SEC Boosts Clout With New Whistleblower Rules

Government watchdogs are stretched notoriously thin and many white-collar crimes go undetected simply because authorities don't have the manpower for routine audits and inspections. Cheating thrives when nobody is looking.

The SEC is a case in point: Every year, as I have discussed before, the SEC scrutinizes the earnings reports of under 15 percent of the 15,000 publicly held companies it is charged with keeping honest, and it audits under 10 percent of the 12,000 financial advisors in the U.S. who collectively manage assets of $38 trillion.

Those are pretty alarming numbers, given the brazen corporate frauds we've seen over the past 15 years and the epidemic of ponzi schemes involving investment advisors, with Bernie Madoff's fraud only the biggest of many.

But the SEC is about to get reinforcements in its fight against white-collar crime: employees with inside knowledge of misdeeds. On May 25, the SEC adopted bold new rules that will provide whistleblowers with major incentives to report corporate frauds and other financial crimes.

The new rules were mandated as part of Dodd-Frank, and show the long reach of that historic law. Whistleblower programs -- which provide huge cash rewards to employees who can document corporate wrongdoing -- have been successful in other sectors, such as pharmaceuticals and healthcare, in providing government prosecutors with enough evidence to impose penalties on corporations for major wrongdoing. Bringing this tool to the financial sector is long overdue. As SEC Chair Mary L. Schapiro said:

For an agency with limited resources like the SEC, it is critical to be able to leverage the resources of people who may have first-hand information about violations of the securities laws. While the SEC has a history of receiving a high volume of tips and complaints, the quality of the tips we have received has been better since Dodd-Frank became law.

Needless to say, Wall Street hates the new whistleblower rules. The Business Roundtable blasted the rules saying they don't provide companies with the opportunity to "self-regulate and self-correct." "Our member companies, as well as other regulated public companies, have devoted substantial resources to establishing a culture of compliance and integrity within their organizations."

I'm all for self-regulation -- when it works. But obviously it hasn't in the financial sector, which is why the government is stepping in.

Wall Street fought hard to stop the new whistleblower rules. Among the ideas touted by the industry was a provision which would have compelled whistleblowers to first share evidence of wrongdoing with their companies. Right, like anyone would take that risk. This idea has been proposed in legislation introduced by Staten Island Republican Michael Grimm, who is emerging as a leading errand boy for Wall Street in the House as it tries to water down Dodd-Frank. Grimm's bill has been opposed by 22 groups who said it would "tip off lawbreakers" and leave whistleblowers vulnerable to retaliation.

Wall Street lobbyists are working frantically to get Congress to block the SEC's new whistleblower rules. But that is unlikely to happen and they should go into effect by the end of the summer.

Score one for the reformers.

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