Originally published July 29, 2010
Keywords: Dodd-Frank, Wall Street Reform, Consumer Protection Act, corporate whistleblower, SOX
The Dodd-Frank Wall Street Reform and Consumer Protection Act1 (the "Dodd-Frank Act") includes important changes to corporate whistleblower protections that affect publicly traded and non-publicly traded companies. While 2002's Sarbanes-Oxley Act (SOX) prohibited publicly traded companies from retaliating against employees who made reports of securities violations, the Dodd-Frank Act significantly enhances the protections afforded to corporate whistleblowers, expands the companies subject to SOX's whistleblower provisions, relaxes the timing and manner in which retaliation claims can be made, and stiffens the penalties for such retaliation.
The Dodd-Frank Act creates a new whistleblower cause of action that allows individuals to bring claims directly in federal court up to 10 years after the alleged retaliatory conduct, to seek extensive damages, including double back pay, and to receive up to 30 percent of SECimposed sanctions. The Act also amends the whistleblower protections created under SOX to include both publicly traded companies and their subsidiaries and affiliates, and it extends the statute of limitations for claims under SOX from 90 to 180 days. While the SEC has 270 days from the Dodd-Frank Act's passage to issue final regulations implementing these changes (approximately April 2011), as discussed in more detail below, these changes will significantly alter companies' obligations with respect to corporate whistleblowers and should be considered carefully.
The Act's Whistleblower Protection Program
The new Whistleblower Protection (WP) program both creates financial incentives for individuals to provide information to the SEC about securities violations and prohibits discrimination against any individuals who do so. As is explained in more detail in our July 23, 2010, Update "Massive Whistleblower Incentives Included in New Wall Street Reform Law,"2 an individual providing information relating to a securities law violation to the SEC is entitled to a significant monetary award. Where original information provided by a whistleblower leads to a successful SEC enforcement proceeding, the individual providing the information will be awarded between 10 and 30 percent of any sanction imposed over $1 million. "Original information" is defined as information "derived from the independent knowledge or analysis of the whistleblower" not otherwise known to the SEC or derived from other allegations or media reports, unless the whistleblower is the source of the information. Given the magnitude of sanctions often imposed by the SEC for securities violations, the Dodd-Frank Act provides significant monetary incentives for employees to raise concerns they may have directly with the SEC, rather than internally.
Where an individual raises such concerns with the SEC, the WP program also provides an independent source of protection. In particular, the Dodd-Frank Act prohibits discrimination against any individual who: (i) provides "original information" to the SEC; (ii) assists in an SEC enforcement proceeding or investigation based on such information; or (iii) makes disclosures required or protected under SOX (15 U.S.C. 7201 et seq.), the Securities Exchange Act of 1934 (including section 15 U.S.C. 78f(m)), 18 U.S.C. 1513(e), or any other law, rule or regulation subject to the SEC's jurisdiction.
While SOX protects employees who report information they reasonably believe constitutes a securities violation or shareholder fraud, individuals asserting claims of retaliation under that statute must go first to the Department of Labor (through OSHA) within 180 days of the alleged retaliatory conduct. 18 U.S.C. 1514A(b). The Dodd-Frank Act, however, allows individuals alleging retaliatory conduct under the WP program to "bring an action...in the appropriate district court of the United States" without first satisfying any administrative requirements. Further, to be timely, claimants need only file their claims within six years after the alleged violation or three years after the date when the claim becomes known, but in any event not later than 10 years after the date of the alleged violation. Finally, where companies are unable to successfully defend against whistleblower claims under the Act, they will also face more stringent penalties than under SOX. In addition to reinstatement, litigation costs, expert witness fees, and reasonably attorneys fees currently provided by SOX (18 U.S.C. 1514A(c)), the Dodd-Frank Act doubles the back pay that prevailing individuals may recover.
The potential impact of these provisions should not be overlooked. This new source of whistleblower protection, coupled with the financial incentives likely to increase the number of employees engaging in protected disclosures, means that companies must ensure that proper compliance programs and anti-retaliation policies are in place and that any allegations of retaliation are responded to appropriately. By creating an alternative to SOX's administrative requirements, the Dodd-Frank Act not only potentially increases the number of whistleblower claims that companies may face, but also the costs and risks associated with defending such claims. Further, the lengthy period during which claims may be brought under the WP program likely means that statute of limitations will be a less viable defense to defeat retaliation claims. And, the application of double back pay will increase costs if companies are not otherwise able to successfully defend against these types of claims.
Expansion of SOX Whistleblower Protections
The Dodd-Frank Act also specifically expands the protections provided to whistleblowers by SOX. First, it amends the definition of companies covered by SOX's whistleblower provisions. As originally drafted, the SOX provisions extended only to employees of publicly traded companies. The Department of Labor and various courts had interpreted SOX to include subsidiaries of publicly traded companies only where the subsidiary is found to be the alter ego of the parent. Congress has now squarely rejected this conclusion. Under the Dodd-Frank Act, "any subsidiary or affiliate whose financial information is included in the consolidated financial statements" of a publicly traded company is now explicitly included within the definition of companies covered by SOX. "Nationally recognized statistical rating organizations" are also now covered by SOX.
The time in which individuals must file their claims with the Department of Labor has now doubled to 180 days. The Dodd-Frank Act also clarifies that SOX plaintiffs proceeding in federal court are entitled to a jury trial, and establishes that neither pre-dispute arbitration agreements, nor waivers of employee's rights or remedies under SOX, will be enforceable.
The impact of these amendments will also be significant—companies will no longer able to avoid litigation of SOX retaliation claims through arbitration agreements or general release and settlement agreements; and, many subsidiaries and affiliates previously unconcerned with SOX compliance will now be faced with potential whistleblower exposure. The lessons learned by those companies subject to SOX over the last eight years, however, should help ease this burden, as the reporting, compliance and anti-retaliation policies put in place by publicly traded parents can now be modified to fit their subsidiaries and affiliates.
The final regulations implementing these whistleblower provisions, due out in April 2011, will have a significant impact on the effect these changes will ultimately have and are likely to elicit comments from a number of industry, employer and employee groups. In the meantime, however, whistleblowers providing information to the SEC under the WP program are immediately covered under the Dodd-Frank Act's bounty provisions. That is, as long the whistleblower provides information to the SEC after the Dodd-Frank Act was signed into law (July 21, 2010), the whistleblower will be eligible for a potential award. Accordingly, there are things that publicly traded and non-publicly traded companies alike should consider now:
- Take stock of which subsidiaries and/or affiliates are now considered a company covered by SOX.
- Ensure that proper reporting mechanisms and anti-retaliation policies are in place and working in those subsidiaries/affiliates now subject to SOX.
- Consider ways to encourage internal reporting of compliance concerns within parent, subsidiaries and affiliates (e.g., hotlines or other formal complaint mechanisms) to ensure the opportunity to investigate concerns, make appropriate corrections and reduce potential liability accordingly.
- Supplement management training programs to include information on recognizing corporate whistleblower complaints, identifying to whom complaints should be reported and appropriately responding to any complaints received.
- Consider altering document retention policies to retain employment, payroll or other records pertinent to defending against retaliation claims to match the maximum 10 year period during which claims under the Act's WP program may be made.
1 For a full overview of the Dodd-Frank Act, see "Understanding the New Financial Reform Legislation," available at http://www.mayerbrown.com/publications/ article.asp?id=9307&nid=6.
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