As part of its overhaul of the financial services industry, the Dodd-Frank Act has substantially increased whistleblower protection in a number of areas. The Act creates significant financial rewards for whistleblowing to the SEC and to the CFTC. In addition to establishing a Bureau of Consumer Financial Protection (“BCP”), the Act creates a private right of action for employees who suffer retaliation for disclosing fraudulent or unlawful conduct by companies that BCP regulates. Employees of businesses that extend credit or service loans, provide certain real estate related services, engage in credit reporting or similar financial activities are now protected against retaliation. Finally, the Act expands the whistleblower protections of the Sarbanes-Oxley Act by extending coverage to certain subsidiaries of publicly-traded companies, and increasing the statute of limitations.
Today I listened in on a One-Hour Briefing featuring Willis Goldsmith of Jones Day and Debra Raskin of Vladeck, Waldman, Elias & Engelhard to discuss the important changes to whistleblower protection under the Dodd-Frank Act. Here are a few of the highlights you need to know:
Bounty Provisions of Dodd-Frank:
- Section 922(a) of the Dodd-Frank Act adds a new Section 21F to the ’34 Act which provides strong monetary awards and employment protection.
- The plan is modeled after a similar IRS program.
- The prior SEC rule limited claims to those involving insider trading but Dodd-Frank expands this to all violations of the federal securities laws.
- Eligibility for a reward is limited to those whistleblowers who provide “original information” that results in a recovery of more than $1 million.
- The range of recovery is 10-30% of the amount recovered in an action brought by the government.
- “Original information” comes from the independent knowledge or analysis of the whistleblower. Information cannot already be known by the SEC via another source unless the whistleblower is the original source of information.
- New analysis, even without new facts, can qualify if the whistleblower is the first person to put together all of the facts and detect the wrongdoing.
- Exceptions are whistleblowers convicted of a criminal act related to the proceeding, whistleblowers who gained information through an SEC required audit, those who did not follow SEC rules and procedures, and certain government employees.
- The Commission has the sole discretion to determine the payment amount. Factors to be considered are the significance of the information and the degree of assistance provided by the whistleblower.
- The award cannot be appealed if it is in the 10-30% range
- 922(a) also prohibits retaliation by employers and it appears to protect whistleblowers regardless of the ultimate validity or reasonableness of their claim.
- Employees alleging retaliation are allowed to bring an action in federal district court. This seemingly allows an employee to bypass the OSHA administrative process set up by SOX.
- The statute of limitations is 6 years after the date of the violation or within 3 years after the date when facts and materials were known or should have been known by the whistleblower and, in no circumstances, longer than 10 years. Goldsmith thinks this is a huge headache for companies and presents many practical problems regarding record keeping and retention.
- If they are represented by counsel, whistleblowers can remain anonymous until an award is made. Such anonymity is allowed even in dealings with the SEC and CFTC.
- The bounty money comes from a newly created SEC fund and the balance of the fund cannot be considered by the Commission when setting award amounts.
- There is no qui tam provision. If the government declines to prosecute, the whistleblower cannot pursue the case themselves.
- Section 748 of the Dodd-Frank Act amends the Commodity Exchange Act to provide similar protection and rewards as 922(a) however the statute of limitations is only two years.
Changes to SOX:
- The Dodd-Frank Act includes major expansion of SOX coverage in Sections 922(b) and 929A.
- Now covered are affiliates and subsidiaries of publicly traded companies which are included in the parent company’s consolidated financial statements. Goldsmith says this is a “huge change in the law” and opens up countless numbers of whistleblower claims.
- NRSRO’s (credit rating agencies) are now covered as well.
- The statute of limitations is extended from 90 to 180 days and 922(c) clarifies that the clock begins to run when an employee becomes aware of a SOX violation, not the date that the violation actually occurred.
- Goldsmith says in keeping with this Congress’s anti-arbitration stance, there is now a prohibition on mandatory predispute arbitration agreements (unless they are included in collective bargaining agreements) in 922(c). He thinks this clause is ambiguous and wonders whether it could possibly mean that every employer that has an arbitration agreement must remove the SOX provision from it.
- Reversing a number of federal court decisions, 922(c) explicitly grants employees the right to a jury trial but Goldsmith does not think the provision is retroactive.
Consumer Financial Protection Act – Title X:
- Section 1057 of the Dodd-Frank Act provides a new whistleblower cause of action for employees in the consumer financial products or services industry who find violations of the new Consumer Financial Protection Act of 2010 or any other violation that falls into the jurisdiction of the BCP.
- Whistleblowers seeking 1057 protection must file a claim with the Secretary of Labor within 180 days of the alleged violation. From there, the process is similar to that already in place under SOX.
- The employee must only show by a preponderance of the evidence that the protected conduct was a contributing factor to the alleged retaliation.
- In contrast, the employer must prove with clear and convincing evidence that they would have taken the same action regardless of the protected conduct.
- Mandatory arbitration is also written out of this statute as well.
I had the chance to catch up with Willis Goldsmith afterwards and asked him if he thought the SEC’s new bounty program could spur a flood of frivolous cases or encourage employees to report problems to the government first instead of working through corporate channels. His answer…a resounding yes to both. He warns that companies who were already covered under SOX’s whistleblower provisions should prepare themselves for increased litigation due to the new statute of limitations, right to a jury trial and prohibition of predispute arbitration agreements. Companies who are now covered under the law must review their internal whistleblower policies and procedures and provide additional training to employees to resolve complaints before they result in whistleblower litigation.
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Tags: '34 Act, BCP, bureau of consumer financial protection, CFTC, commodity exchange act, Consumer Financial Protection Act, corporate governance, debra raskin, Dodd-Frank Act, Dodd-Frank Briefings, employer retaliation, OSHA, qui tam, Sarbanes-Oxley Act, SEC, securities law, Securities Regulation, whistleblower protection, whistleblowers, willis goldsmith