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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 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

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 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

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 

(1) 

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 

2 

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. 

3 

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 

4 

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? 

5 

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 SarbanesOxley 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 

6 

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 DoddFrank 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 emVerDate Nov 24 2008 18:09 Jul 06, 2011 Jkt 066867 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\66867.TXT TERRIE
7 

ployees 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. 

8 

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. 

9 

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 

10 

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 SarVerDate Nov 24 2008 18:09 Jul 06, 2011 Jkt 066867 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\66867.TXT TERRIE
11 

banes-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. 

12 

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. 

13 

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. 

14 

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. 

15 

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 timeconsuming 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. 

16 

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 DoddFrank 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? 

17 

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? 

18 

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 

19 

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. 

20 

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. 

21 

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 reVerDate Nov 24 2008 18:09 Jul 06, 2011 Jkt 066867 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\66867.TXT TERRIE
22 

member 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. 

23 

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, DoddFrank 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. 

24 

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 DoddFrank 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 

25 

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? 

26 

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. 

27 

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 

28 

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 

29 

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 

30 

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.] 

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A P P E N D I X 

May 11, 2011 

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