November 9, 2010
My comment about the new whistleblower rules would be that the investigation process should be more transparent (while maintaining confidentiality), the investigators more communicative (and ask questions to let the insider know that they are actually interested and working on the issue) and more quickly acted upon than the whistleblower program of the IRS. The IRS program has completed almost no investigations leading to awards in the time that it has existed, while they have received some very important information revealing underpayment of taxes and massive undervaluations of estates, for example, which is an area that is overlooked. I have observed that they are looking for the easiest prosecutions and the lowest hanging fruit because they consider themselves to be under-staffed and overwhelmed with tips. They cannot even decide how to treat Brad Birkenfeld who brought the UBS matter to light.
Ms. Schapiro says that very few tips are received from insiders, which means that the risk of losing a job or being sued by the firm is considered to be very great by the whistleblower. I have observed that the SEC and FINRA are both very shy to pursue violations of rules and regulations where there have not been apparent misappropriation of client funds or securities, but there have been violations of rules which both regulators say are very important and basic to the principals of doing honest business. Given that resistance to follow through on these types of violations brought to their attention by insiders, why would an insider take the risk of unemployment, being sued or being ostracized by the investment community where they live and would like to continue working?
Protecting investors and providing a level playing field are the goals and they are very important. The SEC should aggressively follow up on all insider information that they receive and make it a priority because the whistleblower is at risk in one form or another. As for the potential for reward, the SEC should lower the threshold to $50,000 in fines to qualify for a reward because many of the rule violations that I have mentioned occur in small firms which get very little attention from the SEC and would never be found in a regular audit. You might find that with a little publicity about the program, more useful tips would come from inside firms, whether there was potential for a reward or not, as some people still believe in doing the right thing. If you do not encourage and investigate absolute compliance in all firms large and small, there is no reason to have these basic rules of practice in the first place.