Dodd-Frank amends SOX; creates new whistleblower protections

The Dodd-Frank bill signed by President Obama today significantly expands whistleblower protections under the Sarbanes-Oxley Act (SOX) and creates additional anti-retaliation requirements for employers. These whistleblower provisions, a small but important part of the law, respond to dissatisfaction with certain aspects of SOX and the general belief that existing laws did not adequately encourage whistleblowers to come forward.

• Stronger “participation clause” protections and double damages. SOX has been criticized for its “reasonable belief” requirement — SOX only protects an employee who “reasonably believes” the information s/he reports constitutes securities, bank or wire fraud or a violation of an SEC rule or other federal law “relating to fraud against shareholders.” In response, Dodd-Frank (Sec. 922) expands protection to any employee who complains to the SEC, regardless of whether the employee reasonably believes the complained-of conduct violated the enumerated fraud provisions. This provision, in conjunction with existing SOX whistleblower provisions, establish a two-tier system akin to Title VII’s participation and opposition clauses, under which a complaint to the SEC is protected regardless of the validity or reasonableness of the complaint, while an internal objection is still subject to SOX’s “reasonable belief” standard. Dodd-Frank also provides for double back-pay damages to prevailing whistleblowers in “participation clause” cases.
• Subsidiary coverage. Some SOX whistleblower claims have been dismissed because the purported whistleblower did not work for a “publicly-traded company,” even though the purported whistleblower was employed by a publicly-traded company’s subsidiary. Dodd-Frank amends SOX to expressly cover both publicly-traded companies and “any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company.”
• Extended statute of limitations and direct access to courts. The most common basis for dismissal of SOX claims has been employees’ failure to file with the Department of Labor (DOL) within the 90-day statute of limitations period. Dodd-Frank (Sec. 922) doubles this period to 180 days for “opposition clause” type cases, and for “participation clause” cases, lengthens the statute of limitations period to six years from the date of the violation or three years from the date the employee discovers the violation (but no more than ten years from the date of violation). Also, in a significant amendment, an employee now may file a SOX complaint asserting a “participation clause” claim directly in federal court, bypassing the current DOL administrative process.
• Jury trial; invalidation of arbitration agreements. Reversing judicial precedent, Dodd-Frank’s Section 922 provides that its anti-retaliation rights and remedies “may not be waived by any agreement, policy form, or condition of employment, including by a predispute arbitration agreement,” and that any such predispute arbitration agreement is invalid and unenforceable. It also clarifies that jury trials are available for SOX claims in federal court.
• Whistleblower bounty program. In an effort to encourage more whistleblowers to come forward, Section 922 allows the SEC, in any action involving sanctions in excess of $1 million, to compensate whistleblowers with up to 30% but not less than 10% of the amount of the sanctions. The amounts paid are within the sole discretion of the SEC, subject to judicial review.
• Whistleblower protections for financial services employees. Finally, Title X of Dodd-Frank creates the Bureau of Consumer Financial Protection, which is empowered to regulate the offering and provision of consumer financial products and services. The Bureau is granted certain enforcement powers, including the authority to investigate and commence civil actions. Section 1057 prohibits retaliation against financial services employees who engage in protected conduct, which includes: (1) providing an employer, the Bureau, or any state, local or federal agency any information the employee reasonably believes to be a violation of Title X; (2) participating in Bureau proceedings; (3) filing any proceeding “under any federal consumer financial law”; and (4) objecting to, or refusing to participate in, any activity, policy, practice, or assigned task that the employee reasonably believes to be in violation of any law, rule, order, standard or prohibition subject to the Bureau’s jurisdiction. Complaints must be filed with the DOL within 180 days of the alleged violation.

Although they have been overshadowed by the bill’s other provisions, the Dodd-Frank whistleblower provisions likely will have a significant impact on employers, not only those in the financial services industry and those previously covered under SOX, but also subsidiaries and “affiliates” of such companies. It is important to immediately familiarize yourself with these provisions and educate managers and human resources as appropriate regarding Dodd-Frank’s expanded prohibitions.