The Dodd-Frank Act (“Act”), enacted in late July, provides significant new incentives for individuals to report information that leads to a successful enforcement action by the Securities and Exchange Commission (SEC) or Department of Justice. The information reported under the Act to the SEC or Commodity Futures Trading Commission may involve violations such as insider trading, money laundering, accounting fraud, broker-dealer violations and violations of the Foreign Corrupt Practices Act.
Under Section 922 of the Act, individuals who report “original information” to the SEC that results in monetary sanctions exceeding $1 million could be entitled to between 10 percent and 30 percent of this penalty. “Original information” is defined as information that “(A) is derived from the independent knowledge or analysis of a whistleblower; (B) is not known to the Commission from any other source, unless the whistleblower is the original source of the information; and (C) is not exclusively derived from an allegation made in a judicial or administrative hearing, in a government report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information.”
The Act also creates whistleblower protection by prohibiting retaliation against an individual who provides information to the SEC relating to the securities law violation, or who makes required disclosures under the Securities Exchange Act, the Sarbanes-Oxley Act of 2002 (SOX), or any other regulation within the SEC’s jurisdiction, or who participates in an investigation or action of the SEC related to such original information. The Act permits civil causes of action for wrongful termination, suspension, harassment or other discrimination because the whistleblower engaged in the protected activity of reporting information to the SEC. If retaliation is established, the whistleblower may recover two times the amount of back pay owed with interest, reinstatement of seniority and recovery of litigation costs, including attorneys’ fees and expert witness fees. Pre-dispute contractual provisions requiring employees to arbitrate claims under the Act are now unenforceable.
The Act also amends SOX whistleblower protections to include both publicly traded companies and their subsidiaries and affiliates whose financial information is included in the consolidated financial statements of the publicly traded company. The Act permits individuals to bring claims directly in federal court up to ten years after the alleged retaliatory conduct (and without Department of Labor involvement as required under SOX). The Act also permits a jury trial.
Section 1057 of the Act also creates broad protections to employees in the financial services industry who are retaliated against for disclosing information concerning fraudulent or unlawful conduct relating to a consumer financial product or service. The financial service industry within the meaning of this section of the Act includes organizations that extend credit, service or broker loans, organizations that provide financial advisor services and organizations that provide credit counseling or consumer reporting information. Claims under this part of the Act must be filed initially with OSHA before litigation.
The Act further strengthens the anti-retaliation provisions of the Federal False Claims Act. Section 1079B of the Act now protects the investigation of potential fraud within the meaning of the False Claims Act and prohibits retaliation against the employee, contractor, agent “or associated others.”
The SEC is currently establishing regulations to support the new whistleblower program. It is anticipated that the regulations will be finalized in Spring 2011. In the meantime, employers should take steps to review internal reporting systems. Even though the Act provides new incentives for employees to report matters directly to the SEC, the Act’s anti-retaliation provisions mean that employers should ensure that proper internal reporting procedures are in place and that employees are trained on utilizing these procedures.
Publicly traded parents should determine which subsidiaries and affiliates are covered by SOX and modify and extend reporting, compliance and anti-retaliation policies to these subsidiaries and affiliates as appropriate. Staff should be trained to appropriately recognize, investigate and respond to reports of violations. It is critical for employees to understand that internal complaints will not result in retaliation and for management to ensure that retaliation does not occur. Employees who appreciate that concerns will be adequately investigated and effectively remedied may be more likely to report suspicious activity internally instead of directly to the SEC. Employers should also consider record retention policies—and the reality of discovery obligations pertaining to electronically stored information—in light of the potential ten-year statute of limitations under the Act.
For more information about the Act, please see the following Baker Hostetler Executive Alerts: Congress Passes Finalized Financial Reform Bill and Full Senate to Take Up Senator Dodd’s Financial Reform Bill. If you have questions about the information contained in this alert or how it may affect your business, please contact any member of Baker Hostetler’s Employment and Labor Team.
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