Corporate Governance

How the Wall Street Reform Act Impacts Smaller Businesses: Increased Coverage for Whistleblowers - NRSROs

By J Robert Brown Jr.

The Sarbanes-Oxley Act of 2002 provided whistleblower protection for persons reporting wrongdoing at companies registered or reporting under the 1934 Act.72 If an employer is covered under the whistleblower protection, the company may not discharge or in any manner retaliate against an employee who:

• provided information;
• caused information to be provided; or
• assisted in an investigation by a federal regulatory or law enforcement agency, an investigation by a member or committee of Congress, or an internal investigation by the company relating to an alleged violation of mail fraud, wire fraud, bank fraud, securities fraud, or violating SEC rules or regulations or federal laws relating to fraud against shareholders.

In addition, an employer may not discharge or in any manner retaliate against an employee who filed, caused to be filed, participated in or assisted in a proceeding under one of these laws or regulations. The Act also prohibits employer retaliation against whistleblowers who provide information to the SEC or CFTC, assist in any investigation or legal action of the SEC or CFTC related to such information, or engage in any other protected activity under the Sarbanes-Oxley Act. An employee claiming retaliation under the Act may bring an action directly in federal district court (as opposed to the procedure under the Sarbanes-Oxley Act, where a complainant is first required to file an administrative complaint with the Department of Labor, OSHA). By allowing employees to file complaints of retaliation for SOX-protected
activity directly in federal court, the Act would appear to permit employees to bypass the OSHA administrative process completely and go directly to court, an option many employees may prefer given the high percentage of jurisdictional dismissals and the low number of merit findings by OSHA on Sarbanes-Oxley whistleblower claims. Moreover, the potential for the recovery of whistleblower 'incentives' under the Act will also likely result in less use of the Department of Labor's Sarbanes-Oxley complaint procedure.

In contrast to Sarbanes-Oxley's previous 90-day statute of limitations, the statute of limitations under these provisions of the Act has been expanded: for whistleblowers who engage in SEC-related whistleblower conduct or other activity protected under the Sarbanes-Oxley Act, an action must be filed either within six years after the date when the violation occurs or within three years after the date 'facts material to the right of action are known or reasonably should have been known by the employee,' but not more than 10 years after the date of the violation.  This long limitations period not only expands employers' potential liability under the Act, it could create problems for employers who do not typically maintain employee records for 10 years. The statute of limitations for whistleblowers reporting violations of commodities laws to the CFTC is a more moderate two year period.

The Act expands whistleblower protection to employees of subsidiaries or affiliates whose financial information is included in the consolidated financial statements of a publicly traded company and to employees of nationally recognized securities rating organizations ('NRSROs') where the NRSRO may have uncovered such information about an issuer but (for any reason) chooses not to make it public.73 The Act also provides for monetary awards to whistleblowers74 and extends the statute of limitations for whistleblowers to six years after the violation, but not more than three years after facts material to the right of action become known.75 Damages to the whistleblower 'shall include' reinstatement, two times the amount of back pay owed to the whistleblower with interest, and the costs of enforcement.76

Furthermore, the Act requires NRSROs to refer any credible evidence of corporate wrongdoing to law enforcement, even when they uncover the evidence of this wrongdoing in an engagement by the issuer for a rating.77 The Act now requires NRSROs to consider all evidence that the NRSRO may have or obtain from third parties as well as the issuer in making its rating determinations78 – all of which make it more likely that if there is evidence of wrongdoing, the NRSRO will not be able to ignore it.

Section 21F(i) provides that a whistleblower shall not be entitled to an award if he or she knowingly provides false, fictitious or fraudulent information. The Act also amends the enforcement provisions of 18 U.S.C. § 1514A by making any employment agreements waiving whistleblower rights or providing for pre-dispute arbitration of whistleblower provisions to be unenforceable.79

The SEC is authorized to make rules to further interpret the whistleblower provisions,80 and must do so within 270 days after the effectiveness of the Act.81 The GAO is directed to conduct a study as to the effectiveness of the whistleblower provisions and to issue a report within 30 months of the effectiveness of the Act.82?

Herrick K. Lidstone, Jr., Burns Figa & Will, PC

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71 Section 968 of the Act.
72 Sarbanes-Oxley Act, § 806, adding 18 U.S.C. § 1514A entitled 'Civil Action to Prevent Against
Retaliation in Fraud Cases.'73 Section 922 of the Act, adding § 21F to the 1934 Act. Section 923 of the Act provides for conforming
amendments to § 20(d)(3)A) of the 1933 Act, Section 42e)(3)(A) of the Company Act, § 209(e)(3)(A) of the
Advisers Act, and §§ 21(d)(3)(C)(i) and 21A of the 1934 Act. Whistleblower protection for employees of NRSROs
is accomplished by an amendment to 18 U.S.C. § 1514A(a) in § 922(b) of the Act.
74 Section 21F(c)(2)(B) provides that awards will not be paid to a whistleblower who was convicted in a
related action. Section 21F(c)(2) sets forth other persons not eligible to receive awards.
75 Section 21F(h)(1)(C).
76 Section 21F(h)(1)(B)(iii).
77 Section 934 of the Act, adding § 15(u) to the 1934 Act.
78 Section 935 of the Act, adding § 15(v) to the 1934 Act.
79 Section 922(c)(2) of the Act, adding 18 U.S.C. §1514(e).

Full post as published by The Race to the Bottom on July 30, 2010 (boomark / email).