The Dodd-Frank Act is under fire in Congress again.

A new bill introduced in the House Committees on Financial Services and Agriculture by a group of Republicans intent on making changes to the whistleblower rule adopted by the Securities and Exchange Commission in May seeks to make the rule more business friendly. The bill, coined as the ‘‘Whistleblower Improvement Act of 2011,” would require tipsters to report any wrongdoings to their employers first before going to the SEC as an eligibility requirement for the bounty program.

The bill was introduced last week by Representative Michael Grimm (R-N.Y.) and is co-sponsored by four other Congressmen, Reps. John Campbell (R-Calif.), Bill Flores (R-TX), Scott Garrett (R-N.J.), and Steve Stivers (R-OH).

In the SEC's final whistleblower rule, employees are not specifically required to report any wrongdoing internally before sending the tips to the SEC. The regulator has said earlier that they rejected the requirement out of concern that employees could be deterred from reporting incidents if management were involved in the cases.

Critics of the proposed bill claim that mandatory internal reporting would deter many whistleblowers, while advocates said allowing whistleblowers to bypass companies' internal compliance programs would undermine the effectiveness of these programs, including those under the Sarbanes-Oxley Act, said Cydney Posner, co-chair of Securities Regulation at law firm Cooley. “The bill does attempt to address the SEC's concern regarding potential deterrents to internal reporting,” she said in a statement.

In the proposed bill, whistleblowers who bypass a internal reporting requirement could still be eligible for rewards provided:

  • that the employer lacked a policy prohibiting retaliation for reporting potential misconduct or an internal reporting system allowing for anonymous reporting
  • that internal reporting was not a viable option for the whistleblower because the misconduct involved management or evidence of bad faith in the employer

Among other things, the bill also set out to exclude those who are involved in legal and compliance responsibilities within companies from receiving rewards and required the regulator to notify the companies involved in the alleged wrongdoing, allowing them to conduct internal investigations first unless it involves top management or if bad faith  is in play.

The bill also outlined that if a company notifies the SEC that it has conducted its own internal investigation and has taken steps to rectify its wrongdoings, the SEC should be required to treat the company as having self-reported information, and the remedial actions should be taken into account in the SEC's evaluation.