On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). The legislation, aimed at increasing transparency and oversight in the financial industry, also contains numerous provisions designed to encourage and protect whistleblowers.
Specifically, the Dodd-Frank Act creates new monetary incentives and whistleblower protection under the Securities Exchange Act of 1934 and Commodity Exchange Act, expands the scope of coverage and protections already granted to whistleblowers under the Sarbanes-Oxley Act of 2002 ("SOX"), and creates new whistleblower protection for employees performing tasks related to consumer financial products or services.
New Incentives and Protections for Employees Under the Securities Exchange Act
Section 922(a) of the Dodd-Frank Act adds to the Securities Exchange Act of 1934 a new Section 21F, which provides powerful monetary rewards, as well as strong employment protection, for whistleblowers.
The Act directs that whistleblowers who provide the SEC with "original information," i.e., information derived from independent knowledge or analysis and not already known by the SEC, be awarded between 10 percent and 30 percent of monetary sanctions imposed by the SEC that exceed $1 million. Penalties, disgorgement, and interest paid by violators count toward the $1 million threshold. Factors to be considered by the SEC in determining (in its discretion) the amount of the reward include the significance of the information and the degree of assistance provided by the whistleblower, the programmatic interest of the SEC in determining violations of the securities laws by making awards to whistleblowers, and other factors the SEC may establish by rule or regulation.
Section 922(a) also prohibits retaliation against whistleblowers who provide information to the SEC; initiate, testify, or assist in any SEC investigation or legal action related to information provided by the whistleblower; or make disclosures that are required or protected under SOX or the Securities Exchange Act of 1934. Notably, Section 922(a) appears to protect whistleblowers who complain to the SEC without regard to the ultimate validity or reasonableness of the complaint. By contrast, the whistleblower provisions of SOX provide protection only when there is a "reasonable belief" that a violation has occurred.
Also in contrast to SOX's whistleblower provision, Section 922(a) allows an employee alleging retaliation under the Dodd-Frank Act to bring an action directly in federal district court, thereby appearing to bypass the OSHA administrative process that was to be exhausted by SOX whistleblower claimants. In addition, the statute of limitations under Section 922(a) of the Act is much more expansive than that provided by SOX; whistleblowers under Section 922(a) may file an action either within six years after the date of the violation or within three years "after the date when facts material to the right of action are known or reasonably should have been known to the employee," but not more than 10 years after the date of the violation. A successful whistleblower under the Act is eligible for relief including reinstatement, double back pay (as opposed to just back pay under SOX), and litigation costs including reasonable attorneys' fees. Akin to SOX, there is no explicit provision in the Act providing for recovery of nonpecuniary damages (such as emotional distress damages) or punitive damages.
New Incentives and Protections for Employees Under the Commodity Exchange Act
Section 748 of the Dodd-Frank Act amends the Commodity Exchange Act to provide incentives and protections to whistleblowers who provide certain information to the Commission or assist in any investigation or judicial or administrative action of the Commission related to such information. Such whistleblowers are provided incentives and protection that are substantially similar to those provided by Section 922(a) with respect to the Securities Exchange Act of 1934. There are some significant differences, however. First, claims under Section 748 are subject to a two-year statute of limitations. Second, Section 748 claims are not waivable by any agreement, including any predispute arbitration agreement.
Amendments to the SOX Whistleblower Provision
The Dodd-Frank Act also amends the SOX whistleblower provision in several significant ways:
- Expansion of the coverage of SOX to include nationally recognized statistical rating organizations and subsidiaries of publicly traded companies included in their parent corporation's consolidated financial statements. Accordingly, employees of some nonpublicly traded subsidiaries, who were previously found not to be covered by SOX's protections absent showing of a substantial nexus between the parent and the subsidiary, are now undoubtedly protected by SOX. (Sections 922(b) and 929A)
- Extension of the statute of limitations from 90 to 180 days and clarification that this limitations period begins to run when an employee becomes aware of a SOX violation (not the date on which the violation occurs). (Section 922(c))
- Prohibition of mandatory predispute arbitration agreements for SOX whistleblower claims. (Section 922(c))
- Clarification that jury trials are available for SOX whistleblower claims, a reversal of the position taken by all federal courts to have decided the issue. (Section 922(c))
New Whistleblower Protections for Financial Services Employees
Section 1057 of the Dodd-Frank Act creates a new whistleblower cause of action for employees who perform tasks related to the offering or provision of consumer financial products or services. Specifically, Section 1057 prohibits retaliation against employees who provide information to their employers or the government (federal, state, or local) that they reasonably believe constitutes a violation of the Consumer Financial Protection Act of 2010 (Title X of the Dodd-Frank Act) or any other provision of the law that is subject to the jurisdiction of the Bureau of Consumer Financial Protection (which is to be established pursuant to the Act). Protection is also extended to whistleblowers who testify in any proceeding resulting from administration or enforcement of the Consumer Financial Protection Act of 2010 or any other law or rule of the Bureau; file, institute, or cause to be filed or instituted any proceeding under any federal consumer financial law; or object or refuse to participate in any activity, policy, or practice that the employee reasonably believes to be in violation of any law or rule of the Bureau.
Whistleblowers seeking protection under Section 1057 are required to file a claim with the Secretary of Labor within 180 days of the date of the alleged violation. The procedures prescribed for the Department of Labor's handling of such complaints, as well as the burdens of proof, remedies, and ability to remove to federal court, are similar to those provided under SOX.
Implications of the Dodd-Frank Act's Whistleblower Provisions for Employers
The Dodd-Frank Act's whistleblower provisions can be expected to have several important ramifications for employers. Employers who were already covered by SOX's whistleblower provisions prior to these recent amendments should take note of the expanded protections, such as the right to a jury trial, extended filing deadlines, and prohibition of mandatory predispute arbitration agreements, all of which will likely increase litigation under the statute.
Employers who were not previously covered by SOX's whistleblower provisions may now be covered. As result, all employers should consider a careful review of their internal whistleblower procedures and policies, as well as additional training for appropriate personnel, to maximize opportunities to address and resolve employee complaints and avoid whistleblower litigation.
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.