SEC Whistleblower Rule: The Big Problem Is the Agency Itself

Last Updated May 26, 2011 7:07 PM EDT

The Security and Exchanges Commission revamped its whistleblower program, budgeting $300 million after a 3 to 2 rough party line vote. There was plenty of criticism from the usual quarters, like corporations that wanted the SEC to put greater restraints on whistleblowers.

Calls for self-regulation that did so well to stop problems in the banking industry aside, critics do have one point. The SEC could actually become a bottleneck that will bring enforcement to a halt.

Under the program, a corporate whistleblower would get between 10 percent and 30 percent of the fines and penalties collected by the SEC. Someone delivering a tip about corporate financial wrongdoing could go directly to the SEC and not inform the company.

That worried corporations, that wanted whistleblowers to first give the company a chance to fix any problem. Oh, yeah, that worked really well at Fannie Mae, Freddie Mac, AIG, Goldman Sachs, and Lehman Brothers.

Fox, meet henhouse
Some business groups have volunteered to pre-screen complaints for the SEC. That could be like having the wolf take the headcount in the chicken coop every night. You get the feeling that the individuals who might make the loudest squawk could find themselves chewed up before they could raise an alarm.

But the SEC does have some real problems. One is resources, as SEC Chairman Mary Schapiro herself noted:

For an agency with limited resources like the SEC, I believe it is critical to be able to leverage the resources of people who may have firsthand information about potential violations of the law.
Those limited resources didn't have the time to investigate Bernie Madoff, even though someone kept trying to bring the issue to the agency's attention for years. As Matt Taibbi has pointed out at length in Rolling Stone, the SEC's record has been checkered, including having to pay a former agency investigator a $755,000 settlement for wrongful dismissal after he complained about officials blocking him from doing his job.

Between a lack of resources and a shoddy record of stepping in when people brought problems to their attention, it's hard to see how offering more money to whistleblowers or expanding the range of cases that offer a reward will actually improve anything. Reform needs action as much as it needs tips.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.