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.
On Thursday the House Subcommittee on Capital Markets and Government Sponsored Enterprises voted 19-14 in favor of advancing a bill that seeks to amend the whistleblower incentive provisions created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Subcommittee approved the bill on a party-line vote, with Republicans voting in favor of the legislation. Generally, the Whistleblower Improvement Act of 2011 (H.R. 2483) would require employees to first report potential misconduct through the company’s internal reporting system before relaying the information to the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). Under the whistleblower incentive and protection program established by the Dodd-Frank Act, employees who contribute original information that leads the SEC or CFTC 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. In May of this year, the SEC issued a final rule governing these whistleblower protections. The CFTC followed suit in August.
Neither rule requires employees to first report violations through their company’s internal channels in order to qualify for the award, although they do create incentives for employees to do so. Critics of the rules have claimed that the incentives to report internally are insufficient, leading many to bypass an employer’s legitimate internal reporting system. To remedy this occurrence, the bill would deny any award granted under the whistleblower protection program to employees who fail to first report information constituting possible securities fraud internally before reporting such information to the Commissions. In addition, the whistleblower would be required to report such information to the SEC or CFTC 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 or CFTC 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 or CFTC 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 agencies discretion in granting any award up to 30% of the sanctions imposed.
Additionally, the bill would insert a new requirement that the agencies 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 agency 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 agency 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.
During the legislation’s markup session, the committee approved two amendments to the initial bill. The first amendment (pdf) offered by Rep. Michael Grimm (R-NY), who sponsored the underlying legislation, would clarify that an employee would need to report the information to “a person at his or her employer with legal, compliance, financial reporting, or similar responsibilities, or to the board of directors, or a committee thereof, of such employer.” In addition, the amendment permits the SEC to share any information it receives from the whistleblower with the employer.
The second amendment (pdf) offered by Reps. Maxine Waters (D-CA) and Rep. Keith Ellison (D-MN) orders the Government Accountability Office to expand the scope of its study on the whistleblower programs to include the impact on “market integrity, taxpayer protection, mitigation of harms posed to investors, and the Commission’s ability to successfully pursue enforcement actions.” The original bill calls for a study on the programs’ impact on shareholder value only.
The bill will now be referred to the full Financial Services Committee for additional markup and consideration. A link to a webcast of the subcommittee’s bill markup session can be found here.
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.
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