WASHINGTON (Reuters)—U.S. securities regulators are resisting corporate America's demands to force whistleblowers to report possible wrongdoing internally before they can be considered for compensation from regulators.

The Securities and Exchange Commission's whistleblower proposal, one of many rules required by the Dodd-Frank Wall Street overhaul law, would financially reward people who provide original substantive tips leading to enforcement actions that result in sanctions exceeding $1 million.

The whistleblower provision has become one of the most contentious provisions in Dodd-Frank.

Companies from Google Inc. and Microsoft Corp. to General Electric Co. and JPMorgan Chase & Co. have told the SEC that granting whistleblowers rewards could dissuade them from reporting problems internally first.

But SEC officials familiar with the latest discussions on the final rule say that at this point, there is no plan to make internal reporting a mandatory first step for whistleblowers.

A vote on the final rule could come as early as May 25, although that date is only tentative.

Regardless of the SEC's approach, it's sure to draw legal and political scrutiny.

The U.S. Chamber of Commerce has warned it may legally challenge the rule, saying the proposal would create a "bounty program" that rewards "amateur sleuths in search of a big payday."

Meanwhile, the National Whistleblowers Center advocacy group has threatened to take legal action against the SEC if it mandates internal reporting.

On May 11, lawmakers from a U.S. House Financial Services panel will ask industry officials to weigh in on the whistleblower provisions in Dodd-Frank, including the SEC's proposed rule.

Mixed incentives

SEC officials, who spoke anonymously because the negotiations are ongoing, said that instead of requiring internal reporting, the agency is looking at more nuanced changes to encourage it.

One such option includes allowing certain company employees to reap the full benefits of the SEC's whistleblower program if a combination of both their own tip and information from the company's internal probe lead to sanctions.

Under this scenario, for example, an employee could report something small, such as a single bribe, to the company. But if the company investigates, uncovers more widespread problems and reports them to the SEC, the whistleblower would be eligible for a reward based on all of the violations even though he or she only knew about one instance of bribery.

Stephen Kohn, executive director for the National Whistleblowers Center, said this potential change sounds similar to one his organization had proposed, saying it would encourage use of internal reporting while avoiding punishing an employee for going to the SEC.

"That's a creative option," he said. "I would support it fully."

The SEC has also been discussing whether internal reporting to the company could factor into the size of a reward to a whistleblower, although it still unclear how that debate may shape up. Under the proposal, whistleblowers can get a reward ranging between 10% and 30% of the total monetary sanctions.

The whistleblower provisions in Dodd-Frank aim to help bolster the SEC after its embarrassing failure to catch swindler Bernard Madoff. Until now, the agency only had authority to pay whistleblowers for tips on insider trading. The law also gives the Commodity Futures Trading Commission authority to implement a whistleblower program.

If the SEC maintains its position not to mandate internal reporting first, it would be a blow to many of the large companies hoping for more drastic changes to the rule.

Executives at the U.S. Chamber of Commerce told Reuters on Wednesday that they were not surprised that the SEC is leaning in this direction, and they remain concerned that the issues they have raised will not be addressed in a final rule.

"It sounds like there are still a lot of problems with the rule itself," said Tom Quaadman, vp of the Chamber's Center for Capital Markets Competitiveness.