In an effort to encourage those with inside knowledge to assist the government in prosecuting those who have violated securities laws, and to provide whistleblowers with expanded protection from retaliation, President Obama signed the Dodd- Frank Wall Street Reform and Consumer Protection Act (the “Act”) on July 21, 2010. Given the enhanced whistleblower protections provided by the Act, it is vital that companies have in place a strong compliance program and an effective system for the reporting of financial misconduct and investigation of such reports. Note that the Securities and Exchange Commission on November 3, 2010 proposed regulations implementing certain provisions of the Act but which address only the bounty program discussed just below.

New Whistleblower Incentive Program

To motivate whistleblowers to report fraudulent activity to the government, the Act amends the Securities and Exchange Act of 1934 by adding a “bounty” provision designed to provide lucrative monetary incentives for individuals who provide information to the Securities and Exchange Commission (“SEC”) leading to a successful enforcement action. The Act requires the SEC, in any action in which it imposes sanctions in excess of $1 million, to compensate whistleblowers who provide “original information” with between 10% and 30% of the monetary sanctions. “Original information” means information derived from the independent knowledge or analysis of the whistleblower which is not known by the SEC from other sources.

Private Right of Action for Securities Whistleblowers

Section 922 of the Act amends the Securities Exchange Act to generally prohibit employers from discriminating against (e.g., discharging, harassing, threatening, etc.) an employee for providing information to the SEC; initiating, testifying in, or assisting in certain investigations or actions relating to that information; or making disclosures that are required or protected under the Sarbanes-Oxley Act (“SOX”), the Securities Exchange Act or another law, rule or regulation subject to the jurisdiction of the SEC.

The Act provides a private right of action under the Securities Exchange Act for whistleblowers against retaliating employers. Whistleblowers may bring such claims up to the earlier of three years after the date on which the facts material to the right of action are known or reasonably should have been known by the employee or six years after the retaliation occurred.

Under the new provision, whistleblowers can bring their claims directly in federal court. Thus, whistleblowers electing to sue under the new law can seek remedies for retaliation while bypassing SOX’s requirement to exhaust administrative remedies with the Department of Labor before going to court.

The new provisions allow a prevailing claimant to obtain reinstatement, double back pay, interest, and compensation for litigation costs and attorneys’ fees. Notably, this provision differs from Section 806 of SOX, which provides for an award of reinstatement and back pay, but not double back pay.

The Dodd-Frank Act Also Amends SOX

Sections 922 and 929A contain important provisions that broaden the scope and clarify certain provisions of SOX, including the following:

  • Aggrieved employees will now have 180 days to file a complaint with the Department of Labor’s Occupational Safety and Health Administration (“OSHA”), an increase over the 90-day filing period previously provided under SOX. And the timely filing period now starts on the later of the date on which the violation occurred and the date on which the employee became aware of the violation. Previously, the clock started on the date on which the violation occurred, regardless of when the employee became aware of it.
  • The new legislation clearly states that employees bringing claims under SOX have a right to a jury trial.
  • The Act provides that any rights or remedies provided for whistleblowers under SOX may not be waived.
  • The new law amends SOX to expressly prohibit the use of predispute arbitration agreements for SOX claims.
  • The Dodd-Frank Act expands SOX coverage to include employees of “nationally recognized statistical rating organization[s],” as well as employees of subsidiaries or affiliates of publicly traded companies where that subsidiary’s financial information is included in the consolidated financial statements of the company.  

New Whistleblower Protection for Financial Services Employees

Section 1057 of the Act creates a new private right of action for employees in the financial services industry who are subjected to retaliation for disclosing information about unlawful conduct related to the offering or provision of a consumer financial product or service.

Coverage applies to organizations that extend credit or service or broker loans; provide real estate settlement services or perform property appraisals; provide financial advisory services to consumers relating to proprietary financial products, including credit counseling; or collect, analyze, maintain, or provide consumer report information or other account information in connection with any decision regarding the offering or provision of a consumer financial product or service.

Section 1057 prohibits retaliation against an employee who has engaged in any of the following protected acts:

  • providing or attempting to provide to an employer, the newly created Bureau of Consumer Financial Protection (the “Bureau”), or any other state, local, or federal government authority or law enforcement agency relating to any violation of the laws subject to the jurisdiction of the Bureau;
  • testifying or intending to testify in, or filing, instituting or causing to be filed or instituted, any proceeding under any federal consumer financial law; and
  • objecting to or refusing to participate in any activity the financial services employee reasonably believes is in violation of any laws subject to the Bureau’s jurisdiction.

Remedies include reinstatement, back pay, compensatory damages, and attorneys’ fees and litigation costs. Where reinstatement is unavailable or impractical, front pay may be awarded.

The statute of limitations for a cause of action under Section 1057 of the Act is 180 days and the claim must be filed initially with OSHA. If the DOL has not issued a final order within 210 days of the filing of the complaint, the complainant has the option to remove the claim to federal court and both parties have the right to demand a trial by jury.

Section 1057 of the Act also expressly prohibits enforcement of any (a) pre-dispute arbitration agreements and (b) predispute agreements to waive rights or remedies under that section of the Act.

Companies Should Carefully Reassess Compliance Systems and Whistleblower Policies

Given the monetary incentives and enhanced remedies available to whistleblowers who report alleged misconduct to either the government or to their employer, corporations should expect a significant increase in such claims. Employers must reassess both their compliance programs and their whistleblower policies and practices. Emphasis should be placed on strong compliance practices with the goal of preventing misconduct. Additionally, corporations must encourage internal reporting of concerns of improper conduct and must ensure that employees have clear and accessible avenues for reporting misconduct. Training should be provided to those responsible for receiving reports about improper conduct and care should be taken to prevent retaliation against employees who make a report. Where the company learns of actual misconduct, appropriate disciplinary and remedial action must be taken. Employees will be more likely to report concerns internally rather than to the governmental authorities when they believe they will be treated fairly and their concerns will be addressed promptly and with care.