The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 made a wide range of significant changes in financial regulation in the United States, a number of which have extra-territorial effect.
The workshop will cover:
- An overview of the current position in relation to the implementation of Dodd-Frank
- An overview of the whistleblower provisions
- Some significant aspects of the whistleblower provisions for regulated entities
- Impact on non-US entities, including implications under the Foreign Corrupt Practices Act
- Interaction with some of the other whistle-blowing rules (e.g. under Sarbanes-Oxley)
- Effective management of whistle-blower issues
Speaker
Richard Hornshaw, Partner, Bingham
An Introduction to the Whistleblower Rules in the Dodd-Frank Act
By Richard Hornshaw, Partner, Bingham
Background
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was signed into law on 21 July 2010. As is well-known, Dodd-Frank represents a substantial overhaul of financial regulation in the US (and, in certain respects, beyond).
Section 922 of Dodd-Frank provides the basis for a new set of whistleblower rules which were eventually finalised in May 2011 and became effective from 12 August 2011 (albeit with retroactive effect for tips received after 21 July 2010) (the “Rules”).
Although there was already extensive legislation in place in the US encouraging and protecting whistleblowers, there was an impetus to supplement the existing laws in order to address the perceived failings revealed by, in particular, the Madoff financial scandal which came to light in 2008. The most discussed change introduced by the Rules was the provision which, subject to certain conditions, entitled a whistleblower whose tip led to a successful SEC enforcement action to receive an award of between 10% and 30% of the sanction collected. Another area which has been the subject of some controversy (and which was the subject of numerous comments in the consultation phase for the Rules) is the decision of the legislators that whistleblowers are not required to use their firm’s internal reporting mechanisms before giving tips to the SEC (although there are incentives for them to do so embedded in the Rules). The Rules also strengthened the existing statutory protections for whistleblowers by prohibiting any adverse employment actions being taken by the employer because of information which has been provided to the SEC by a whistleblower.
The Rules are relevant to institutions outside the US. Any whistleblower (whether US or not) can report a securities law violation by any company (whether US or not) to the SEC. This is likely to increase the (hitherto low) rate of investigations by the SEC of non-US violations. One of the significant sources of potential securities law violations which will be relevant to non-US institutions is the Foreign Corrupt Practices Act (the “FCPA”), which has extra-territorial effect.
Business Challenges and Practical Responses
The Rules, including the financial incentive for whistleblowers, and the non-mandatory nature of internal reporting, give rise to a number of potential business challenges. Some of these challenges, and some suggested responses, are set out below:
- There are now enhanced risks from non-compliance with applicable US securities laws. Accordingly, staff should be given regular training to enable them to be familiar with the US securities laws which apply in their part of the business (including, for example, the FCPA).
- There is a risk that the effectiveness of internal investigation processes will be undermined if those processes are ignored by a whistleblower. It is therefore important to create a positive environment for internal reporting with well-publicised and clear policies which also identify the advantages of reporting a potential violation internally. It is also worth noting that, from the firm’s perspective, the Rules may alter the dynamics of the decision-making process around whether or not to self-report a violation which has been identified internally.
- If an internal investigation is triggered by a report, there is a greater prospect of the robustness of that investigation being challenged by the SEC and/or the whistleblower. It is therefore important for a clear written procedure for responding to internal tips to be in place, and for the investigation to be carried-out promptly, thoroughly and in accordance with that policy (or for any deviations to be explained).
- Finally, there is now an increased risk in relation to retaliation claims being brought by a whistleblower. In order to reduce this risk, firms should seek to ensure that there is no causative link between information having been provided by a whistleblower and any subsequent adverse employment action. Internal policies which separate responsibility for employment decisions from whistleblower investigations; a code of conduct which makes clear that any victimisation of a whistleblower will lead to disciplinary action; and good record-keeping for previous adverse employment action would all be important parts of this response. Care should also be taken when agreeing the terms of any settlement with a departing employer who claims to have been the victim of retaliatory action.
For further information, please contact:
Richard Hornshaw, Partner, Bingham
