Dodd Frank Act s Whistleblower Bounties/Protections, Diversity/Affirmative Action and Executive Compensation Provisions April 5, 2011

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1 Dodd Frank Act s Whistleblower Bounties/Protections, Diversity/Affirmative Action and Executive Compensation Provisions April 5, 2011 Margaret Coughlin LePage Scott E. Pueschel Pierce Atwood LLP

2 Dodd-Frank Whistleblower Bounties and Protections Margaret Coughlin LePage Partner Portland, P ME

3 Federal and State Statutory Sources of Whistleblower Protection Sarbanes-Oxley False Claims Act Securities Exchange Act Dodd-Frank Act State Whistleblower Protection Acts Title VII/ADEA/ADA (employment discrimination) NLRA (concerted protected activity) Workers Comp Energy Reorganization Act Affordable Care Act OSHA (Safety and Health) FMLA (Family Medical Leave) Clean Air Act USERRA (Military Leave) ERISA (Employee Benefits) FLSA (Wage-Hour)

4 Common Types of Whistleblower Claims Accounting fraud Insider trading Pricing policies Customer billing Authenticity or quality of product Insurance claims handling Unlicensed professionals Lead paint Pollution Immigration violations Falsified tax returns Medical malpractice Failure to pay overtime Machine guards Personal protective equipment

5 State Whistleblower Protections State Protects Individuals Who: Remedies ME Report in good faith what they reasonably believe to be a violation of law or a condition that puts health or safety at risk, or who participate in an investigation of such allegations. Refuse to engage in activity that would be a violation of law or expose an individual to conditions causing serious injury or death. Reinstatement Back pay Compensatory, punitive and civil penal damages Injunctive relief Attorneys fees and costs MA Report or threaten to report what they reasonably believe to be a violation of law or a risk to public health, safety or the environment, or who participate in an investigation of such allegations. Refuse to engage in activity that would be a violation of law or pose a risk to public health, safety or the environment. Reinstatement Fringe benefits and seniority rights 3x lost wages/benefits Injunctive relief Attorneys fees and costs NH Report in good faith what they reasonably believe to be a violation Reinstatement of law, or who participate in a investigation or hearing concerning such allegations. Refuse to engage in activity that would be a violation of law. Back pay Fringe benefits and seniority rights Injunctive relief Attorneys fees and costs RI Report or are about to report what they reasonably believe to be a violation of law, or who participate in an investigation or hearing concerning such allegations. Refuse to violate or assist in violating a law. Reinstatement Back pay Fringe benefits and seniority rights Actual damages Injunctive relief Attorneys fees and costs

6 Maine Human Rights Commission

7 Sources of Whistleblower Protections in Dodd-Frank Title VII Commodity Whistleblower Incentives and Protection ( 748) Title IX Securities Whistleblower Incentives and Protection ( 922) Title X Consumer Financial Whistleblower Protection ( 1057)

8 Consumer Financial Services ( 1057) Employee s Protection from Retaliation Broad scope of protection. Employee in the financial services industry is protected if retaliated for disclosing information about fraudulent or unlawful conduct related to the offering or provision of a consumer product or service. Broad scope of coverage: Section 1057 applies to organizations, regardless of size, that provide consumer financial products or services including entities that: extend credit or service or broker loans, provide real estate settlement services or perform property appraisals; take deposits, cash checks provide financial advisory services (credit counseling) to consumers related to proprietary financial products; or collect, analyze, maintain or provide consumer report information in connection with decision regarding offering of consumer financial product or service.

9 Employee Protected from Retaliation under 1057 When He or She Has: Provided to employer, Bureau of Consumer Financial Protection, or any other government authority or law enforcement information that the employee reasonably believes relates to any violation of any provision of Title X or any rule or prohibition of Bureau Testified or will testify in covered proceeding Filed any proceeding under any federal consumer financial law Objected to or refused to participate in any activity that employee reasonably believes to be in violation of any law subject to Bureau jurisdiction.

10 Procedural Provisions of 1057 Effective July 21, 2011 Employees file charge with DOL/OSHA within 180 days; initial investigation by DOL within 60 days Complainant may bring lawsuit if DOL does not issue final order in 210 days. No waiver of rights or pre-dispute arbitration ti agreements allowed Employer defense that it would have taken the same employment action in absence of whistleblowing must be proved by clear and convincing evidence.

11 Consumer Financial Services ( 1057) Employee s Protection from Retaliation Whistleblower s s remedies: Reinstatement or front pay Back pay Compensatory damages Attorneys fees Litigation costs, including expert witness fees No bounties (unlike 748, 942)

12 Employment Protection for Whistleblowers under 748 and 922 Prohibits discharge, demotion, suspension, harassment or other discrimination for individuals who: (1) Provide information to the SEC/CFTC (2) Assist in any investigation or judicial or administrative action of the SEC/CFTC (3) Make disclosures required or protected under Sarbanes-Oxley

13 Employment Protection for Whistleblowers under 748 and 922 Employee may file complaint directly in federal court without obligation to exhaust administrative remedies. Statute of limitations is 6 years after date of violation or 3 years after date when facts are known to employee, but must not be more than 10 years after date on which violation occurs. Employee has right to a jury trial. Employees cannot waive rights and remedies by agreement, including pre-dispute arbitration agreements.

14 Remedies for Retaliatory Employment Action Under 748 and 922 Reinstatement with same seniority status Back pay with interest for claims related to commodities violations (Title VII) or double back pay with interest for claims relating to securities violations (Title IX) Compensation for litigation costs, including reasonable attorneys fees and expert witness fees

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16 Dodd-Frank Whistleblower Incentives Bounty Provisions available to individual (who may be anonymous) who: (1) )provides original information (2) to SEC (Title IX) or CFTC (Title VII) (3) regarding violation of securities or commodities laws (4) resulting in government recovery in excess of $1 million

17 Original Information under Dodd-Frank Information derived from the independent knowledge or analysis of the whistleblower. Not known to the SEC/CFTC from any other source, unless whistleblower original source. Not exclusively derived from allegation made in judicial or administrative hearing

18 Whistleblower Bounty Exclusions Individual convicted of criminal violation in related action Individual who gains information by auditing financial statements as required by SEC Individual who fails to submit information to SEC/CFTC as required by agency rule; Employee of DOJ or appropriate regulatory agency, self regulatory organization, the Public Company Accounting Oversight Board or law enforcement agency

19 Factors Determining Size of Bounty SEC/CFTC shall pay between 10-30% of any award Significance of the information Degree of assistance provided by the whistleblower Interest of the government in deterring violation

20 Dodd-Frank Whistleblower Protections Recommended Action Items Adopt and disseminate policy expressing commitment to compliance with statute t t Revise whistleblower policies to encourage internal reporting through hotlines, etc. and investigation procedure Provide training for managers on handling employee and outside complaints Prepare for increased numbers of internal investigations and internal audits (budget item) Conduct more careful vetting of termination/discipline decisions; coordinate HR and Corporate Compliance. Review document retention policies for personnel files (for employers covered by Title VII/Title IX.)

21 Dodd-Frank Diversity/Affirmative Action Margaret Coughlin LePage, Esq. Partner - Portland, ME

22 Dodd-Frank s Diversity Clause- Section 342 Mandates that each covered governmental agency establish Office of Minority & Women Inclusion (OMWI) responsible for all matters of agency related to diversity in management, employment and business activities. Each OMWI to develop standards and procedures to ensure fair inclusion and utilization of minorities, women and minority-owned and women-owned businesses in workforces of agency contractors and, as applicable, subcontractors.

23 Dodd-Frank s Diversity Clause Covered Governmental Agencies: Department of Treasury Federal Deposit Insurance Corporation (FDIC) Federal Housing Finance Agency Federal Reserve Banks/Board of Governors National Credit Union Administration Office of Comptroller of the Currency Securities & Exchange Commission Bureau of Consumer Financial Protection

24 Dodd-Frank s Diversity Clause Scope of Coverage: All types of service contracts with covered governmental agencies, including services by: financial institutions, investment banking firms, mortgage banking firms, asset management firms, brokers, dealers, underwriters, accountants, investment consultants and law firms.

25 Dodd-Frank s Diversity Clause Impact on Covered Financial Institutions Contract proposals will consider diversity of applying institution. Contractor will have to demonstrate ongoing good faith efforts to fairly include minorities and women in workforce. Contractor s failure to make good faith effort can result in Director of OMWI to recommend contract termination. OMWI may refer to Department of Labor s OFCCP for investigation and enforcement actions.

26 Dodd-Frank s Diversity Clause Contracts is broadly defined by section 342 as all contracts for all business and activities of a covered agency, including contracts for: Issuing or guarantying any debt, equity or security; Selling or managing the assets of the agency Making equity investments Implementing programs to address economic recovery.

27 Dodd-Frank Executive Compensation Provisions Scott Pueschel, P.C. Partner - Portsmouth, NH

28 Say-on-Pay Shareholder vote on compensation of executives Public companies, at first annual or other meeting of shareholders occurring after January 22, 2011, required to include a resolution providing non-binding, advisory vote on compensation of executive officers Must also include a separate resolution to determine whether say-on-pay votes should occur on an annual, biannual or triennial basis. This frequency vote must occur at least once every six years.

29 Say-on-Pay Shareholder vote on compensation of executives SEC final rules issued January 25, Say on pay votes are non-binding and advisory, but may have in terrorem effect on companies and their boards to the extent that institutional shareholder advisory groups counsel institutional clients to vote against directors who ignore outcome of shareholder say-onpay votes. But what does it mean to ignore the vote? The vote is on all compensation of all named executive officers. How does a Board interpret the vote given the lack of granularity?

30 Say on Golden Parachutes Proxy statement in which shareholders are asked to approve an acquisition, merger, consolidation or sale of substantially all assets, target company or acquiring company must disclose any compensation (present, deferred or contingent) agreement that is based on or relates to business combination. Nonbinding shareholder resolution to approve such agreements. SEC final rules issued January 25, 2011.

31 Clawback of Incentive-Based Compensation As a condition to being and remaining listed on a national securities exchange, listed companies must implement a policy to clawback compensation (including stock options) from current or former executives who received incentive compensation in the 3 years prior to an accounting restatement, in excess of what would have been paid under the accounting restatement.

32 Clawback of Incentive-Based Compensation Goes beyond Sarbanes-Oxley, which only required a clawback for the CEO and the CFO and for a 12-month period. Clawback is not predicated on any fault on the part of the executives (unlike under Sarbanes-Oxley). SEC has yet to promulgate proposed rules implementing the provisions, but is expected to do so in the fourth quarter of 2011.

33 Disclosure of Relationship Between Pay and Performance SEC required to adopt rules requiring companies to disclose in annual proxy statement relationship between compensation paid to executive officers and the company s financial performance, taking into account any change in the value of stock and dividends and distributions.

34 Disclosure of Relationship Between Pay and Performance SEC has yet to propose p rules on these provisions, but is expected to do so in the fourth quarter of 2011.

35 Disclosure of Ratio of Median Employee Compensation to CEO Compensation Public companies must disclose to shareholders: (1) the median annual total compensation of all employees, except the CEO; (2) the annual total compensation of the CEO; and (3) the ratio of the compensation of employees to the CEO

36 Disclosure of Ratio of Median Employee Compensation to CEO Compensation SEC has yet to propose p rules on these provisions, but is expected to do so in the fourth quarter of 2011.

37 Compensation Committees Condition of Being Listed The SEC must issue, no later than July 16, 2011, rules prohibiting the listing of any security of an issuer that does not comply with the independence requirements. Such rules will provide an issuer a reasonable opportunity to cure any noncompliance before a de-listing occurs. Compensation Committee Member Independence Each member must be independent under the rules of the national securities exchange, considering, among other things, the sources of compensation and affiliations with the issuer and its subsidiaries.

38 Compensation Committees Compensation Consultants If the Compensation Committee elects to retain any compensation consultant, legal counsel or advisor, it is directly responsibility for their appointment, compensation and oversight Funding - Dodd-Frank requires the issuer to provide for appropriate p funding, as determined by the Compensation Committee, for the payment of reasonable compensation to a compensation consultant, independent legal counsel or any other advisor to the Compensation Committee.

39 Compensation Committees Consultant Independence SEC must promulgate rules relating to consultant, counsel or advisor independence, considering factors such as issuer stock owners, percentage of revenues derived from services to the issuer, other services performed for the issuer, conflictof-interest policies and procedures, personal relationships with members of the Compensation Committee. Rules expected to be adopted during the second quarter of 2011.

40 Excessive Compensation Disclosures Federal regulators to prescribe regulations or guidelines that: Require covered financial institutions to disclose to federal regulators the structures of all incentive-based compensation arrangements sufficient to determine whether compensation structure provides an executive officer, employee, director or principal shareholder with excessive compensation, fees or benefits that could lead to material financial loss to institution.

41 Excessive Compensation Disclosures Covered financial institutions include banks and savings associations and their respective holding companies, registered broker-dealers, credit unions, investment advisers, Fannie Mae, Freddie Mac, and any other financial institutions that the federal regulators determine should be covered if they have assets of more than $1 billion. FDIC, SEC, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Office of Thrift Supervision, National Credit Union Administration and Federal Housing Finance Agency are involved in the joint rulemaking on the provision.

42 Excessive Compensation Disclosures Proposed regulations approved by the FDIC and the SEC; final regulations must be adopted by April 21, Incentive-based compensation requirements apply to executive officers, employees, directors, or principal i shareholders of a covered financial institution. Dodd-Frank prohibits incentive-based compensation that encourages inappropriate risks. The proposed regulation defines excessive compensation as occurring when amounts paid are unreasonable or disproportionate t to the services performed by the covered person.

43 Excessive Compensation Disclosures Dodd-Frank also prohibits incentive-based compensation that encourages inappropriate risks that could lead to a material financial loss to the covered institution. Under the proposed regulation, incentive-based compensation does not meet this requirement unless it balances risk and financial rewards, is compatible with effective controls and risk management and is supported by strong corporate governance.

44 Excessive Compensation Disclosures The proposed p regulation sets forth annual reporting requirements to the financial institution s regulator which are designed to be sufficient to determine whether the arrangements provide covered persons with excessive compensation, fees, or benefits, or could lead to material financial loss to the financial institution. Finally, the proposed regulation requires covered financial institutions to adopt policies and procedures designed to ensure compliance with the rules, and sets forth minimum standards d for the same.

45 Questions and Issues Is it possible to relate executive compensation to financial performance through anything other than equity compensation? Yes, but compensation plan design grows increasingly complex. What is the right ratio of CEO to rank-and-file compensation? I suppose institutional investors and their advisors will begin to tell us. How useful are say on pay votes? Will the clawback rules drive issuers back to time-based vesting? Will institutional investors squawk if it does? There is an enormous amount of uncertainty and subjectivity in the proposed rules on excessive compensation for covered financial institutions.