Dodd-Frank, Part I Whistleblower Regulations and Responses

Transcription

1 Dodd-Frank, Part I Whistleblower Regulations and Responses Presenters: Thomas A. Aldrich Partner, Thompson Hine, LLP Robert M. Loesch Partner, Tucker Ellis & West LLP David A. Zagore Partner, Squire Sanders & Dempsey (US) LLP 1

2 Introduction Whistleblower rules implementing Sections of the Dodd-Frank Act were adopted by the Commission May 25, Rules were effective 60 days after publication in Federal Register, but apply retroactively to all whistleblower tips received by the Commission since July 21, 2010 (the date of enactment of Dodd-Frank). 2

3 Sections of Dodd-Frank Act and Rule 21F under the Exchange Act Key Provisions Together, these provisions require the payment of a bounty to a whistleblower who reports securities law violations that lead to the imposition of monetary fines or penalties. The award or bounty paid to whistleblowers must be not less than 10% or greater than 30% of the collected monetary sanctions. Fines or penalties must derive from judicial or administrative proceedings brought by the Commission under the securities laws (or in related actions); and result in monetary sanctions exceeding $1M. Whistleblower must be one or more individuals and must provide original information to the Commission. Whistleblower need not be an employee or based in the United States. 3

4 What information qualifies for an award? Original information must be provided voluntarily by the whistleblower; be derived d from the independent d knowledge or analysis of the whistleblower; not be exclusively derived from an allegation made in a judicial or administrative hearing, from a governmental report, or from an audit, investigation or news report (unless the whistleblower is the source); not be known to the Commission from any other source; and have led to the successful enforcement of a covered judicial or administrative action or a related action. 4

5 Other provisions relating to information provided Original information may relate to securities violations that have occurred, are on-going or are about to occur. A whistleblower may report information anonymously y through an attorney. Information will be deemed to be voluntarily provided if it is provided before a request, inquiry or demand is directed to the whistleblower or his representative by a federal or state governmental authority or SRO with securities enforcement authority; and it is provided by a person who is not required to report the information to the Commission (by legal duty, agreement or court order). 5

6 Other provisions relating to information provided Whistleblower must be the first individual providing the information to the Commission. Information entitling a whistleblower to an award must be sufficiently specific, credible and timely to cause the staff to commence or reopen an investigation or examination; or must significantly contribute to the success of an action if an examination or investigation is on-going. 6

7 Interplay with internal compliance programs A whistleblower will be deemed to have provided the information to the Commission on the date the same information is first reported by the whistleblower to an internal compliance program if it is provided to the Commission within 120 days thereof. If a whistleblower reports information to a company s internal legal or compliance program prior to or at the same time he provides the information to the Commission and the company then provides the information to the Commission, the whistleblower may be attributed with all information provided to the Commission by the company (whether or not originally attributed to the whistleblower). 7

8 Calculating the award An eligible whistleblower must be paid an award equal to 10-30% of sanctions collected as a result of the original information provided, to the extent monetary sanctions exceed $1M. $1M sanction eligibility ibilit threshold h can be satisfied from civil il money penalties, pre-judgment interest, disgorgements from one or more actions that arise from the same nucleus of operative facts, as well as related criminal proceedings. $1M sanction eligibility ibilit threshold h does not include any amount the whistleblower is ordered to pay or that a company pays if the company s activities are directed, planned or initiate by the whistleblower. The amount of the award payable within the 10-30% range is in the discretion of the Commission. An award will not be payable by the Commission if the United States Commodity Futures Trading Commission has paid a whistleblower an award for such information. 8

9 Calculating the award Factors considered by the Commission in determining an award include the significance of the information to the success of the Commission action or related action; the degree of assistance provided by the whistleblower in the Commission action or related actions; the programmatic interest of the Commission in deterring violations of the securities laws by making awards to whistleblowers; whether the whistleblower participated in internal compliance systems and reported any violation internally, or assisted in any internal investigation; the personal culpability of the whistleblower; any unreasonable delay by the whistleblower in reporting the securities violations; and whether the whistleblower interfered with internal compliance and reporting systems. 9

10 Ineligible whistleblowers The following individuals are not eligible to receive an award for information regarding securities law violations provided about a company: officers, directors, trustees, t or partners of a company who receives information about the alleged violation from a company employee or from the company's internal compliance process; attorneys and others who obtained such information i in connection with legal representation to the extent ethical limitations and/or attorney-client privilege would prohibit disclosure; audit, investigatory and compliance personnel (internal and external) retained by the company; and those who obtained information in violation of applicable criminal law. 10

11 Ineligible whistleblowers In addition, the following individuals are also ineligible: a member, officer, or employee of an appropriate regulatory agency, the Department of Justice, a self-regulatory organization, the Public Company Accounting Oversight Board or a law enforcement organization; foreign government officials and employees of state-owned enterprises; individuals who obtained the information from an ineligible whistleblower; and individuals who are criminally convicted of a related securities law violation. oato Certain ineligible whistleblowers may be eligible for an award if he has a reasonable basis to believe that disclosure is necessary to prevent the company from engaging in conduct that is likely to cause substantial financial injury to the company or investors; has a reasonable basis to believe the company is engaging in conduct that will impede an investigation of the misconduct; or at least 120 days have elapsed since the whistleblower provided the information through the company's internal reporting system. 11

12 Whistleblower protections The Dodd-Frank Act added Section 21F(h) to the Exchange Act to protect whistleblowers against retaliation. Section 21F(h), and Rule 21F-2 promulgated thereunder, provide that: an employer may not discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower; an individual is a whistleblower for purposes of these protections if that individual possesses a reasonable belief that the information he is providing relates to a possible securities law violation and he reports that information in accordance with the procedures delineated in the rules; a whistleblower may bring an action in a district court of the United States up to 10 years following a violation of Section 21F(h); the Commission also has enforcement authority for violations by employers; and a successful whistleblower may be entitled to (i) reinstatement with the same seniority status that the individual would have had, but for the discrimination; (ii) 2 times the amount of back pay otherwise owed to the individual, with interest; and (iii) compensation for litigation costs, expert witness fees, and reasonable attorneys fees. A whistleblower need not be entitled to an award in order to be subject to these protections. 12

13 Whistleblower Confidentiality Section 21F(h)(2) of the Exchange Act requires that the Commission not disclose information that could reasonably be expected to reveal the identity of a whistleblower. Notwithstanding the foregoing, the Commission may disclose such information when disclosure is required to a defendant in connection with a federal court or administrative action that the Commission files or in another public action or proceeding that is filed by an authority to which the Commission provided information; and to the Department of Justice, an appropriate regulatory authority, a self regulatory organization, a state attorney general in connection with a criminal investigation, any appropriate state regulatory authority, the Public Company Accounting Oversight Board, or foreign securities and law enforcement authorities. 13

14 What companies should do now Use whistleblower rules as an opportunity to reinforce the strength of your internal compliance program. Increase the likelihood that whistleblowers will first report internally. Tread carefully when taking adverse actions against whistleblowers. 14

15 Strength of your internal compliance Review existing whistleblower policy. Ensure meaningful protection of internal whistleblowers. Consider including disciplinary policies prohibiting retaliation and/or internal reporting incentives. Review and strengthen procedures for receiving tips. Consider using third-party providers. Considering use of multiple reporting methods (in-person, paper, telephone, internet, e- mail). Promote existence of various reporting methods to employees. Consider using no fraud certifications. Consider creating and training a whistleblower response team (Legal, Finance, IR, HR, Audit). Develop formal procedures to respond to whistleblower complaints. Communicate with whistleblower (e.g., thanks, results). Consider public recognition of whistleblowers who have aided compliance effort. 15

16 Strength of your internal compliance Create a visible compliance program and culture of compliance. Enhance existing training programs (what is considered a violation, how to report complaints, what is considered retaliation, how supervisors should respond to complaints). Integrate reporting program into hiring, training, and evaluating employees. Make compliance program credible to employees. Ensure confidentiality and integrity of reporting process. Use consistent and professional investigation procedures. Demonstrate complaints will be listened to and addressed. 16

17 Strength of your internal compliance Enhance exit interview process. Create checklist that requests specific information known regarding legal violations (don t focus on securities violations). Document the exit interview with a memorandum. Any potential violations reported should be reported to compliance function. Use consistent and professional investigation procedures. 17

18 Take care when taking actions against whistleblowers Consult counsel before making personnel decisions whistleblowers. You can still fire/discipline whistleblowers for legitimate reasons. Create a paper trail documenting these reasons and maintain documents for at least 10 years. 18