On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173) ("the Act"). While the law results in the expansion of government power over financial institutions and markets, it also contains significant whistleblower protections that will likely prove troubling for employers in the financial services industry.
Broad Scope: Section 1057 of the Act creates a private right of action for a wide range of financial service industry employees who suffer retaliation for disclosing information about fraudulent or unlawful conduct related to the offering or provision of a consumer financial product or service. This broad scope is concerning because it covers almost any employer in the financial services industry, including those that extend credit, service loans, provide real estate settlement services, and provide financial advice.
Employee-Friendly Burden of Proof: The Act also sets forth an employee-friendly burden of proof. To prevail in a whistleblower claim under the Act, an employee need only demonstrate by a preponderance of the evidence that the protected conduct was a "contributing factor" to the reprisal. Other federal anti-retaliatory statutes require a plaintiff to establish that the impermissible consideration was a "determining" or "significant" factor in the employer's decision. Once the employee meets this burden, an employer can avoid liability at an early stage only by demonstrating by "clear and convincing evidence" that it would have taken the same action in the absence of the employee engaging in protected conduct. This burden is much higher for employers compared to other federal anti-retaliatory statutes.
Sarbanes-Oxley Amendments: Of particular note, section 922 of the Act allows potential whistleblowers to directly commence a lawsuit in federal court against the employer as opposed to first proceeding through an administrative process. In addition, section 929A clarifies that Sarbanes-Oxley whistleblower protections apply to employees of subsidiaries or affiliates of publicly traded companies whose financial information is included in the publicly traded company's consolidated financial statements. This elimiates a loophole used by some courts to limit the scope of coverage of Sarbanes-Oxley by excluding such employees.
In an effort to encourage more whistleblowers to come forward, Section 922 also 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.
An exemption from compliance with Section 404(b) of Sarbanes-Oxley has been included in section 989G of the Act for smaller institutions with less than $75 million in market capitalization. The proposed exemption would eliminate responsibility for the auditor attestation of internal controls over financial reporting requirement for eligible smaller institutions. However, disclosure of management assessment on internal control over financial reporting under Section 404(a) would still be required.
SEA and CEA Amendments: The Act also amends the Securities Exchange Act of 1934 and the Commodity Exchange Act of 1936 to provide broad, new private rights of action for employees who have suffered retaliation as a result of providing information to the Securities and Exchange Commission or the Commodity Futures Trading Commission. These rights of action are separate and apart from an employee's rights under Sarbanes-Oxley and the Act's whistleblower provisions for financial services employees, and includes provisions that are substantially more favorable to employees.
Employers must take deliberate action to minimize the risk of whistleblower claims. If you need assistance in understanding or implementing the requirements of the Dodd-Frank Act, please contact David Paxton or any member of Gentry Locke's commercial litigation or employment law teams.
To read President Obama's comments about the Act, click here.
Please note: This page is provided for general informational purposes only and is a marketing publication of Gentry Locke Rakes & Moore, LLP. It is intended to alert visitors to developments in the law and is does not constitute legal advice or a legal opinion on any specific facts or circumstances. You are urged to consult your own lawyer concerning your situation and specific legal questions you may have.