A House subcommittee heard testimony Wednesday on a bill that would force whistleblowers to report possible misconduct to his or her employer before seeking new rewards from the Securities and Exchange Commission. The Dodd-Frank Act provided new protections and incentives for employees at publicly traded companies to notify authorities of wrongdoing. In November, the SEC set aside $452 million for anticipated claims and proposed a rule governing who would be eligible for the bounties. A final rule was scheduled to be issued in April, but the SEC delayed the issuance to either May or June. Rep. Michael Grimm (R-N.Y.) introduced a bill, however, amending Dodd-Frank and would require employees to make an initial report to the employer. If the whistleblower can prove the company had no internal system allowing anonymous reports of wrongdoing, that person could then step forward to the SEC within 180 days, according to the amendment. The SEC must also then determine there were no controls in place. Robert Kueppers, deputy CEO of accounting firm Deloitte, said the very investors the SEC is trying to protect with the new rule could be harmed if reporting companies are unaware that a whistleblower came forward. “We are concerned that the rules proposed by the SEC could create a monetary incentive for whistleblowers to bypass companies’ established and effective internal reporting procedures,” Kueppers said in written testimony Wednesday. Marcia Narine, on behalf of the U.S. Chamber of Commerce, testified there has been an “explosion” of new compliance programs since 2004. And federal laws including Sarbanes-Oxley, she said, already protect whistleblowers and punish companies that try to cover-up crimes. But Geoffrey Rapp, a law professor at the University of Toledo, testified Sarbanes-Oxley provided an “illusion” of protection for whistleblowers. Since the passage of that law, he said, the percentage whistleblowers who were employees fell to 13% from 18%. “The reason bounties work is that a whistleblower faces tremendous disincentives, which bounties can help offset,” Rapp said. “Most whistleblowers will be subject to some form of retaliation on the job.” Under Dodd-Frank, eligible whistleblowers may receive an amount between 10% and 30% of the monetary sanctions the SEC imposes. While the sweeping reform legislation also requires a whistleblower be represented by an attorney if he or she steps forward anonymously to collect the reward, Grimm’s amendment disallows the attorney to charge legal fees on a contingency basis. “Very few attorneys would take on such time-consuming representation absent the possibility of a contingency fee. The whistleblowers in these cases simply can’t afford to pay attorneys by the hour,” Rapp said. “They have usually been terminated or suspended.” Also, Dodd-Frank language states nothing in the whistleblower section can limit the Attorney General’s ability to submit whistleblower evidence before a grand jury. “As the proposed rule is currently written, it seems as if potential whistleblowers can enjoy retaliation protections whether or not they satisfy the conditions for an award,” said Ken Daly, CEO of the National Association of Corporate Directors, in testimony. “This opens the door for employees to submit fake allegations that may cause reputational harm to the company and/or unfairly embarrass corporate employees and leadership.” Grimm’s amendment adds nothing in the section can prevent or restrict an employer from enforcing established agreements, policies or codes of conduct violations against the whistleblower. Grimm’s amendment also requires the SEC to notify the company of any information reported by a whistleblower to allow the company to investigate the matter and possibly remediate the situation. If the company does, the SEC is required to report the company as having “self-reported” the information, according to the amendment. Those backing the amendment stated the whistleblower reform would not prevent the next financial crisis but would only undermine a company’s own compliance program. “Responsible companies and boards want to know sooner rather than later if something is wrong before the problem gets bigger,” Narine said. As the lone panelist against the amendment, Rapp said motivated fraudsters may only choose to cover-up what a whistleblower brings to light if required to go to internal controls first. “By imposing a hard requirement of internal reporting, the proposed legislation may delay a regulatory response to serious fraud,” Rapp said. “Since the financial markets today operate at an incredible velocity, any delay in bringing fraud to light can magnify the seriousness of fraud and the potential loss to the investing public.” Write to Jon Prior. Follow him on Twitter @JonAPrior.