Introduction New whistleblower incentive programme Private right of action for securities whistleblowers Amendments to Sarbanes-Oxley Act New whistleblower protection for financial services employees Comment
On July 21 2010, in an effort to encourage employees with inside knowledge to assist the government in prosecuting those that 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 into force. Given the enhanced whistleblower protections provided by the act, it is vital that companies have in place a strong compliance programme and an effective system for the reporting of financial misconduct and investigation of such reports. Furthermore, on November 3 2010 the Securities and Exchange Commission proposed regulations implementing the provisions of the act's whistleblower incentive programme, detailed below.
To motivate whistleblowers to report fraudulent activity to the government, the Dodd-Frank Act amends the Securities Exchange Act 1934 by adding a 'bounty' provision designed to provide lucrative monetary incentives for individuals that provide information to the SEC leading to a successful enforcement action. The new act also requires the SEC, in any action in which it imposes sanctions in excess of $1 million, to compensate whistleblowers that provide 'original information' with between 10% and 30% of the monetary sanctions. 'Original information' is defined as that which is derived from the independent knowledge or analysis of the whistleblower and which is not known by the SEC from other sources.
Section 922 of the Dodd-Frank Act amends the Securities Exchange Act to prohibit employers from:
discriminating against (eg, discharging, harassing or threatening) an employee for providing information to the SEC;
initiating, testifying in or assisting in certain investigations, or actions relating to that information; and
making disclosures that are required or protected under the Sarbanes-Oxley Act, the Securities Exchange Act or another law, rule or regulation subject to the jurisdiction of the SEC.
The Dodd-Frank 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 the Sarbanes-Oxley Act's requirement to exhaust administrative remedies with the Department of Labour 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 the Sarbanes-Oxley Act, which provides for an award of reinstatement and back pay, but not double back pay.
Sections 922 and 929A of the Dodd-Frank Act contain important provisions that broaden the scope and clarify certain provisions of the Sarbanes-Oxley Act. Aggrieved employees will now have 180 days to file a complaint with the Department of Labour's Occupational Safety and Health Administration (OSHA), an increase on the 90-day filing period previously provided under the Sarbanes-Oxley Act. The timely filing period now starts on the date on which either the violation occurred or the employee became aware of the violation, whichever is later. Previously, the clock started on the date on which the violation occurred, regardless of when the employee became aware of it.
The new legislation additionally states that:
employees bringing claims under the Sarbanes-Oxley Act have a right to a jury trial;
rights or remedies provided for whistleblowers under the Sarbanes-Oxley Act may not be waived; and
the use of pre-dispute arbitration agreements for claims under the Sarbanes-Oxley Act is expressly prohibited.
Finally, the new act expands the coverage of the Sarbanes-Oxley Act to include employees of 'nationally recognised statistical rating organisation(s)', as well as employees of subsidiaries or affiliates of publicly traded companies where that subsidiary's financial information is included in the company's consolidated financial statements.
Section 1057 of the Dodd-Frank Act creates a new private right of action for employees in the financial services industry that 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 organisations 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 counselling; or
collect, analyse, maintain or provide consumer report information (or other account information) in connection with decisions regarding the offering or provision of a consumer financial product or service.
Section 1057 prohibits retaliation against an employee that 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 or any other state, local or federal government authority or law enforcement agency information relating to a 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 federal consumer financial law; or
objecting to or refusing to participate in any activity that the financial services employee reasonably believes is in violation of the laws subject to the bureau's jurisdiction.
Remedies include reinstatement, back pay, compensatory damages, 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 Dodd-Frank Act is 180 days and the claim must be filed initially with the OSHA. If the Department of Labour has not issued a final order within 210 days of 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 Dodd-Frank Act also expressly prohibits enforcement of both pre-dispute arbitration agreements and pre-dispute agreements to waive rights or remedies under that section of the act.
Given the monetary incentives and enhanced remedies available to whistleblowers that report alleged misconduct either to the government or to their employer, corporations should expect a significant increase in such claims. Employers must reassess both their compliance programmes 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 that 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 that they will be treated fairly and their concerns will be addressed promptly and with care.
For further information on this topic please contact Kevin B Leblang or Robert N Holtzman at Kramer Levin Naftalis & Frankel LLP by telephone (+1 212 715 9100), fax (+1 212 715 8000) or email (firstname.lastname@example.org or email@example.com).
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