Whistleblower Protections in the Finance Reform Bill

By R. Scott Oswald and Jason Zuckerman

Law360, New York (May 27, 2010) — On May 20, the Senate passed the Restoring American Financial Stability Act of 2010, or S. 3217, by a vote of 59-39. The bill, which is the largest overhaul of financial services regulation since the New Deal, contains several new whistleblower protection provisions and strengthens the whistleblower protection provision of the Sarbanes-Oxley Act (SOX). The House passed a similar measure in December, and President Obama hopes to sign a final bill by July 4. This article summarizes the whistleblower provisions.

Section 922: Reward for Whistleblowing to the Securities and Exchange Commission

Section 922 of the bill amends the Securities Exchange Act of 1934 and provides a monetary incentive for whistleblowers in an effort to “motivate those with inside knowledge to come forward and assist the Government to identify and prosecute persons who have violated securities laws and recover money for victims of financial fraud.”[1]

According to Senate Report 111-176, this section was motivated in part by the Bernie Madoff Ponzi scheme as well as data revealing that whistleblower tips identified 54.1 percent of uncovered fraud schemes in public companies while external auditors, including the SEC, detected only 4.1 percent of uncovered fraud schemes. Congress also noted the ineffectiveness of the current bounty program which has paid only a total of $159,537 to five whistleblowers since its inception in 1989.[2]

Section 922 requires the SEC to pay a reward to individuals who provide original information to the SEC which results in monetary sanctions exceeding $1 million. The award will range from 10 to 30 percent of the amount that is recouped and the amount of the award shall be in the discretion of the SEC. Penalties, disgorgement and interest paid count towards the $1 million threshold.

Factors governing the determination of the reward include the significance of the information provided by the whistleblower, the degree of assistance provided by the whistleblower, the programmatic interest of the SEC in deterring violations of the securities laws by making awards to whistleblowers, and other factors that the SEC may establish by rule or regulation. A whistleblower may appeal the SEC’s determination of the amount of an award by filing an appeal in the appropriate federal court of appeals within 30 days after the determination is issued.

Section 922 prohibits the SEC from providing an award to a whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower provided information; who gains the information by auditing financial statements as required under the securities laws; who fails to submit information to the SEC as required by an SEC rule; or who is an employee of the Department of Justice or an appropriate regulatory agency, a self-regulatory organization, the Public Company Accounting Oversight Board, or a law enforcement organization.

Section 922: Prohibition Against Retaliation

Section 922 creates a new private right of action for employees who have suffered retaliation “because of any lawful act done by the whistleblower — ‘(i) in providing information to the Commission in accordance with [the whistleblower reward subsection]; or (ii) in assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information.”

The action may be brought in federal court and remedies include reinstatement, double back pay with interest, as well as litigation costs, expert witness fees and reasonable attorneys’ fees. An employee has either three years after the date when the facts material to the right of action are known or reasonably should have been known by the employee or six years after the date on which the retaliation occurred to bring a civil action, whichever is less.

Section 748: Reward for Whistleblowing to the Commodity Futures Trading Commission and Protection Against Retaliation

Section 748 amends the Commodity Exchange Act by adding a whistleblower reward program and whistleblower protection provision that are nearly identical to the SEC reward program and retaliation provision set forth in Section 922.

Section 1057: New Whistleblower Protection for Financial Services Employees

Section 1057 creates a robust private right of action for employees in the financial services industry who suffer retaliation for disclosing information about fraudulent or unlawful conduct related to the offering or provision of a consumer financial product or service. The scope of coverage is quite broad in that Section 1057 would apply to organizations that extend credit or service or broker loans; provide real estate settlement services or perform property appraisals; provide financial advisory services to consumers relating to proprietary financial products, including credit counseling; or collect, analyze, maintain, or provide consumer report information or other account information in connection with any decision regarding the offering or provision of a consumer financial product or service.

Section 1057 prohibits retaliation against an employee who has engaged in any of the following protected acts:

• Provided, caused to be provided, or is about to provide or cause to be provided, to an employer, the newly created Bureau of Consumer Financial Protection (Bureau), or any other government authority or law enforcement agency, information that the employee reasonably believes relates to any violation of any provision of Title X of the bill, which establishes new consumer financial protections, or any rule, order, standard or prohibition prescribed or enforced by the Bureau;

• Testified or will testify in a proceeding resulting from the administration or enforcement of any provision of Title X;

• Filed, instituted, or caused to be filed or instituted any proceeding under any federal consumer financial law; or

• Objected to, or refused to participate in any activity, practice, or assigned task that the employee reasonably believes to be a violation of any law, rule, standard or prohibition subject to the jurisdiction of, or enforceable, by the Bureau.

Remedies include reinstatement, back pay, compensatory damages, and attorneys’ fees and litigation costs, including expert witness fees. Where reinstatement is unavailable or impractical, front pay may be awarded.

Section 1057 employs a burden-shifting framework that is favorable to employees. A complainant can prevail merely by showing by a preponderance of the evidence that her protected activity was a contributing factor in the unfavorable action. A contributing factor is any factor which, alone or in connection with other factors, tends to affect in any way the outcome of the decision. Once a complainant meets her burden by a preponderance of the evidence, the employer can avoid liability only if it proves by clear and convincing evidence that it would have taken the same action in the absence of the employee’s protected conduct.

The procedures governing Section 1057 claims are substantially similar to those governing retaliation claims brought under the Consumer Product Safety Improvement Act of 2008, 15 U.S.C. § 2087. The statute of limitations is 180 days and the claim must be filed initially with OSHA, which will investigate the complaint and can order preliminary reinstatement. Once OSHA issues its findings, either party can request a hearing before a Department of Labor administrative law judge. If DOL has not issued a final order within 210 days of the filing of the complaint, the complainant has the option to remove the claim to federal court and either party can request a trial by jury. Section 1057 claims are exempt from mandatory arbitration agreements.

Expansion of Sarbanes-Oxley Whistleblower Protection Provision

Section 929A clarifies that the whistleblower protection provision of SOX, 18 U.S.C. § 1514A, applies to employees of any subsidiaries of publicly traded companies “whose financial information is included in the consolidated financial statements of [a publicly] traded company.” This amendment eliminates a significant loophole that some courts have read into SOX that has substantially narrowed the scope of SOX coverage.

Elevating form over substance, some judges have permitted publicly traded companies to avoid liability under SOX merely because the parent company that files reports with the SEC has few, if any, direct employees, and instead employs most of its workforce through non-publicly traded subsidiaries. As Judge Levin pointed in Morefield v. Exelon Servs., Inc., ALJ No. 2004-SOX-002 (ALJ Jan. 28, 2004), this loophole is contrary to the purpose of SOX in that “[a] publicly traded corporation is, for Sarbanes-Oxley purposes, the sum of its constituent units; and Congress insisted upon accuracy and integrity in financial reporting at all levels of the corporate structure, including the non-publicly traded subsidiaries . . . Congress imposed reforms upon the publicly traded company, and through it, to its entire corporate organization.”

Section 806 of SOX was also amended by the Grassley-Cardin Amendment, which applies SOX whistleblower protection to employees of nationally recognized statistical ratings organizations (NRSROs), including A.M. Best Co. Inc., Moody’s Investors Service Inc. and Standard & Poor’s Ratings Service. According to Sen. Cardin, “NRSROs played a large role — by overestimating the safety of residential mortgage-backed securities and collateralized debt obligations — in creating the housing bubble and making it bigger. Then by marking tardy but massive simultaneous downgrades of these securities, they contributed to the collapse of the subprime secondary market and the ‘fire sale’ of assets, exacerbating the financial crisis.”[3]

In a May 7 press release, Cardin’s office noted that “91 percent of the AAA-rated securities backed by subprime mortgages issued in 2007 have been downgraded to junk status, along with 93 percent of those issued in 2006. Someone at these agencies had to be aware of the problems with these ratings early enough to have made a difference in the severity.”[4]


[1] S. Rep. No. 111-176, at 110 (2010).

[2] Sec. & Exch. Comm’n, Office of Inspector Gen., Office of Audits, Rep. No. 474, at 13, Assessment of the SEC’s Bounty Program (Mar. 29, 2010), available at www.sec-oig.gov/Reports/AuditsInspections/2010/474.pdf.

[3] 111th Cong. Rec. S3349 (daily ed. May 6, 2010) (Statement of Sen. Cardin).

[4] Press Release of Sen. Cardin, CARDIN WHISLTEBLOWER [sic] AMENDMENT TO WALL STREET REFORM BILL WILL HELP KEEP RATINGS AGENCIES HONEST (May 7, 2010), available at cardin.senate.gov/news/record.cfm?id=324782.

Originally published as “Whistleblower Protections In The Finance Reform Bill”, Law360; http://employment.law360.com/print_article/170760. Reprinted by permission.