Sweeping New Whistleblower Incentives and Protections in Financial Reform Bill

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The legislation covers a wide range of topics in an effort to address the causes of the recent turmoil in the financial markets.  It includes significant new whistleblower protections, including the creation of SEC and CFTC (Commodities Futures Trading Commission) whistleblower programs, a dramatic expansion of current whistleblower protections under the Sarbanes-Oxley Act of 2002, and a new whistleblower cause of action for employees performing tasks related to consumer financial products or services.  Significantly, the legislation creates alternative paths for whistleblowers to assert their rights, often with different and conflicting rights, procedures and remedies.

New SEC and CFTC Whistleblower Incentives and Protections

The Dodd-Frank Act provides powerful monetary incentives for whistleblowers to report securities and commodities law violations to the SEC and CTFC, as well as strong protections for doing so.  The legislation provides for whistleblowers who provide the respective Commissions with original information about violations of securities or commodities laws to be awarded a share of between 10% and 30% of monetary sanctions ultimately imposed by the Commissions that exceed $1 million. 

The Act also prohibits employer retaliation against whistleblowers who provide information to the SEC or CFTC, assist in any investigation or legal action of the SEC or CFTC related to such information, or engage in any other protected activity under the Sarbanes-Oxley Act.  An employee claiming retaliation under Dodd-Frank may bring an action directly in federal district court (as opposed to the procedure under SOX, where a complainant is first required to file an administrative complaint with the Department of Labor, OSHA). 

By allowing whistleblowers (defined by the Act as individuals who have reported a violation to the Commissions) to file complaints of retaliation for SOX-protected activity directly in federal court, the Dodd-Frank Act would appear to permit such employees to bypass the OSHA administrative process completely and go directly to court, an option many employees may prefer given the high percentage of jurisdictional dismissals and the low number of merit findings by OSHA on SOX whistleblower claims.  Moreover, the potential for the recovery of whistleblower "incentives" under Dodd-Frank will also likely result in less use of the DOL's SOX complaint procedure.

In sharp contrast to SOX's previous 90-day statute of limitations, the statute of limitations under these provisions of the Dodd-Frank Act has been dramatically expanded: for whistleblowers who engage in SEC-related whistleblower conduct or other SOX-protected activity, an action must be filed either within six years after the date when the violation occurs or within three years after the date "facts material to the right of action are known or reasonably should have been known by the employee," but not more than 10 years after the date of the violation.  This long limitations period not only expands employers' potential liability under the Act, it could create problems for employers who do not typically maintain employee records for 10 years.  The statute of limitations for whistleblowers reporting violations of commodities laws to the CFTC is a more moderate two year period.

Upon a finding of retaliation against a whistleblower who has reported a violation of securities laws or engaged in other SOX-protected activity, the Dodd-Frank Act provides for the whistleblower's reinstatement, double back pay (as opposed to just back pay, as under SOX), attorneys' fees and other costs.  There is no explicit provision for the recovery of non-pecuniary damages, such as emotional distress or loss of reputation damages.  With respect to whistleblowers who report violations of the commodities laws, the Act provides for reinstatement, back pay (as opposed to double back pay), and "special damages," including attorneys' fees and costs. It is possible that "special damages" may include at least some forms of non-pecuniary damages.  SOX cases are currently split on the issue.  The Act does not provide for recovery of punitive damages.  

The CFTC whistleblower section in addition provides that its rights and remedies "may not be waived by any agreement, policy, form, or condition of employment, including by a predispute arbitration agreement," and that "[n]o predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section."  Based on this language, it appears that employers will not be able to compel arbitration of CFTC whistleblower claims, nor will they be able to include a release of CFTC whistleblower claims in their general releases or settlement agreements with employees.

The Dodd-Frank Act requires the SEC to establish a separate office within the Commission to administer and enforce the Act's whistleblower provisions.  The SEC and CFTC have 270 days from the passage of the Act to issue final regulations implementing these whistleblower provisions.  However, whistleblowers providing information to the SEC or CFTC are immediately covered under the Act's bounty provisions.  That is, as long the whistleblower provides "original information" after the Act is signed by the President, the whistleblower will be eligible for a potential award.  Moreover, a whistleblower may receive an award for reporting violations that occurred even prior to the passage of the Act.  Accordingly, there are concrete steps employers should start taking now to protect themselves, which are discussed at the end of this Alert.

Sweeping Amendments to § 1514A of the Sarbanes-Oxley Act

The Dodd-Frank Act expands the scope of SOX's whistleblower protections in several key ways.

• The statute of limitations has been broadened from 90 to 180 days to file a complaint with OSHA.  (The import of this change is dwarfed, however, by the Act's six-year statute of limitations to bring such claims directly in federal court.) 
• SOX plaintiffs are now entitled to a jury trial, which was an unsettled question under SOX case law. 
• Non-publicly traded subsidiaries of publicly traded companies are now covered by SOX, by amendment to the definition of "publicly traded company" to include any "subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company."  Prior to this amendment, the Department of Labor took the position that employees of non-publicly traded subsidiaries were generally not covered by the Act absent a showing of a substantial nexus between the parent and subsidiary, substantially narrowing the scope of coverage. 
• "Nationally recognized statistical ratings organizations" are now covered by SOX, so employees of these organizations will now have the benefit of SOX whistleblower protection.
• Pre-dispute arbitration agreements will no longer be enforceable under SOX (except perhaps in the collective bargaining agreement context), nor will the rights and remedies under SOX be capable of waiver by agreement.  This means that employers will no longer be able to compel arbitration under SOX, nor will they be able to include a release of SOX claims in their general releases or settlement agreements with employees.

New Consumer Financial Whistleblower Protections

The Dodd-Frank Act also creates a new whistleblower cause of action for employees performing tasks related to the offering or provision of consumer financial products or services.  Section 1057 of the Act prohibits retaliation against employees who provide information to their employers or to the government they reasonably believe to be a violation of the Consumer Financial Protection Act of 2010 (which is Title X of the Dodd-Frank Act) or any other provision of law subject to the jurisdiction of the Bureau of Consumer Financial Protection, which Bureau is to be established under the Act.  This provision also protects employees who object to, or refuse to participate in, any activity that the employee reasonably believes to be a violation of any law, rule, or standard of the Bureau, who testify in proceedings relating to same, or who file, institute or cause to be filed any proceeding under any Federal consumer financial law.  Aggrieved employees are required to file a complaint with the Secretary of Labor within 180 days of an alleged violation, and the DOL's procedure for handling such complaints, as well as the burdens of proof, remedies, and ability of a complainant to file an action in federal district court and demand a jury trial, are somewhat similar to the scheme to which employers have become accustomed under SOX.

Next Steps for Employers

In light of these important changes to the landscape of employee whistleblower protections, including the strong monetary incentives provided to employees to report compliance issues to the SEC and CFTC, employers would be well served to review their internal whistleblower procedures and policies as soon as possible to ensure that they require internal reporting and the maximum opportunity to address compliance concerns before employees provide information to federal agencies in pursuit of generous bounties.  In addition, subsidiaries and affiliates of publicly traded companies who will now be covered by SOX should review, and if necessary, enhance, as well as train line management in, their existing anti-retaliation procedures to protect against SOX whistleblower claims by their employees.