United States: Cementing a Trend: Financial Reform Act Dramatically Expands Whistleblower Protections

The newly enacted Dodd-Frank Wall Street Reform and Consumer Protection Act ("DFA") (H.R. 4173), signed into law by President Barack Obama on July 21, 2010, not only creates sweeping new whistleblower protections for employees in the financial services industry,1 but also significantly broadens existing whistleblower protections far beyond the financial services industry. Viewed in isolation, these expansive new whistleblower protections represent a dramatic expansion of rights and remedies. Bathed in the light of the last ten years, it is clear that whistleblower protection has become ubiquitous. Only a decade ago, federal whistleblower protection existed mostly for companies involved in highly regulated industries. By contrast, it now appears that almost any company – large or small, publicly traded or privately held – faces the distinct possibility of being subject to one or more federal or state whistleblower statutes. Accordingly, all employers should be aware of this development and must take action now to establish compliance programs and train their workforce.

DFA Whistleblower Provisions

The enhanced whistleblower protections in the DFA create a new incentive program to encourage individuals to report Securities Exchange Act (SEC) violations; allow aggrieved employees to bring a civil action in federal court; and establish a more stringent burden-shifting approach to certain whistleblower claims. The new law also amends existing statutes like Sarbanes-Oxley Act of 2002 (SOX) and the False Claims Act (FCA) to provide broader protection to whistleblowers, and it includes provisions that severely limit the use of mandatory pre-dispute employment arbitration agreements and releases of whistleblower retaliation claims.2 Employers should also note that the DFA expands the class of firms that must report to the SEC. In particular, private equity firms and hedge funds that manage over $100 million are now required to report to the SEC.

This expansion of whistleblower protections and the dramatic increase in available remedies is almost certain to spawn a deluge of whistleblower claims. It is important for employers in the financial services industry to understand these new provisions and to be proactive in the development and maintenance of compliance and reporting programs and procedures.

New Whistleblower Rights and Remedies for Direct Reports to the SEC

Section 922 of DFA Title IX amends The Security and Exchange Act of 1934 to provide a significant new monetary incentive for individuals to make whistleblower reports to the SEC and sets forth robust retaliation protection. To motivate those with knowledge of violations of securities laws to blow the whistle, Section 922 provides monetary awards to those who contribute original information that leads to recoveries of monetary sanctions of $1,000,000 or more in criminal and civil proceedings. The award ranges from 10 to 30 percent of any monetary sanctions actually collected based on the original information provided by the whistleblower.

Original information is defined as information derived from the independent knowledge or analysis of the whistleblower, is not known to the SEC from any other source, and is not exclusively derived from an allegation in an administrative hearing, governmental report, hearing, audit or investigation or from the news media. The award is determined in the SEC's discretion. If the amount awarded is not within the 10 to 30 percent statutory range, a whistleblower may appeal the SEC's determination by filing an appeal in the appropriate federal court of appeals within 30 days of the determination. Factors considered in determining the amount of the reward include the significance of the information provided, the degree of assistance provided, the programmatic interest of the SEC in deterring violations and other factors the SEC may establish.

Some commentators have questioned whether this new award program will dissuade employees from reporting misconduct through a company established hotline because they will no longer be the "original source."3 Such concerns appear misplaced as the definition of "original information" appears on its face to encompass information a whistleblower provides through a company hotline. The confusion on this issue, however, underscores the fact that regulatory guidance is needed. The SEC has 270 days to issue proposed regulations interpreting this new statute and employers will then presumably have a period of notice and comment.

Not all would-be whistleblowers are entitled to awards, however. Section 922 prohibits the SEC from providing an award to a whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower provided information; who gains the information by auditing financial statements as required under the securities laws; who fails to submit information to the SEC as required by an SEC rule; or who is an employee of the U.S. Department of Justice or an appropriate regulatory agency, a self-regulatory organization, the Public Company Accounting Oversight Board, or a law enforcement organization.

In addition to sweetening the remedies available to whistleblowers, Section 922 also enhances protections for whistleblowers. The statute prohibits retaliation due to lawful whistleblower acts, including providing information to the SEC, initiating or otherwise participating in investigations or judicial or administrative actions of the SEC, or making disclosures required or protected under SOX, the Security and Exchange Act of 1934 or any other law, rule or regulation in the SEC's jurisdiction. The protection extends to discharging, demoting, suspending, threatening, harassing (directly or indirectly) or otherwise discriminating against the whistleblower. Section 922 allows one who has been retaliated against to bring a private action in federal court against his or her employer for reinstatement, double back pay plus interest, and attorneys' fees and litigation costs. The private right of action is not limited to employees, but instead extends to claims by any individual claiming to have been threatened, harassed or subjected to discrimination because of protected activity. The statute of limitations for such actions is extremely long – six years after the date on which the retaliation occurred or three years after the date on which the facts material to the right of action are known or reasonably should be known to the employee. There is no administrative exhaustion requirement to bringing such an action in federal court. In this and other regards, Section 922 is a significant expansion of the whistleblower protections offered by SOX, as discussed below.

New Whistleblower Provisions for Direct Reports to the Commodity Futures Trading Commission

Section 748 of the DFA amends the Commodity Exchange Act by adding a "Commodity Whistleblower Incentives and Protection" section, Section 23, which provides whistleblower incentives and a new private right of action designed to protect whistleblowers in ways nearly identical to those set forth in Section 922. The new Section 23 prohibits employers from discharging, demoting, suspending, threatening, harassing (directly or indirectly) or otherwise discriminating against an employee for: (1) providing information to the Commodity Futures Trading Commission (CFTC) in accordance with the commodity whistleblower incentive program; or (2) assisting in an investigation or judicial or administrative action relating to the information provided. Employees alleging violations of this new law may bring an action in the appropriate federal district court. Such claims may not be brought more than two years after the violation complained of by the whistleblower. Relief for prevailing employees under this new private right of action includes reinstatement, backpay plus interest, and special damages, including attorneys' fees, expert witness fees and litigation costs. One notable difference between sections 748 and 922 is the ability of a commodity whistleblower to appeal any determination regarding an award made by the CFTC, not just awards outside of the 10 to 30 percent range, within 30 days.

The legislation also provides that no pre-dispute arbitration agreement shall be valid or enforceable if it requires arbitration of a dispute arising under this section. This restriction is reflective of a continued scrutiny by Congress of mandatory arbitration agreements, and similar restrictions may appear in future whistleblower protection legislation.

New Whistleblower Provisions for Financial Services Employees

Section 1057 of the DFA provides protection against firings of, or discrimination against, employees who provide information or testimony to the Bureau of Consumer Financial Protection ("CFPB" or "Bureau") – an independent consumer entity within the Federal Reserve newly created by the legislation. The scope of coverage is very broad in that the new provisions also stipulate that:

No covered person or service provider shall terminate or in any other way discriminate against, or cause to be terminated or discriminated against, any covered employee or any authorized representative of covered employees by reason of the fact that such employee or representative, whether at the initiative of the employee or in the ordinary course of the duties of the employee (or any person acting pursuant to a request of the employee), has –

(1) provided, caused to be provided, or is about to provide or cause to be provided, information to the employer, the Bureau, or any other State, local, or Federal, government authority or law enforcement agency relating to any violation of, or any act or omission that the employee reasonably believes to be a violation of, any provision of this title or any other provision of law that is subject to the jurisdiction of the Bureau, or any rule, order, standard, or prohibition prescribed by the Bureau;

(2) testified or will testify in any proceeding resulting from the administration or enforcement of any provision of this title or any other provision of law that is subject to the jurisdiction of the Bureau, or any rule, order, standard, or prohibition prescribed by the Bureau;

(3) filed, instituted, or caused to be filed or instituted any proceeding under any Federal consumer financial law; or

(4) objected to, or refused to participate in, any activity, policy, practice, or assigned task that the employee (or other such person) reasonably believed to be in violation of any law, rule, order, standard, or prohibition, subject to the jurisdiction of, or enforceable by, the Bureau.

A covered employee would include any individual performing tasks related to the offering or provision of a consumer financial product or service. Significantly, any predispute arbitration agreement intended to require arbitration of a dispute arising under this section is invalid and unenforceable.

The term covered person means any person that engages in offering or providing a consumer financial product or service, and any affiliate of such person if such affiliate acts as a service provider to such person.

A service provider is:

any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service, including a person that: –

(i) participates in designing, operating, or maintaining the consumer financial product or service; or

(ii) processes transactions relating to the consumer financial product or service (other than unknowingly or incidentally transmitting or processing financial data in a manner that such data is undifferentiated from other types of data of the same form as the person transmits or processes).

The term service provider does not include a person solely by virtue of such person offering or providing to a covered person –

(i) a support service of a type provided to businesses generally or a similar ministerial service; or

(ii) time or space for an advertisement for a consumer financial product or service through print, newspaper, or electronic media.

A person that is a service provider is not deemed to be a covered person to the extent that such person engages in the offering or provision of its own consumer financial product or service.

An employee aggrieved under this section has 180 days to file a complaint with the Secretary of Labor. An employee would have a viable cause of action if the Secretary determines that any of the employee's actions described in paragraphs (1) – (4), above, constituted a "contributing factor" to the alleged adverse employment action. In its defense, an employer would have to demonstrate "by clear and convincing evidence" that it would have taken the same adverse actions regardless of the employee's conduct. This new burden-shifting framework, already in place for SOX claims, is advantageous to the employee and represents a reversal of the burden of proof more typically seen in discrimination or harassment claims, where the burden is placed on the employee. In the event the Department of Labor fails to issue a final order within 210 days of the filing of the complaint, the complainant can bring a claim in federal court for de novo review and either party may request a trial by jury.

Amendments to Existing Laws

In addition to creating the new securities whistleblower incentive and protection program, the DFA expands protections available under existing laws, including the SOX and the False Claims Act.

Sarbanes-Oxley Act of 2002

Section 929A of the DFA significantly expands the protections available to whistleblowers under SOX. Section 922(c) of the DFA also expands the statute of limitations for filing a whistleblower claim under SOX from 90 days to 180 days.

Section 929A makes clear that SOX's whistleblower protections apply to employees of the subsidiaries of publicly traded companies, even where the subsidiary is a non-publicly traded company. Previously, the applicability of SOX to non-publicly traded subsidiaries was a hotly contested issue. The Administrative Review Board for the Department of Labor (the "ARB") recently observed that "ALJ's and courts have struggled with this question, resulting in a variety of diverging and conflicting opinions," and the ARB issued an order inviting amicus briefs in a case that presented this issue. The DFA now settles the question of SOX's applicability to non-public subsidiaries by defining a "publicly traded company" to include any "subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company." Under the DFA, SOX's whistleblower protections also apply to employees of nationally recognized statistical ratings organizations, including A.M. Best Company, Inc., Moody's Investors Service, Inc. and Standard & Poor's Ratings Service.

The DFA also declares that plaintiffs bringing claims under SOX are entitled to a jury trial, a right which had not previously existed.

Notably, the DFA further provides that pre-dispute arbitration agreements are no longer enforceable under SOX and that SOX remedies cannot be waived by agreement, such as a general release or settlement agreement.

Whether the amendments to SOX will apply retroactively is likely to be a highly disputed matter. The statute does not contain any specific guidance on this issue, thereby sowing seeds of disputes. For example, if on July 21, 2010, an employee had allowed more than 90 days to pass from the possible accrual of a SOX claim, does the new statute in effect extend the time to file for another 90 days, or is the matter stale? For SOX cases filed in federal court before July 21, 2010, is a jury now available, or do the pre-July 21 rules apply? These matters are expected to be sharply litigated.

Amendments to the False Claims Act

Section 1079B of the DFA amends the False Claims Act (FCA), which allows private citizens to file civil actions, called qui tam actions, on behalf of the government and provides such individuals a substantial portion of the government's recovery. The DFA expands the definition of protected whistleblower conduct under the FCA to include "lawful acts done by the employee, contractor, or agent or associated others in furtherance of an action under this section or other efforts to stop 1 or more violations of [the FCA]." Under this expanded definition, employees are protected from so-called associational discrimination. Furthermore, protected activity will now include a broad range of actions that could potentially advance a qui tam action or constitute an attempt to stop an FCA violation.

Section 1079B also clarifies that the statute of limitations for actions brought under the FCA is three years. Previously, the U.S. Supreme Court held in Graham County Soil & Water Conservation Dist. v. U.S. ex rel. Wilson4 that the most closely analogous state statute of limitations applies to FCA retaliation claims.

These changes to the FCA are significant given the recent increase in FCA enforcement actions. According to the U.S. Department of Justice, 34 prosecutions in 2009 resulted in $435.3 million in penalties. The DFA amendments are also consistent with a trend of pro-whistleblower amendments to the FCA, including those enacted as part of the Fraud Enforcement Recovery Act and the American Recovery and Reinvestment Act of 2009.

Next Steps for Employers

To address the new whistleblower provisions in the DFA effectively, employers, and not just the financial services entities who are the most obvious focus of the act, must continue to cultivate a culture of compliance and transparency and need to be conspicuous about doing so within their companies. This includes taking the following actions immediately:

  • Update policies to encourage employees to report their reasonable good faith concerns with any issues within the company;
  • Update policies to clearly articulate that the employer will not tolerate any reprisals or retaliation by anyone against an individual who reasonably in good faith makes a complaint;
  • Develop and implement whistleblower reporting procedures for employees and procedures for handling such reports;
  • Consider implementation of a Code of Conduct;
  • Train management about whistleblower protections, handling of internal complaints, including how managers deal with employees who have complained about those same managers, and reporting procedures. In this regard, Littler Mendelson just completed a year-long project in conjunction with its Legal Learning Group and subject matter experts and has a new training product on Retaliation and Whistleblowing, which can be tailored to an employer's organization;
  • Review mandatory arbitration agreements and revise as necessary.

Companies outside of the financial services industry also face a climate that is increasingly hospitable to whistleblower claims. In this environment, Congress is likely to include whistleblower provisions in a legislative response to a myriad of issues ranging from mine and workplace safety to the oil spill. For example, last week Rep. George Miller (D-CA) introduced the Offshore Oil and Gas Worker Whistleblower Protection Act (H.R. 5851), that the House passed in conjunction with a broader oil spill response bill. State legislatures have also jumped on the bandwagon — in the past few years, state legislatures have passed sixteen different statutes broadening whistleblower protections. Companies in other industries should heed this as another sign that Congress and the state legislatures have not finished expanding whistleblower protection laws. Even if companies are not currently targeted by specific federal or state whistleblower legislation, companies should take steps now to minimize their exposure to the ever-expanding web of whistleblower protection laws. Including whistleblower protections provisions in an employee handbook, and developing whistleblower reporting procedures and training management accordingly, are fairly simple to implement and relatively low in cost, compared to the cost and exposure of whistleblower litigation. The risk of failing to take these proactive steps is substantial and likely to increase as Congress, state legislatures and regulatory agencies continue to focus on developing and enhancing whistleblower protections.

Footnotes

1. The SEC has 270 days from the date the legislation was enacted to issue regulations implementing the SEC's new whistleblower program.

2. Additional information on existing whistleblower laws is available in the national treatise entitled "Retaliation and Whistleblowing: A Guide for Human Resources Professionals and Counsel" (3d edition 2010) by Littler Shareholder Greg Keating.

3. For a more extensive discussion of this debate, see Can Hedge Fund Managers Use Whistleblower Hotlines to Help Create and Demonstrate a Culture of Compliance? in The Hedge Fund Report (July 23, 2010) by Jennifer Banzaca.

4. 545 U.S. 409 (2005).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions