says about the 
disincentives whistleblowers face when considering whether or 
not to step forward?
    Mr. Rapp. In response to the first question, I think it is 
unlikely that whistleblowers will race to the SEC in search of 
a bounty. The way that the bounty provision in Dodd-Frank is 
structured, a whistleblower is only entitled to a bounty if 
their information leads to a successful enforcement action 
producing over $1 million in monetary sanctions.
    And the bottom line is that the SEC often pursues 
enforcement actions that do not produce that minimum threshold 
as required for the Dodd-Frank bounty provision to be 
triggered.
    Between 1978 and 2002, by one study, the SEC imposed 
monetary penalties in only 8 percent of the enforcement actions 
that it pursued. And in those where monetary sanctions were 
imposed, the median sanction was below $1 million.
    What that means is that in less than 10 percent of the SEC 
enforcement actions, only half of the time would the 
whistleblower potentially be eligible for a bounty.
    So I don't think that it is likely to lead to a rush to the 
SEC because only in the most serious instances of fraud would a 
bounty actually be triggered.
    As far as the disincentives to whistle-blowing, I think 
that the fear of retaliation is obviously the foremost one that 
has been covered in the media.
    Various studies have found that between 80 and 90 percent 
of whistleblowers are either fired, demoted, or forced to quit 
under duress. In addition, in one study, more than 60 percent 
reported being blacklisted by their industry. But I think the 
social costs of whistle-blowing are often the most significant.
    A whistleblower will inevitably become distant from friends 
and colleagues. And these water-cooler effects, the social 
effects, I think, can provide a strong disincentive, a 
disincentive which bounty programs are meant to overcome.
    Ms. Waters. Thank you.
    To be clear, I would like more clarity on one provision of 
the Grimm draft discussion that perhaps won't get a lot of 
attention but could have a chilling effect on the ability of 
legitimate whistleblowers to step forward.
    The Grimm draft legislation will prohibit whistleblowers 
from paying their counsel via contingency fee arrangement. Can 
you explain to me the practical impact of this provision? Would 
an average employee be able to afford counsel if no contingency 
fees were allowed? What would be the impact of this provision 
on the SEC's ability to screen and develop potential cases?
    Mr. Rapp. I think that aspect of the proposal would 
virtually guarantee that no whistleblowers were represented by 
talented counsel in the application for an SEC bounty. And I 
think that would be particularly problematic in light of two 
aspects of the Dodd-Frank statute.
    First, it authorizes whistleblowers to report anonymously 
to the SEC and requires that they be represented by counsel if 
pursuing anonymous submission.
    And the alternative to a contingency fee, whistleblowers 
will be paying attorney's hourly rates. Bearing in mind that 
many of these people will have been terminated and not have any 
income, paying hundreds of dollars an hour is simply 
unrealistic and I can't see that happening.
    The Dodd-Frank statute also has an appellate right where a 
whistleblower who is denied a bounty can appeal to the U.S. 
Court of Appeals.
    I don't think talented lawyers are likely to take on such 
time-consuming representation without the prospect of a 
contingency fee. The fact is, contingency fees are regular part 
of practice in other areas of Federal bounty reward programs 
and there is no evidence of widespread abuse of contingency 
fees.
    Ms. Waters. Do you know any place else in the law where 
contingency fees are absolutely denied to someone seeking legal 
assistance?
    Mr. Rapp. My understanding of the American Bar 
Association's Model Rules of Professional Responsibility is 
that they are denied in criminal defense matters but that 
wouldn't seem to be a very strong parallel.
    The ABA model rules on contingency fees require that like 
all attorney fees, they be reasonable at three points in time: 
when they are agreed to; when they are charged; and when they 
are collected. So, if an attorney signs a contingency fee 
arrangement for a Dodd-Frank whistleblower, but doesn't end up 
doing any work on the matter and a bounty is paid, that fee 
would have to be renegotiated.
    Ms. Waters. But, would you conclude that it is a 
disincentive? For someone that information--important 
information that would benefit the taxpayers and would like to 
share that, if they could not get an attorney based on 
contingency fees, that would be a disincentive that this person 
probably would not come out of their own pocket to hire an 
attorney to do this?
    Mr. Rapp. The idea of paying an attorney tens of thousands 
or more in attorney's fees to pursue a bounty would to me be 
unrealistic for most whistleblowers.
    Ms. Waters. Thank you very much.
    I yield back.
    Chairman Garrett. The gentlelady yields back.
    The gentleman from Arizona.
    Mr. Schweikert. Thank you, Mr. Chairman.
    And actually, the ranking member just started a whole line 
of thoughts in my head.
    My understanding is that a--we call it a bounty, is now 
mandatory within the Dodd-Frank. Am I correct about that?
    Ms. Narine. That is correct.
    Mr. Schweikert. What is the law of unintended consequences 
here? Are we heading down the path where I have just created 
the whole new legal industry that I do my best even to collect 
data or put up things on the boards or e-mail, saying, ``Have 
you been fired, have you been removed from your position, would 
you like to get back at your former organization? Excuse me, 
would you like to catch your former organization?''
    It is always my concern. Look, I am new here, but I keep 
looking at pieces of legislation, and people keep saying, ``We 
didn't mean for that to happen.'' And there seems to be this 
repeated cascading effect around here of the law of unintended 
consequences.
    And I heard the professor's comments which I appreciate. Is 
it pronounced ``Narine?''
    Ms. Narine. ``Narine.''
    Mr. Schweikert. Narine.
    Ms. Narine. I can address that. I actually--a few weeks ago 
I sat on a panel addressing whistleblowers. And so, in the 
audience, what would be your response? Would you ask a--when 
they walk in the door if they had used the company's internal 
reporting requirement? If there was a viable compliance option, 
would you ask them to use them?
    He said, ``I might or I might not, but that is really not 
my problem. My role is to maximize their award because I am 
going to use my other contingency plan.'' That was actually his 
response: ``It is not my role to make sure that they use their 
internal reporting response.''
    And there is--that is his job and that is how he sees his 
role.
    Mr. Schweikert. Mr. Chairman, and this is also for anyone 
who wants to answer, but wouldn't you be now queuing up a 
scenario where I am dismantled or I see something that I don't 
understand, whatever the reason be.
    And that the threat is, we are going to go on to the step 
of filing at the SEC unless we receive certain compensation? Or 
is it, you hire a legal counsel and immediately go?
    I am thinking through the number of steps here. This has 
almost become a new legal paper practice.
    Ms. Narine. The follow-up question I have, I posted a 
series of questions. I said, what if your whistleblower is 
wrong? Because, in many instances, companies rely on people to 
come forward internally. Sometimes your whistleblower in good 
faith believes he or she has information.
    They may not have the complete story. They could be wrong. 
And once the company says, ``Here is the actual situation,'' 
they realize, ``You know, something, I was wrong. I am sorry. I 
am glad you cleared that up.'' And then they are wrong and they 
go away.
    But sometimes they are right and you say, ``I am glad you 
brought that information. We have now remedied the issue.'' You 
won't know that if they don't come internally.
    I raised that issue with the--and, again, he said, ``That 
is not my issue. I go to the SEC and I take care of my 
client.''
    And I said, ``Would there be a situation where you come to 
the company first and say, `I am coming to you first, how about 
a settlement before I go to the SEC'?''
    He said, ``I could see that happening.''
    Mr. Schweikert. Okay. So we are--
    Ms. Narine. So could there be--is that an extortion issue 
if I wouldn't call it that? I am coming in to settle with the--
of the company before going to the SEC.
    So these are the kinds of things that companies would have 
to deal with which again is that the best interest of a 
shareholder? I am not sure.
    Mr. Schweikert. Okay. Ms. Narine, we try not to use the 
extortion word but functionally--so it is not only just at the 
company level or at the bureaucracy level. There may be that 
midpoint.
    I need to also get myself educated a little bit. This is 
for all publicly held companies? Any types? So not just 
financial companies. It is all publicly held companies?
    Is it also for other types of organizations out there that 
have to share a relationships and up and down the chain?
    No?
    Ms. Narine. We are not trading on the exchange.
    Mr. Schweikert. They would know. I do not believe it.
    Would it be for pension plans?
    Mr. Daly. Probably not, but there is one side of this that 
I think you should not miss. You don't have to be an employee 
in this particular company to file a claim against some other 
company.
    Mr. Schweikert. But--okay. I want to close on that. And I 
have like 26 seconds.
    And it wouldn't be for a very large charity. This is only 
for a publicly held company?
    Mr. Daly. Correct.
    Mr. Schweikert. Not just financial companies, all publicly 
held companies?
    Mr. Daly. All publicly held companies.
    Mr. Schweikert. And from--my other thing--and you have just 
heard a touch on it. And it didn't have to be an employee in 
that organization or--I could be the filer of any publicly, 
filing the complaint on any publicly held--
    Mr. Schweikert. --company?
    Ms. Narine. You could be a filer. A client officer at 
Ryder--I learned that we had an agent in Bangladesh who was 
bringing people unauthorized which could expose Ryder to--
practice at that liability.
    I terminated that agent. That agent could call the 
Department of Justice and the SEC and say, ``For 10 years I 
have been bribing people--and that person conceivably under the 
law--
    Mr. Schweikert. --and thank you for being so gracious. I 
know we are going over time, but the other side, towards Mr. 
Daly. Does it have to be--it was part of that organization? 
Could it be, for instance, the housekeeper who overheard 
something?
    Mr. Daly. It could be literally anyone.
    Mr. Schweikert. So, back to my scenario again. If you had a 
new legal profession, you could just shop for professional--
    Mr. Daly. Possibly.
    Mr. Schweikert. All right.
    Thank you, Mr. Chairman.
    Chairman Garrett. The gentleman's time has expired.
    The gentleman from New York.
    Mr. Ackerman. Thank you very much, Mr. Chairman.
    It seems to me we have a tremendous difference in point of 
view based on philosophy and based on whose interest we are 
interested in protecting. It is not surprising to me that all 
three expert witnesses who agree with each other represent 
corporate interests who have a need to be protected against 
people who might want to expose them to things that they are 
doing wrong.
    We have one witness who doesn't necessarily have a vested 
interest and I appreciate his point of view because--not just 
because I agree with it, but I think it makes more sense.
    Whose interest do we represent? Who are we trying to 
protect? Are we trying to protect corporate interest because on 
investors, because of people who are putting up their money or 
are we trying to protect the system and innocent people?
    If there is one thing that--if not worse than, but it is 
bad as blaming the victim, it is blaming the witness and trying 
to discourage people who are witnesses from coming forward.
    Nobody is saying that everybody in the corporate world is 
part of the mob, but there are people in the corporate world as 
there are else who do things that are wrong. And there is 
nothing wrong with having encouragement and disincentive from 
people who call them on that in every walk of life.
    And if you are interested in protecting the public, you 
call them whistleblowers. If you are part of the system that 
needs protection against being exposed, you call them snitches, 
whether it is a corporation that is doing something wrong or a 
criminal venture that is doing something wrong.
    The point I was trying to make before is that you really 
don't go to the bad guys to report the bad guys hoping that 
they are going to change their ways because there is a price to 
be paid for that.
    The incentives and disincentives seem to work. It works for 
the FBI. They were offered a $27 million reward for legitimate 
evidence to find Bin Laden. Now, there were a lot of people who 
knew who Bin Laden was and where he was and they didn't get the 
reward.
    I know probably a lot of innocent people who retired six-
foot, seven footer to some basketball team who looked like Bin 
Laden who were looked at but nothing ever happened, but they 
still have to reward Mr. Moore.
    In major cities, mine included, they have a cops program. 
If you report that you are a witness and saw somebody killing a 
cop, you would go and report it to the police and there is a 
minimum $10,000 reward if you are right. If you are wrong, 
nothing happens.
    Decision as far as invention of incentives and 
disincentives and rewards goes all the way back to when 
religion was invented or God created heaven and hell. It 
doesn't mean everybody is evil but the FBI said that the IRS 
has a system where you turn someone in for income tax fraud 
whether it is the individual or corporate, you get 10 percent 
of what they can recoup. It doesn't mean every taxpayer is a 
cheat. We have a program where if you see something, say 
something. We want people to participate and to report.
    I don't think we should reduce whistleblowers to the status 
of bounty hunters and I would be shocked if there weren't a 
large number, if not a majority of people who work for 
corporations who think the corporation is violating their own 
rules or some standards who doesn't report it to somebody 
within the corporation seeking no reward.
    And maybe like the essence that Mr. Kueppers, in Deloitte 
where you have considerable experience, other people who come 
and say, ``Hey, I think we are doing this wrong. We shouldn't 
be doing this. This is wrong to violate the company rules.''
    Mr. Kueppers. Yes, indeed. In fact, in my experience with 
clients, this is not an everyday occurrence. But I have 
experienced several pretty serious situations where somebody in 
the organization called the financial management of the company 
and comes forward. They are uncomfortable and it goes up the 
chain and--
    Mr. Ackerman. I would suspect that.
    Mr. Kueppers. Yes.
    Mr. Ackerman. And I think that is a good thing, but there 
are people who legitimately say--I am not pointing the finger 
at your company--but I am sure that there are people in other 
companies who think that people are deliberately doing things 
wrong.
    I am not as worried about the lure of unintended 
consequences as I am about the deliberate intended consequences 
of actions that some people do, that people know if they blow 
the whistle will turn them in, that they are going to--and I 
would think that is a legitimate concern, and to try to 
penalize those people, to try to discourage them, to try to 
cause not to report to a legitimate authority, it is something 
that we really have to view through dispassionate eye.
    And as policymakers, those of us on this side of the table 
should be looking at this as to how to protect not just our 
company and investors, not just one guy or gal who may be a 
shakedown artist within a company, I am sure we can find one or 
two of those as well, but we have to be seriously talking about 
protecting the public, Mr. Chairman. I know I have not--but I 
wanted to make that statement.
    Chairman Garrett. I appreciate that. And the gentleman 
yields back.
    Mr. Hurt, you are recognized for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman. I thank you all for 
appearing this afternoon on this important subject.
    And yes, my comments would begin with saying, I think that 
one of the important hallmarks of our civil justice system is 
ensuring fairness and ensuring accountability and offering a 
way in which the government allows for the enforcement of 
contracts and making sure that the people in the marketplace 
act honestly.
    It is my view that most do, and that those who represent 
shareholders, those are the corporate--the people who are 
elected to be the corporate structure certainly have a purer 
interest in seeing and taking care of shareholders, certainly a 
greater interest than even the SEC or any government entity.
    And I guess it strikes me that coming to Washington, you 
find again and again examples where the Federal Government 
seems to believe that it knows better how to take care of its 
customers or its employees than those who have the greatest 
interest and that is in running a successful business for the 
shareholders, and I can't help but be struck by that as we have 
listened to this testimony and consider what I think is a good 
bill.
    But my question--my first question--and I would ask that 
all of the witnesses maybe address this, but my question is 
with respect to uncovering illegal activity within the 
corporate structure, I would think there is a big difference 
between having an organization that is corrupt throughout or in 
a significant way at the higher end of the management versus 
having one rogue employee.
    It seems to me as a pretty big difference in terms--and it 
has some implications here, and I was wondering if not having 
that much of a background in this area, if each of you could 
maybe just address that issue, how are you able to quantify or 
qualify the number of times that you have just a rogue employee 
who needs to be stopped immediately? And when you stop them 
early, it saves shareholders' money, saves the company money as 
opposed to these larger conspiracies that may require a longer 
time of investigation. Perhaps you can just speak to that.
    Mr. Kueppers. Sure, let me start, Congressman.
    I have on several occasions witnessed client situations 
where one or two handfuls of people were engaged in improper 
behavior. Uncovering that, you would hope there is a function 
of the regular sort of management processes but there is not.
    For example, as outside auditors, if we uncover it, it is 
our duty to take that to management and to insist that they 
investigate and take action. If they don't, we go to the audit 
committee. If they don't act, we go to the board. If they don't 
act, we go to the SEC under Section 10A of the Exchange Act.
    I take those responsibilities very seriously because I have 
never--the reason I have so many of these 10A reports must not 
be working, we don't get these reports.
    The threat of going to the SEC, and I have done it twice, 
is pretty much all it takes for people to get serious about 
solving the problem and doing it quickly.
    Mr. Hurt. Thank you.
    Ms. Narine. I think--and just to be very clear about some 
things there, from a corporate perspective, if the management 
team is corrupt, no one would expect the employee to use 
anything within the corporation. That doesn't make sense.
    The fear of reporting anything, whether it is, ``My manager 
is mean to me, please investigate,'' or ``The CEO is stealing 
the pension funds,'' it is very real. There is a rational 
normal fear of reporting anything and the compliance officers 
are sensitive to that. So it is not an insensitivity to that 
issue. But every company whether you have 100 employees or 
28,000 employees, you are going to have some rogue employees 
somewhere.
    So for those kinds of things, you would hope that if there 
is a viable functioning compliance program, you use that. If 
you believe that there is a corruption that is coming from the 
top or that the independent auditor is really not independent 
or the board member is in bed with a CEO and you really can't 
trust them, there is no way and no reason that anybody would 
expect you because that is not legitimate, that is not a 
legitimate function and compliance program.
    In the seven steps, the sentencing guidelines set out are 
very clear as to what it is. And the revised guidelines in 
2010, the first thing that they recommend is that the 
compliance officer report to the board, and if not reporting 
directly to the board, have access to the board of directors, 
but there is a level of independence because they recognize 
that those kinds of issues can come up.
    So again, if there is no way, if the person legitimately 
believed, it will have to be right, that they legitimately 
believe that there is no way, not just rumor, speculation, ``I 
think if I go, I am going to be retaliated against.''
    If they have a legitimate reason to believe no one is going 
to reasonably believe that they shouldn't go directly to the 
SEC and collect their bounty of that is due to them.
    So there is a difference between, ``I think I am going to 
be retaliated against,'' and I am dealing with one rogue 
employee versus, ``It is dirty at the top and I shouldn't have 
to go.''
    Mr. Hurt. All right. Thank you.
    Mr. Daly. I can report that in a prior life before I 
arrived at the NACD, I audited dozens and dozens of companies. 
And I cannot remember one instance where I would report that 
the entire company, to your point, was corrupt from the top 
down.
    Essentially, what happens is you have rogue employees. You 
have someone who does something nefarious for an evaluation or 
for a bonus or for something of that nature.
    I think to the chairman's point at the beginning, at the 
top of this discussion today, I think we are wrestling with the 
issue of whether additional assistance is required and whether 
to have Sarbanes Oxley as originally envisioned work.
    Unfortunately, I don't think that there has been sufficient 
work to make the decision with that. That is to my point that I 
think we want to delay this for a while until we have an 
opportunity to determine whether or not the systems are 
working. If in fact the systems are not working, then they 
should be corrected. If in fact the systems are working, then I 
suspect we should allow them to continue.
    And I can tell you from spending lots of times with lots of 
audit committees and my current role with the NACD, there is 
consistent talk, robust discussion about how the systems work, 
what kind of issues are being found and what the companies are 
doing about it. So this is very much on the minds of corporate 
America.
    Chairman Garrett. Thank you.
    The gentleman from California.
    Mr. Sherman. I see that there are two controversies here. 
One is whether the whistleblower gets a bonus, the other one is 
would the SEC keep the investigation confidential at certain 
stages.
    Ms. Narine, do you have any objection to a whistleblower 
who helps society and comes forward and blows the whistle and 
takes those risks, getting a bonus or payment? Is there 
something the matter with that?
    Ms. Narine. No.
    Mr. Sherman. Now, the next issue is how confidential the 
whole investigation is. Mr. Kueppers, what would be the 
advantage if when the SEC opens a file, they also notify the 
auditor of the company under question?
    Mr. Kueppers. I think there would be an advantage to 
notifying the auditor and we would obviously put that 
information directly to the board or the audit committee of the 
company plus the resources to perform their own investigation.
    Today, most problems with financial reporting, indeed with 
the SEC, violations of SEC law investigated by the companies 
who spent the money, the resources, do whatever needs to be 
done and they report immediately back to the SEC.
    Mr. Sherman. So there is really no way to notify the 
auditor without notifying the company as well?
    Mr. Kueppers. That is the optimal--
    Mr. Sherman. In other words, if the auditor--if there was a 
situation in which it was not best to notify the company, then 
it is probably not best to notify the auditors as well?
    Mr. Kueppers. It would--out of necessity because we 
couldn't investigate without the cooperation of the company--
    Mr. Sherman. Okay.
    Mr. Kueppers. --it probably wouldn't achieve much.
    Mr. Sherman. Section 301 of Sarbanes Oxley requires the 
independent audit committee at every public company to 
establish a system for managing whistleblower concerns related 
to accounting and auditing. Section 806 of Sarbanes Oxley 
provides protections for the whistleblowers. Does any provision 
of Dodd-Frank undermine those two provisions of Sarbanes Oxley?
    Mr. Kueppers. I think the tension here comes when--in 
applying or operationalizing the Dodd-Frank elements which is 
what the SEC is in the process of doing, the worry is that it 
would render the company systems under 301 of SOX in effect 
because people would bypass those systems and go to the SEC. So 
it is more in the--and sort of how it would work where the 
issue arise.
    Mr. Sherman. So SOX envisions a company investigation, 
Dodd-Frank envisions a company not notified, SEC investigation, 
and those are two rival as anything that matter with having 
those two items be separate and both available or--
    Mr. Kueppers. I am not sure what the intent of the statute 
was, but if the SEC is investigating itself through its 
enforcement division--
    Mr. Sherman. Yes, the company is going to get notified 
there too.
    Mr. Kueppers. Absolutely, because of the need to produce 
documents, witnesses, and so forth.
    Mr. Sherman. Professor Rapp, is there any reason for the 
SEC to not share with the company the fact that there has been 
a complaint filed, perhaps not identifying who filed it and if 
they are investigating a particular matter? And how would they 
possibly investigate without the company knowing?
    Mr. Rapp. Their usual practice of reporting to the SEC, and 
I don't speak for the Commission, but I see what they have 
announced publicly, their usual practice would be to contact 
the corporation.
    It might not make sense to do that in the early stages of 
investigation insider trading, for example. And the Dodd-Frank 
bounty scheme subsumes the insider trading bounties that were 
formerly part of the law if we were concerned that a wrongdoer 
facing significant criminal sanction might destroy a document, 
you might try to get preliminary safety case together before 
you reach out in that way.
    Mr. Sherman. I yield back.
    Chairman Garrett. The gentleman yields back.
    The gentleman from New York.
    Mr. Grimm. Thank you, Mr. Chairman.
    I want to take a step back because you just mentioned the 
destroying documents. Here is the reality. Sometimes it is just 
so frustrating because what sounds great and looks good and it 
is an honest, fair theory to have, doesn't marry up with 
reality.
    When the SEC does these investigations, who do you think 
they contact? They contact the company because that is how they 
get all their information, and it may not be that day but it is 
very, very soon thereafter, so does the FBI. That is how it 
works. That is how it has always worked. That is how it is 
always going to work.
    So this idea that you just go to the SEC and the company is 
not going to find out, it is simply not based in the way things 
are done and there is the distortion of what really happened.
    The idea that someone is going to destroy documents, that 
is why since 2004, the penalty for doing such a thing is up to 
20 years in prison, and that is a big hammer and that is why 
the vast majority of players out there are not going to destroy 
documents, and that is better than anything we could be talking 
about today, is that 20 years of imprisonment is a lot more of 
disincentive than Dodd-Frank is going to address. So I think 
that is already handled.
    But I wanted to just strongly disagree with my colleague 
from New York that it has left in--this idea that the 
whistleblower that we are protecting is the public and that 
corporate America is not.
    That is a fundamental problem that we have of ideology. 
These corporations, a lot of the plumbers and all the different 
unions and teachers and every other person in America, they are 
invested in these companies. Their pensions are invested in 
these companies.
    Corporate America is providing all the jobs that we all 
talked about creating. Who do you think is creating these jobs? 
This is where America works. This is where America invests. 
These corporations are the heart and soul of our public.
    So to think that pitting corporations against the public is 
just--is this demonization that has to stop. The idea that we 
want these companies to succeed not at the expense of a 
whistleblower, that is just drawing the divide that is not 
there.
    The reality is that Congress created Sarbanes Oxley, and 
asked all of these corporations to spend a lot of time and 
effort to get it right, and they are right in doing so and 
corporate America did that.
    And now, a few years later, we want to come back when they 
are just about finished and say, ``Oops, it is not necessary.'' 
Because the idea that you can go straight to the SEC and not 
have to go to any internal controls really does obviate the 
need for those internal controls.
    If I owned a big corporation, I would no longer spend 
hundreds of thousands and millions of dollars on my internal 
controls knowing that you can just go to the SEC anyway. And I 
think that is very, very important.
    My colleague from New York also mentioned the way FBI 
awards work. Let me tell you, I can tell you for a fact people 
came in all day with bogus information seeking a reward, and 
what did it do, it tied up agents on wild goose chases for 
days, for weeks, for months.
    Our SEC is already overburdened. They cannot afford to have 
people coming in, in the hope that they are going to get an 
award because they have an attorney out there who just went for 
the CLE class. The new CLE class has been telling everyone, 
``Hey, this new rule is coming out. We can help you build your 
legal business.''
    So it is going to be another legal frenzy and yes, it can 
lead to frivolous lawsuits, but more importantly, it is not 
just the frivolous lawsuits. It is the SEC being bogged down 
with all these claims while the burning--is not being worked 
at.
    And lastly, again, it is just a dose of reality. Think 
about this. I discover a Ponzi scheme and I am an employee and 
I go to the SEC. Guess what? The SEC, they have 200 allegations 
of Ponzi schemes, 300 allegations of illegal insider trading, 
400 pump and dump schemes, and so on and so forth.
    Do you really think the SEC is going to look at my Ponzi 
scheme allegation today or tomorrow? Maybe not for 8 months. So 
what do we tell the public who is being scammed for 8 months 
until the SEC gets to it?
    When, if we went through the internal controls and 
compliance of the company, they would stop that then and there 
that day. That employee who was doing all these schemes would 
have been looked at and cut off from trading right there.
    So the SEC cannot handle everything. They certainly can't 
handle it as efficiently as the company there. I do believe 
that we should not penalize in any way the whistleblower and 
they should be protected if they blow the whistle but not at 
the cost of obviating what Sarbanes Oxley did, all the controls 
we have in place now and the unrealistic expectation that is 
not based in reality that the company is not going to find out 
about the investigation anyway. That is just a--sorry, I didn't 
get to ask you a question. I had to address all the 
misinformation out there.
    I yield back with time that I don't have left.
    Chairman Garrett. Thank you very much.
    Mr. Green?
    Mr. Green. Thank you. I may not need all of my time and I 
will be honored to yield, so you may ask a question. I thank 
the witnesses for appearing. And I would like to move quickly 
to the area of legal fees--contingency fees for legal 
representation.
    There was something known as ``voir dire'' or ``voir dire'' 
depending on where you are from. It is a French term and it 
means to speak the truth. For our purposes, this will become 
the truth telling portion. It always has been but for us moving 
forward.
    And in ``voir dire'' or ``voir dire,'' we tend to have 
people who are responding raise their hands so please don't be 
offended by my asking that you raise your hand.
    Do you believe that a person who is a millionaire who 
desires to report as a whistleblower should be allowed to hire 
a lawyer to represent himself or herself? If you do believe 
that this is appropriate, kindly raise your hand.
    Thank you. Let the record reflect that all of the witnesses 
have raised their hands.
    For my edification, should a person who is poor, who cannot 
afford a lawyer, not be permitted to have a similar 
opportunity? That would lead in a contingency fee such that a 
poor person, not an indigent but a person who is not of need, 
why would this person not have the same opportunity to have 
legal counsel that the millionaire had?
    What is wrong with a contingency fee for people who cannot 
afford legal counsel? That is a rhetorical question. My 
suspicion is that most of you would think that it would be fair 
to allow this, but my suspicions are not always correct, so let 
me just ask.
    Is it fair for a poor person to have legal counsel just as 
a millionaire will have legal counsel? If you think it is fair 
for the poor person to have legal counsel, would you kindly 
extend a hand into the air?
    Thank you. Let the record reflect that all persons believed 
that poor people are entitled to legal counsel.
    Now, contingency contracts allow poor people to acquire 
that which they cannot afford contingent upon a lawyer taking a 
certain amount of risk and moving forward to aid and assist a 
person who has an agreement. Anybody kindly raise your hand 
because that is a basic premise that I think we have to build 
upon.
    If this is the case, why would we not allow a contingency 
fee for people who cannot afford a lawyer who have a legitimate 
complaint? Before you respond, I need to say this. No one 
assumes corporate executives are dishonest. As a matter of 
fact, they are honest, honorable people. Shareholders are 
honest, honorable people. People who blow whistles are honest, 
honorable people--some make mistakes, some do not.
    Some corporate executives are able to do some things that 
are inappropriate and unlawful, and they are the person that we 
are talking about.
    So the question of these jobs and who creates the jobs, I 
am coming back to my point, but to the questions of jobs, your 
friend, yes, corporations may be the vehicle. But if the 
consumer--if the consumer spending that calls as a job to be 
there. So while we want to thank the corporations for what they 
do and the businesses, let's not forget that the consumers play 
a vital role in this process.
    Now, back to where I was. I have to get back commercially. 
Who among you believe that a person who cannot afford counsel 
should not have the opportunity to have counsel by way of a 
contingency fee? If so, raise your hand please.
    Let the record reflect that no hands were raised and that 
this panel believes that a contingency fee arrangement appears 
to be appropriate.
    And to my friend, I have some time left. I would allow you 
to ask a question if you so choose.
    Nothing left?
    Chairman Garrett. Nothing left.
    Mr. Green. I owe you one.
    Chairman Garrett. There you go.
    Mr. Green. Thank you. Thank you very much. I yield back.
    Chairman Garrett. The gentleman yields back.
    Mr. Stivers, for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman.
    Yes, I know a lot of folks have talked about the 
contingency fee arrangements and there have been a lot of 
discussions. Do any of the panelists have any concern about 
where our contingency fee might encourage the wrong behavior?
    I know that at least one of the panelists talked about it 
earlier, but again, just to follow up on my colleague's 
question, is there any one on the panel who would have some 
concern about the behavior of--that an attorney would give 
their client or tell their client to do because of a 
contingency fee as opposed to just a discretionary award 
without a contingency fee?
    Ms. Narine. I am happy to address that. In my prepared 
remarks, I did not address the contingency issue directly 
because it is not a focus of my main area of concern.
    Where I would have a concern, however, so for the record, I 
do believe that people should have the right and the ability to 
get counsel. My concern would be, again, protecting the 
interests of the shareholders, many of whom are company 
employees, from secretaries all the way up to the CEO. So those 
people have a vested interest in the company succeeding.
    My concern would be whether the incentive of the larger 
contingency fee could cause the attorney consciously or 
subconsciously to want the award to be larger, which could 
thereby allow the alleged fraud to perpetuate longer so--
    Mr. Stivers. I would like to follow up on that with the 
couple other members of the panel.
    Ms. Narine. And so that would be the concern that--
    Mr. Stivers. Because that was what I assumed, that if I had 
a concern, it would be if there is a financial incentive based 
on the award as a contingency, how much the attorney is going 
to get.
    The attorney is going to have every incentive to make the 
award as large as possible, therefore telling their client if 
they know something, ``Well, let's wait a little bit because it 
is not quite big enough yet and we might not--you might now 
profit enough from it and we might not profit enough from it. 
Let's just give it a little while and see what happens.''
    Ms. Narine. Exactly.
    Mr. Stivers. Yes, go ahead--
    Mr. Kueppers. Congressman--
    Mr. Stivers. Yes.
    Mr. Kueppers. --I, too, believe that a contingency 
arrangement per se is no problem particularly if the individual 
who needs counsel on the SEC rule cannot otherwise afford 
counsel of contingency from misrepresentation.
    Here is my worry. If--just a word to work in a way that 
what actually create more claims as opposed to giving good 
counsel to those who already had legitimate claims, 
solicitation of large numbers of clients, I worry about the 
system getting clogged to the point where the real 
whistleblower, I will call it, is not heard because of the 
volume issue.
    So soliciting large groups of people who have just been 
recently laid off and so forth. By outside counsel, I would 
worry about that because it is going to create a problem with 
getting the legitimate whistleblowers heard as they should be.
    Mr. Stivers. All right. And I guess my follow up to 
Professor Rapp--by the way, it is great to see you here from 
Ohio; I am from Columbus--is, how do we do exactly what Mr. 
Kueppers just talked about, encourage focus on the legitimate 
claims as opposed to just creating incentive for more volume 
which may or may not be legitimate and does a contingency fee 
really help us in that vein?
    Mr. Rapp. The theory behind a contingency fee is that the 
lawyer takes some of the risks and should therefore get some of 
the reward. I don't see there being a major likelihood that 
attorneys will encourage clients to save up fraud. That same 
argument has been made about the Civil False Claims Act and 
there is no evidence that occurs in False Claims Act practice.
    And the reason why I don't think it occurs there and why I 
don't think there will be a problem with Dodd-Frank is because 
bounties are only permitted to the original source in False 
Claims Act practice or whistleblower here to provide original 
information.
    If you try to save up fraud hoping it will get bigger, 
there is a very good chance that some other individual who 
knows about the fraud will be the first to report it to the SEC 
and you will no longer be the original source or the person 
with the original information eligible for a bounty.
    Mr. Stivers. Okay. And I do want to follow up on Mr. 
Rapp's--I think it was third concern about--maybe it was your 
first concern about the percent of the--the difference in the 
mandatory award, I believe is 10 percent or a completely 
discretionary award.
    It seems to me that a discretionary award would certainly 
would empower some folks but I guess my concern on the 
mandatory award is that it really doesn't seem to be 
appropriate based on--it should matter what the information is 
and how important it is, shouldn't it, as opposed to, you gave 
us information therefore you are entitled to 10 percent of the 
award regardless?
    Mr. Rapp. I think that is absolutely right, and that is why 
the SEC rules only make the awards mandatory where the 
information provided by a whistleblower leads to a successful 
enforcement action.
    So if someone calls the SEC and gives them information and 
the SEC starts digging and finds a legitimate instance of fraud 
that is separate from what the whistleblower brought to their 
attention, that whistleblower gets nothing because the 
information they have provided didn't directly lead to a 
successful enforcement action.
    Mr. Stivers. But you believe that a mandatory award as 
opposed to a discretionary award, I saw you talked about the 
IRS. It sounds like--it works better when people--and can you 
help me understand either psychology or profit motive behind 
that? Do you think people needs certainty on what the award is 
or--I just don't follow if there is a possibility of an award 
and it is 0 to 30 percent as opposed to between 10 and 30 
percent. Why are they guaranteed 10 percent, that big of a 
deal?
    Mr. Rapp. I think it just makes the cost benefit analysis 
for a potential whistleblower easier to run, so to speak.
    Mr. Stivers. Thank you, Mr. Chairman. I yield back my time.
    Chairman Garrett. The gentleman yields back.
    The gentlelady looks like she--
    Ms. Waters. If you would grant me a minute to raise a 
question before you close the committee?
    Chairman Garrett. For a witness?
    Ms. Waters. No, to you.
    Chairman Garrett. Sure.
    Ms. Waters. It is not parliamentary.
    Chairman Garrett. Yes, okay.
    Ms. Waters. On the whistleblower question, I am trying to 
find out what the Financial Services Committee intended placing 
a request for whistleblowers to report to members of the 
financial services committee. Are you aware of that on your 
work site? What are you trying to do with this--
    Chairman Garrett. I am informed that is on the committee's 
Web site. There is a provision not with regard to what we are 
talking about here per se which is whistleblowers, but it is 
just a more general idea of waste, fraud and abuse and wasteful 
programs and for the public to come forward with those.
    Ms. Waters. So that means you do believe in whistleblowers?
    Chairman Garrett. Exactly. We do believe that there is a 
need for whistleblowers both in the corporate world, as we 
heard from this panel--I think all four of them would agree 
that there is a need for whistleblowers in the corporate world 
because there are bad actors, sometimes individual actors and 
sometimes more than one actor.
    And we certainly know that there is a need for 
whistleblowers when it comes to government programs because 
there is certainly a need to point out waste, fraud and abuse 
in the Federal Government. So absolutely, we need to do so.
    But on our Web site, we are not saying that there will be a 
payback to them specifically as far as the contingency fee and 
otherwise where they are saying as the American citizens to 
come forward that information and let us know, and I am sure 
you will join with us when those come forward to try to root 
out that waste, fraud, and abuse on the Federal level.
    And with that--
    Ms. Waters. As you asked me to join with you, allow me to 
indicate that yes, I do absolutely support the whistleblowers. 
I am more concerned with the testimony from Mr. Rapp that talks 
about a lot of whistleblowers coming forward.
    And as we have discussed Mr. Grimm's legislation here, we 
can see where there are disincentives to whistleblowers coming 
forward. So I would like to join with you to see what we can do 
to encourage whistleblowers, to compensate whistleblowers with 
fair compensation, and to make sure that as he has indicated, 
they have representation even if they don't have the money to 
have legal counsel or a counsel rather.
    Chairman Garrett. The gentlelady yields back. And I am glad 
that the lady agreed that there is a need to do what we are 
doing here today and that is to examine Dodd-Frank, to realize 
that there is a possibility for re-examining it to see how it 
could be made to work better.
    The gentleman from New York has a draft--I don't think it 
is in final form yet. This is for draft discussion to try to 
address some of the concerns that the gentlelady from 
California has, how we can work to make sure that it does 
exactly what I think everyone in the room wants it to do--
identify who the whistleblowers are, have an incentive for 
those cases that are appropriate cases to come forth. Not 
overwhelm the situation with fraudulent cases or cases without 
any merit, if you will, but for the rightful cases to come to 
the top of the list and make sure that the SEC can investigate 
those and also to do something else. He is no longer sitting in 
this chair, but the former chairman, Mr. Oxley, who was 
instrumental in passing the bill by his name, Sarbanes Oxley, 
to make sure that law also can be seen to provision as well to 
make sure that the internal controls and the corporations can 
be properly implemented, administered, and used as SOX--
Sarbanes Oxley--was intended.
    Some of which--for some of us who thought that it might 
have been unnecessary in other areas, but this is one area that 
I think we have an agreement on and that was right for 
addressing in SOX, and also in Dodd-Frank as far as to the 
extent of this.
    I am looking forward to--
    Ms. Waters. Mr. Chairman, I have a unanimous consent 
request to insert into the record the project on government 
oversight on the Grimm discussion..
    Chairman Garrett. It is all yours--
    Ms. Waters. And--
    Chairman Garrett. --without objection.
    Ms. Waters. --we would like to--without objection, you are 
saying? Yes, I would like to enter the project on government 
oversight document into the record.
    Chairman Garrett. Okay.
    And does Mr. Grimm have the copy? It might be something you 
want to just take a look at as well?
    Okay, great.
    And also, without objection, we will be entering into the 
record: a May 11th letter of the Association of Corporate 
Counsels; testimony of David Baris, executive director of the 
American Association of Bank Directors; the statement of the 
Investment Company Institute with regard to the hearing today; 
and written testimony of Darla C. Stuckey, senior vice 
president, policy & advocacy, for the Society of Corporate 
Secretaries and Governance Professionals.
    And with that, again, as I did at the very beginning of the 
hearing, I thank this panel very much for their testimony, for 
their insights and their study on these issues as well and with 
that, your full testimony as indicated earlier will be made a 
part of the record.
    The Chair notes that some members may have additional 
questions for these witnesse that they wish to submit in 
writing. The record will remain open for 30 days so members can 
submit written questions to these witnesses and place their 
responses in the record.
    [Whereupon, at 4:55 p.m., the hearing was adjourned.]
                            A P P E N D I X


 
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