When it was passed in July 2010, the Dodd-Frank Act was hailed by many as a comprehensive reform of almost every aspect of the nation's financial services industry. The legislation created new governmental agencies, implemented safeguards and standards intended to protect the American public, and sought to create mechanisms to deter future abusive practices.
The majority of initial attention provided to the Dodd-Frank Act centered on whistleblower provisions that provided potential financial awards to those who report securities law violations. Under the statute, individuals who provide original information to the SEC that results in an investigation and ultimate issuance of monetary sanctions exceeding $1 million shall be eligible for an award between 10 percent and 30 percent of the total monetary award.
Numerous companies have publicly expressed their concern that the eligibility for commissions on monetary sanctions will not just increase invalid complaint filings with the SEC, but will also decrease the likelihood of concerned individuals filing internal complaints that would permit companies to immediately remedy a situation and/or prepare its defense of a pending SEC investigation. In addition to the chilling effect that the bounty-hunter provision may have, many observers have given heightened attention to two additional employment law issues presented by the legislation that are summarized below.
The Anti-Retaliation Provisions
From a fair employment perspective, the more relevant parts of the Dodd-Frank Act are the additional statutory protections given to whistleblowers. The statute provides an additional statutory protection to whistleblowers for reports not just of actual, but also potential, violations of securities laws. No ruling by any governmental agency or court on the validity of the complaint is required to entitle the whistleblower to protection. Notably, the statute also expands coverage of the Sarbanes-Oxley Act whistleblower protections to both publicly traded companies and any subsidiary or affiliate whose financial information is included in the consolidated financial statements as such.
The legislation also prohibits any action by an employer that would inhibit an employee from communicating with the SEC about potential securities violations. Remedies available to adversely affected employees, under the statute, include reinstatement, two times back pay and attorneys' fees. Moreover, the Dodd-Frank Act extends the statute of limitations to bring a claim in civil court well beyond most fair employment statutes and declares void any pre-dispute arbitration agreement waiving rights and remedies provided under the Sarbanes-Oxley Act.
Although regulations interpreting the Dodd-Frank Act are still being discussed and are not set for final approval for another three months, it is in every covered entity's interest to begin implementing policies, procedures, and protocol to ensure compliance with the statute.
First, employers must review their employee handbooks to ensure that their open door and internal complaint reporting policies permit both internal disclosure of potential violations of the law as well as fair and prompt investigations into these internal complaints. For employers with numerous remote locations or departments in a single-site, particular attention should be given to the accessibility that employees have to the individual that will intake or investigate his/her complaints. Additionally, employers should ensure that management at remote locations are trained on how to promptly forward notification of the complaint to all interested parties in management and/or Human Resources. Similarly, before any personnel action involving an individual who has inquired about or complained of a potential securities violation, Human Resources and, if necessary, counsel should be consulted to ensure that such action is not retaliatory. The key to compliance and risk management, particularly in light of the bounty-hunter provision, will be the implementation of an internal investigation procedure that is receptive to complaints and facilitates fair and prompt investigations.
Employee Compensation Provisions
One of the provisions of the Dodd-Frank Act is a requirement that public companies implement a "clawback" policy for their incentive-based compensation. This policy must provide that if the company is required to restate its financial statements because of material noncompliance with any financial reporting requirements under the Securities laws, the company will recover from any current or former executive officer who receives incentive-based compensation (including stock options) during the three-year period preceding the date of the restatement any amount in excess of the amount that would have been paid to the executive under the restated financial statements. This clawback policy requires recovery even in the absence of misconduct and applies to anyone who served as an executive officer during the relevant three-year period. This rule is applicable upon enactment, July 21, 2010. To the extent covered entities have not done so already, an internal review should be conducted to ensure that a compliant policy has been drafted and implemented.
Those responsible for Human Resources issues at companies that are covered by Dodd-Frank should keep up to date on proposed regulations on the employment law provisions of the statute, review public comment on the regulation, and consider submitting public comment and ensure that all policies and procedures are in concert with the requirements of the new legislation.