Bill Would Amend Dodd-Frank Whistleblower Provisions

Legislation introduced in the House of Representatives would amend the whistleblower incentive provisions created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) by, among other things, requiring employees to first report potential misconduct through the company’s internal reporting system. Under the whistleblower incentive and protection program established by the Dodd-Frank Act, employees who contribute original information that leads the Securities and Exchange Commission (SEC) to recover monetary sanctions of $1,000,000 or more in criminal and civil proceedings are entitled to receive between 10% and 30% of any monetary sanctions that are imposed. The measure also provides a number of anti-retaliation protections for employees that act as whistleblowers. In May of this year, the SEC issued a final rule governing these whistleblower protections.

As discussed in Littler’s Report: Dodd-Frank and The SEC Final Rule: From Protected Employee to Bounty Hunter, the SEC’s rule does not require employees to first report violations through their company’s internal channels in order to qualify for the award, although it does create incentives for employees to do so. For example, the rule makes whistleblowers eligible for an award if they report internally and the company informs the SEC about the violations. Therefore, all information provided by the employer to the SEC is to be attributed to the whistleblower for award purposes. Additionally, a whistleblower’s voluntary participation in the company’s internal compliance and reporting system would constitute a factor that could increase the amount of the award, while the whistleblower’s interference with the company’s reporting process could decrease the amount of the award.

The Whistleblower Improvement Act of 2011 (H.R. 2483), introduced by Rep. Michael Grimm (R-NY), seeks to preserve the integrity of a company’s internal reporting system and prevent employees whose job it is to investigate misconduct from being considered whistleblowers. Specifically, the bill would deny any award granted under the whistleblower protection program to employees who fail to first report information constituting possible securities fraud to their employers before reporting such information to the SEC. In addition, the whistleblower would be required to report such information to the SEC no later than 180 days after providing the information to the employer. The bill would create an exception to the internal reporting requirement if 1) the SEC determines that the employer lacks either a policy prohibiting retaliation for reporting potential misconduct or an internal reporting system allowing for anonymous reporting, or 2) the SEC determines in a preliminary investigation that an employer’s internal reporting system would not have been a viable option based on evidence that the alleged misconduct was committed by or involved the complicity of the highest level of management, or other evidence of bad faith on the part of the employer.

An award under this program would also be denied to a whistleblower:

who has legal, compliance, or similar responsibilities for or on behalf of an entity and has a fiduciary or contractual obligation to investigate or respond to internal reports of misconduct or violations or to cause such entity to investigate or respond to the misconduct or violations, if the information learned by the whistleblower during the course of his or her duties was communicated to such a person with the reasonable expectation that such person would take appropriate steps to so respond.

This legislation also would eliminate the minimum award requirement, and instead give the SEC discretion in granting any award up to 30% of the sanctions imposed.

Finally, the bill would insert a new requirement that the SEC notify the employer of the whistleblower’s allegations prior to commencing any enforcement action against the employer in order to give it time to investigate the alleged misconduct and take remedial action. In the event the employer responds in good faith and takes appropriate corrective action, the SEC would treat the employer as having self-reported the alleged violations. This option would not apply if, during its preliminary investigation, not to exceed 30 days, the SEC determines that notification would jeopardize its overall investigation into the securities law violation allegations, based on evidence that the misconduct was committed by or involved complicity of the highest level of management or bad faith by the entity

This bill has been referred to the House Committees on Financial Services and Agriculture.

For more information on this legislation, see Littler's ASAP:  The Whistleblower Improvement Act: New Legislation Takes Aim at Dodd-Frank Whistleblower Bounty Provisions by Ilyse Schuman and Gregory Keating.

Photo credit: Lkmorlan

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.