The Dodd-Frank Wall Street Reform and Consumer Protection Act (Act), signed into law on July 21, 2010, contains more than the much-discussed reforms aimed at Wall Street. It also expands whistleblower protections under both the Sarbanes-Oxley Act of 2002 (SOX) and the False Claims Act (FCA), as well as for those who assist the Securities and Exchange Commission (SEC), who now may receive substantial bounties under the Act’s provisions.
The new and expanded whistleblower protections and incentives in the Act have created a flood of telephone calls to whistleblower hotlines, the SEC and plaintiffs’ attorneys providing whistleblower tips. Employees, former employees and consultants are now incentivized to make reports and receive potential monetary rewards and expanded protection from any alleged or perceived retaliation or harassment resulting from providing whistleblower tips.
SOX Whistleblower Protections Expanded to Affiliates
SOX originally protected only whistleblowers who were employees of publicly traded companies. The Act expands whistleblower protections to employees of subsidiaries and affiliates whose financial information is included in the consolidated financial statements of a publicly traded company. The SOX provisions were designed to enable companies to identify and rectify their problems internally as a matter of good corporate governance by encouraging companies to establish whistleblower hotlines and to encourage employees to report internally any suspected financial wrongdoing.
An employer covered under SOX may not discharge or in any manner retaliate against an employee because he or she:
- Provided information;
- Caused information to be provided; or
- Assisted in:
- An investigation by a federal regulatory or law enforcement agency,
- An investigation by a member or committee of Congress, or
- An internal investigation by the company relating to an alleged violation of mail fraud, wire fraud, bank fraud or securities fraud, or an alleged violation of SEC rules or regulations or federal laws relating to fraud against shareholders.
In addition, an employer may not discharge or in any manner retaliate against an employee because he or she filed, caused to be filed, participated in or assisted in a proceeding under one of these laws or regulations.
Subsidiaries and affiliates of public companies should consider adopting their own Code of Ethics that includes provisions (1) prohibiting conduct that may give rise to a whistleblower complaint, (2) establishing procedures for the reporting and resolution of employee complaints, and (3) prohibiting retaliation against an employee for providing or causing to be provided information or assisting in an investigation relating to an alleged violation of SOX.
In developing a Code of Ethics, keep in mind that simply applying the publicly traded company’s Code of Ethics to employees of its subsidiaries and affiliates can raise issues of joint employer status. Additionally, a reporting system must allow for anonymous and confidential submissions. Many companies have opted to institute an anonymous hotline to comply with this requirement. Companies will want to ensure that employees of subsidiaries and affiliates have access to and are informed of the hotline or that the affiliate company sets up its own.
Pre-dispute arbitration agreements are no longer enforceable under SOX. Any contract containing an agreement to arbitrate a SOX claim, such as a claimed whistleblower violation, will invalidate the pre-dispute arbitration agreement. Employees can no longer waive their SOX rights and remedies by agreement, and employers will no longer be able to compel arbitration under SOX, nor will they be able to include a release of SOX claims in their general releases or settlement agreements with employees.
New Whistleblower Incentives for Those Directly Reporting to SEC and CFTC
In contrast to SOX, the Act encourages employees to report directly to the SEC or the Commodity Futures Trading Commission (CFTC) based on the prospect of receiving a substantial financial reward for providing "original" information that leads to a recovery of monetary sanctions against employers in government enforcement actions. Individuals who voluntarily provide the SEC or CFTC with original information that results in monetary sanctions in excess of US$1 million in civil or criminal proceedings may receive a reward. The Act authorizes this reward for information leading to any securities law violation, as well as violations of the Foreign Corrupt Practices Act (FCPA) and cases of accounting fraud.
The monetary reward to the whistleblower ranges from 10 percent to 30 percent of the amount recouped by the SEC or CFTC. The respective commission is given the discretion to determine the monetary reward, subject to judicial review if the amount is not within the 10 percent to 30 percent statutory range. Factors considered in determining the amount of the reward include the significance of the information provided, the degree of assistance provided, the programmatic interest of the commission in deterring violations and other factors the commission may establish.
The Act provides a private right of action for employees or other individuals who have suffered retaliation due to lawful whistleblower acts, including providing information to the SEC, initiating or otherwise participating in investigations or judicial or administrative actions of the SEC, or making disclosures required or protected under SOX, the Securities Exchange Act of 1934, or any other law, rule or regulation within the SEC’s jurisdiction.
The private right of action is not limited to employees, but instead extends to claims by any individual claiming to have been threatened, harassed or subjected to discrimination because of protected activity. Unlike SOX actions, these private actions may be asserted directly in federal court, and remedies may include reinstatement, double back pay with interest, litigation costs, expert witness fees and reasonable attorneys’ fees. The statute of limitations for such actions is six years after the date on which the retaliation occurred or three years after the date on which the facts material to the right of action are known or reasonably should be known to the employee.
New Whistleblower Protection for Financial Services Employees
The Act also contains new whistleblower protection for financial services employees who disclose information about fraudulent or unlawful conduct related to the offering or provision of a consumer financial product or service. The Act prohibits retaliation against a covered employee who:
- Provided information to her employer or government authority relating to any law subject to the jurisdiction of the newly created Bureau of Consumer Financial Protection;
- Testified or will testify relating to the enforcement of any laws subject to the bureau’s jurisdiction;
- Filed or instituted any proceeding under any federal consumer financial law; or
- Objected to participating in any activity that the employee believed to be in violation of any rule subject to the bureau’s jurisdiction.
Employees who believe they have been retaliated against for engaging in protected activity must file a complaint with the Secretary of Labor within 180 days of the alleged retaliation. In order to establish a prima facie case, an employee need demonstrate only that the protected activity was a contributing factor in the adverse action. The employer must then demonstrate by clear and convincing evidence that it would have taken the same action absent the protected activity. The parties can appeal the department’s findings to the Office of Administrative Law Judges. In the event the department fails to issue a final order within 210 days of the filing of the complaint, the complainant can bring a claim in federal court for de novo review, and either party may request a trial by jury.
Claims under this section also are exempt from arbitration agreements.
Enhanced Anti-Retaliation Provisions Under the False Claims Act
The Act amends the FCA’s anti-retaliation provisions by expanding the definition of what is deemed "protected conduct" and by clarifying a three-year statute of limitations period. "Protected conduct" now includes: "lawful acts done by the employee . . . in furtherance of an action under this section. . . ." The FCA’s protective anti-retaliation provisions now extend to individuals who take action pursuant to the Act’s consumer protection efforts.
The Act further clarifies that the statute of limitations for FCA retaliation actions is three years rather than being tied to that of the analogous state statute.
Potential Impacts on Public Companies
The Act and recent policy changes by the SEC signal a shift in the government’s approach to enforcement of securities laws from fostering internal corporate compliance programs to encouraging whistleblowing directly to external agencies. A result will likely be situations in which companies learn about potential wrongdoing from a regulator rather than through internal whistleblowing and reporting systems.
To counter the potentially negative consequences of the Act’s incentives for employees to bypass internal whistleblower processes and call the SEC directly, companies should reinforce and improve compliance systems and messages to employees. Companies should review their ethics functions to ensure that compliance is a part of employee day-to-day business operations. It is more important than ever that employees are protected from employment retaliation in light of the expanded anti-retaliation provisions of the Act. More than any other effort, companies need to develop effective ways to communicate to employees the importance of surfacing their concerns internally in order to ensure that the first time the company learns of potential misconduct is not a telephone or subpoena from the enforcement division of the SEC or CFTC.
Proactive steps a company should consider include:
- Reviewing and updating corporate compliance programs and policies, including provisions for anonymous reporting, hotlines and whistleblower policies;
- Cultivating a culture that values the importance of legal and regulatory compliance and ethical conduct;
- Ensuring that the company’s compliance programs have adequate oversight at the board level;
- Ensuring that all employees know that retaliation for reporting legitimate concerns of potential misconduct will not be tolerated;
- Investigating and evaluating whistleblower complaints quickly following receipt;
- Documenting the company’s response to each complaint;
- Consulting with counsel experienced in investigations, compliance and enforcement; and
- Ensuring that appropriate corrective action is taken whenever wrongdoing is found and, in appropriate circumstances, letting employees know that the action taken was the result of a whistleblower complaint.
For more information on the new whistleblower provisions or the Dodd-Frank Wall Street Reform and Consumer Protection Act, or assistance developing a Code of Ethics, please contact your principal Squire Sanders lawyer or one of the individuals listed in this Alert.