How the Dodd-Frank Act strengthens the whistleblower protections and incentives of the Sarbanes-Oxley Act.

The passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act in late July of this year includes a robust strengthening of the protections already given to workplace whistleblowers under the Sarbanes-Oxley Act of 2002 (SOX). In an effort to rein in the rampant financial misconduct that contributed in part to the 2008 financial crisis, Congress has, under the Dodd-Frank act, made it easier for and honest employees and others to blow the whistle on illegal and unethical activity in the workplace without fear of retaliation. In fact, recognizing the value of whistleblower employees and bystanders to the health of our economy, the Dodd-Frank Act not only protects them when they blow the whistle, but encourages them to do so.

First, the Dodd-Frank act significantly increases the rewards whistleblowers can earn by reporting misconduct to the U.S. Securities and Exchange Commission.  The law describes the purpose of this provision as being 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.” Under the Act, the whistleblower is guaranteed 10 – 30% of any sanctions collected under “original information,” as long as those sanctions exceed $1 million, dwarfing the previously discretionary rather than mandatory 0 – 10% range. In contrast with the previous rate, which returned only $1.16 million to 14 applicants since 1988, one of which totaled $1 million, SEC officials already report a flood of “very high-quality tips” since the bill’s passage. The new incentive takes advantage of the fact that whistleblower tips lead to 54.1% of the SEC’s collected fraud sanctions, while external audits lead to only 4.1% of those sanctions, according to a Senate report.

Second, the Dodd-Frank Act expands the types of whistleblowing that might qualify for rewards. The SEC’s prior program rewarded only tips about insider trading. The Dodd-Frank Act expands the coverage to original information regarding all securities law violations, ranging from money laundering to accounting fraud to Ponzi schemes, as well as violations of the Foreign Corrupt Practices Act. Academic and journalistic analysis of even publicly available facts now also qualifies as “original information.” This takes advantage of the analytic insight of third parties spending time and energy looking at the big picture. The act also expands the coverage of Sarbanes Oxley’s anti-retaliation provisions to employees of nationally recognized statistical ratings organizations, whose reports of misconduct could possibly have lessened the severity of the 2008 housing crisis, and doubles the limitations period for filing SOX whistleblower complaints to 180 days. The Dodd-Frank Act also allows employees who are retaliated against to bring an action directly in court rather than exhaust administrative procedures as required by SOX.

Finally, the Dodd-Frank Act closes loopholes in the whistleblower provisions of the Sarbanes-Oxley Act that had diluted their strength.  While the legislative history made clear that the drafters of the Sarbanes-Oxley Act had intended for its whistleblower protections to apply to employees of subsidiaries of publicly traded companies, many judges had held that an employer was not covered by the anti-retaliation provisions of the Sarbanes-Oxley Act if the employee’s direct employer did not file reports with the SEC.   This interpretation essentially granted immunity for whistleblower retaliation to a vast array of large companies based solely on their corporate structure.  For example, a publicly traded parent company that employed few people and conducted little business of its own could not be sued for retaliation under the Sarbanes-Oxley Act by employees of its privately held subsidiaries, even though the parent company’s real business was done solely through its subsidiaries.  The Dodd-Frank Act closes this loophole by applying whistleblower protections to subsidiaries of any publicly traded company “whose financial information is included in the consolidated financial statements of [a publicly] traded company.”

Already these strengthened whistleblower incentives and protections have fostered a noticeable increase in reports to the SEC. For more on that increase, continue reading here.