On July 21, 2010, President Barack Obama signed H.R. 4173 — better known as the Dodd-Frank Act (“Dodd-Frank”). The stated purpose of the new law is:
To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, [and] to protect consumers from abusive financial services practices . . .
Given Dodd-Frank’s breadth, it should not be surprising that several provisions within its 800-plus pages apply to employers.
Specifically, Dodd-Frank expands the current whistleblower protections under the Sarbanes-Oxley Act (“SOX”), incentivizes employees to engage in whistleblowing by allowing them to recover up to 30 percent of any monetary sanctions applied to organizations, and creates entirely new whistleblower protections in the financial services industry. It also requires shareholder approval of executive compensation, including “golden parachutes.” Finally, it mandates that federal financial regulatory agencies contract with minority and women-owned businesses.
Expansion of SOX Protections
Sarbannes-Oxley is the federal government’s attempt to reign in corporate corruption following several notable sandals, including Enron and WorldCom. When President George W. Bush signed SOX into law in 2002, he hailed it as one of “the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt.” Among other things, SOX makes it unlawful for publicly-traded companies to retaliate against anyone who provides truthful information to law enforcement about possible federal securities law violations.
Significantly, Dodd-Frank expands the number of employees to which the whistleblower protections under SOX apply. Prior to Dodd-Frank, SOX only applied to publicly traded companies — not necessarily their subsidiaries or affiliates. Now those protections apply to any subsidiary or affiliate whose financial information is included in a publicly traded company’s consolidated financial statements.
Dodd-Frank also extends new procedural rights and protections to SOX whistleblowers. For example, an employer may not require employees to waive any rights under SOX. Further, Dodd-Frank invalidates any predispute agreements that require arbitration of SOX claims.
In addition, under Dodd-Frank, the limitations period for filing administrative claims with the United States Department of Labor Occupational Safety and Health Administration (“OSHA”) is extended from 90 days to 180 days. If OSHA does not issue a decision on a whistleblower’s claim within 180 days, the employee may file a lawsuit in federal court and obtain a jury trial.
Financial Incentives and Protections for Whistleblowers Who Assist the SEC
Dodd-Frank amends the Securities and Exchange Act of 1934 to allow whistleblowers to recover between 10 percent and 30 percent of monetary sanctions that exceed one million dollars for providing “original information” in an administrative or judicial action brought by the Securities and Exchange Commission (“SEC”). “Original information” is: (1) derived from the whistleblower’s independent knowledge or analysis; (2) not known to the SEC from any other source, unless the whistleblower is the original source of the information; and (3) not exclusively derived from an allegation made in the news media, or in a hearing, audit, or investigation.
The factors taken into consideration by the SEC when determining the size of an award include: (1) the significance of the information provided by the whistleblower to the success of a judicial or administrative action; (2) the degree of assistance provided by the whistleblower and his or her legal counsel; (3) the extent to which the size of the award will deter violations of securities laws; and (4) “such additional relevant factors” as the SEC may determine.
Dodd-Frank also provides significant protections to employees who assist the SEC in enforcement actions. An employer may not “discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against” an individual who: (1) provides information in an SEC administrative or judicial action; (2) initiates, testifies in, or assists in any SEC investigation or administrative or judicial action; or (3) makes disclosures required under SOX, the Securities and Exchange Act of 1934, or any other law, rule, or regulation under the SEC’s jurisdiction. An employee who claims to have been unlawfully discharged or otherwise discriminated against by her employer may bring an action in federal district court for up to 10 years after the actionable conduct occurs.
Dodd-Frank similarly amends the Commodity Exchange Act to reward whistleblowers who provide original information to the Commodity Futures Trading Commission (“CFTC”) if that information is used in enforcement actions. Like the amendments to the Securities and Exchange Act of 1934, commodities whistleblowers may be awarded between 10 percent and 30 percent of any monetary sanction up to one million dollars. The same factors are used to determine the size of the award. Further, an employee may bring a retaliation claim in federal district court based on any termination, demotion, suspension, threat, or harassment based on the employee’s cooperation with the CFTC.
Protections for Whistleblowers in the Financial Services Industry
Dodd-Frank also provides new protections for whistleblowers in the financial services industry. An employer may not discharge or otherwise discriminate against a “covered employee” who: (1) provides information to an employer or the government regarding the violation of federal consumer financial law; (2) testifies in a proceeding within the jurisdiction of the newly-established Bureau of Consumer Financial Protection (“BCFP”); (3) files or causes to be filed any proceeding under federal consumer financial law; or (4) objects to or refuses to participate in any action believed by the employee to violate any law within the BCFP’s jurisdiction. The term “covered employee” is broadly defined to include “any individual performing tasks related to the offering or provision of a consumer financial product or service.”
Employees in the financial services industry who believe they have suffered retaliation for whistleblowing activities may file a claim with the federal Department of Labor within 180 days of the alleged retaliation.
Shareholder Input on Pay and Golden Parachutes
Under Dodd-Frank, shareholders now have the authority to approve executive compensation, including “golden parachutes” (i.e., generous severance agreements for corporate executives). Generally, the law requires that shareholders vote to approve executive compensation at least once every three years. Dodd-Frank also provides that shareholders must approve golden parachute provided as part of a change in business structure (e.g., merger, acquisition, etc.).
Office of Minority and Women Inclusion
Dodd-Frank also requires each financial regulatory agency, such as the United States Treasury Department and the SEC, to establish an Office of Women and Minority Inclusion. These offices are tasked with ensuring “minorities, women, and minority-owned and women-owned businesses” are included in all activities of the agency, including contracts and procurement. This means every agency contract with investment banking firms, underwriters, brokers, dealers, accountants and lawyers, for example, will be reviewed to ensure inclusion of traditionally underrepresented contractors. In addition, each agency must evaluate whether their contractors make “a good faith effort” to include women and minorities in their workforce.
Dodd-Frank’s provisions are complicated. Publicly traded companies should work with experienced legal counsel to ensure full compliance with the law. For example, employment agreements and policies must be reviewed to ensure they do not require employees to waive any rights under SOX or require arbitration of SOX claims.
Also, strong anti-retaliation policies are a must for all covered employers. These policies should contain effective complaint procedures and appropriate resolution guidelines. With the financial incentives now available for whistleblowers who suffer retaliation, employers should be proactive and aggressive in providing a safe process.
Finally, employers that contract with the SEC and other enforcement agencies will have to carefully evaluate how to satisfy the requirements established by the Offices of Women and Minority Inclusion.