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Dodd-Frank’s anti-retaliation provisions: What employees need to know (1)

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") was enacted. In the employment context, much has been written about the historic implications of the new monetary awards outlined in Dodd-Frank Section 922 for individuals who "blow the whistle" to the Securities and Exchange Commission ("SEC") about violations of securities laws.

But, one should not overlook Section 922's strong anti-retaliation provision. For attorneys representing employees, these anti-retaliation provisions are, arguably, equally or more significant than the bounty, because they provide robust protections for a broad range of employees. Accordingly, this article will outline Dodd-Frank Section 922's anti-retaliation provisions and provide a brief analysis of Section 922's protections compared to the anti-retaliation provisions in the Sarbanes-Oxley Act of 2002 ("SOX").

The objective of Dodd-Frank Section 922

Section 922 amends the Securities and Exchange Act of 1934 ("Exchange Act") to add a new section entitled "Securities Whistleblower Incentives and Protections." As the name suggests, the amendment does two things: first, it creates the potential for whistleblowers to obtain financial awards for providing "original" information to the SEC related to securities violations.

On Nov. 3, 2010, the SEC issued proposed regulations to implement the whistleblower provisions. Under these proposed regulations, a whistleblower is eligible for an award only if she "voluntarily" provides "original information" to the SEC which "leads to the successful enforcement" of an "action" where the SEC recovers $1 million dollars or more.1

A whistleblower is not eligible for an award if she fails to submit the information to the SEC in the manner prescribed by the SEC, or has a duty to report the misconduct because she is in a compliance, legal or audit role.

Second, Section 922 provides anti-retaliation protections for employee-whistleblowers against discharge, demotion, suspension, threats, harassment and discrimination for enumerated protected acts. Specifically, it protects against: (1) providing information to the SEC in accordance with Section 922's new statutory awards and protections; (2) initiating, testifying in or assisting in an investigation or judicial or administrative action brought by the SEC; and (3) making disclosures that are required or protected by SOX, the Exchange Act and any other law, rule or regulation subject to the SEC's jurisdiction.

To be entitled to either the financial bounty or the anti-retaliation protections, Section 922 requires that the employee qualify as a "whistleblower," i.e. an individual (or group of individuals acting jointly) who provide information relating to the potential violation of securities laws to the SEC in a manner established by the SEC. This would include providing information directly, or indirectly, pursuant to an SEC investigation or inquiry, so long as the whistleblower is cooperating with the investigation.

Broad whistleblower anti-retaliation protections

Section 922 provides robust protections to employee-whistleblowers who engage in protected activity. Under the SEC's proposed regulations, employee-whistleblowers are protected from retaliation if they report a potential violation of securities laws. Therefore, unlike the bounty provision, the anti-retaliation protections depend solely on the report of a violation, and not the SEC's successful enforcement of the reported violation.

The scope of Section 922's anti-retaliation protections is similarly broad. Indeed, it applies to not just public companies, but employee-whistleblowers in non-public companies who allege a potential violation of any securities law regulated by the SEC. For example, an employee would be protected if she blew the whistle about potential violations of the Investment Advisors Act of 1940 by a registered investment adviser at a private company.

Procedural benefits and remedies for Section 922 whistleblowers as compared to SOX whistleblowers

For plaintiffs' attorneys, one important benefit of the whistleblower protections under Section 922 is that it provides direct access to the U.S. district courts. This is a significant departure from other federal laws, like SOX, which require an employee to file an administrative complaint with the U.S. Department of Labor, Occupational Safety and Health Administration, before bringing suit in federal court.

The statute of limitations for a Section 922 whistleblower provides greater flexibility for whistleblowers as compared to SOX. Most simply, a Section 922 claim must be brought within six years from the date of the violation, but when "facts material to the right of action are known or reasonably should have been known" by the employee-whistleblower, it must be brought within three years from such notice.

Given that the "knowledge" prong could greatly extend the relevant statute of limitation, Section 922 provides an absolute cap that all actions (whether or not known) must be brought within 10 years of the violation. By contrast, SOX now requires that a plaintiff file her administrative complaint no later than 180 days after the date of the adverse act or after the date the employee-whistleblower becomes aware of the violation. It is apparent that Section 922's comparably long statute of limitations is consistent with Congress and the SEC's intention to encourage employees to come forward with such
information.

Section 922, like SOX, also provides financial protections for employee-whistleblowers, including reinstatement and attorneys' costs and fees. Notably, Section 922 allows an award of two times back pay, while SOX only allows for a single back pay award.

In other respects, however, the language of SOX's anti-retaliation provision may be more plaintiff-friendly than Section 922. In particular, SOX states that a prevailing employee-whistleblower is entitled to "all relief necessary to make the employee whole." It further allows for "compensation for any special damages sustained as a result of the discrimination …"

In reliance on this language, some courts and administrative review boards have allowed awards for emotional distress and damage to the employee-whistleblower's reputation.2 Without such language in Section 922, it is currently unknown whether a Section 922 plaintiff will be able to recover such awards.

Conclusion

With its enactment, Dodd-Frank Section 922 significantly expands whistleblower protections to employees. While the long-term impact of Section 922 is unknown, in the short term, there is no question that it provides robust protections for employee-whistleblowers, including those who may not be eligible for the financial bounty.

1Dodd-Frank provides that the SEC has 270 days from the date of enactment - or until April 21, 2011 - to issue its final regulations implementing Section 922. The SEC was unable to meet this deadline and now, according to its website, expects to issue the final regulations implementing Section 922 between May and July 2011.

2See e.g. Kalkunte v. DVI Financial Services, Inc. et al, ARB Nos. 05-139 and 05-140, ALJ No. 2004-SOX-056 (ALJ February 27, 2009) (affirming award under SOX for "pain, suffering and mental anguish"); Hanna v. WCI Communities, Inc., No. 04-80595-CIV (S.D. Fla. Dec. 2, 2004) (damages to harm to reputation may be awarded where it was necessary to make the employee "whole").

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