November 18, 2019

November 18, 2019

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Senators Introduce Bipartisan Legislation Strengthening Corporate Whistleblower Protections and Improving the SEC and CFTC Whistleblower Programs

Senators Baldwin, Durbin, Ernst, and Grassley introduced S. 2529, the Whistleblower Programs Improvement Act (WPIA), which would protect corporate whistleblowers who report potential securities or commodities fraud to their employers and expedite the processing of applications for whistleblower awards at the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC).  This bill is similar to the Whistleblower Protection Reform Act of 2019 (H.R. 2515) that the House enacted by an overwhelming bipartisan majority of 410-12 in July 2019.

As there is bipartisan support for this non-controversial bipartisan legislation, hopefully the Senate will enact if promptly.  Protecting internal whistleblowing benefits companies by providing an early warning of fraud and providing companies an opportunity to investigate and remedy fraud and other violations of securities and commodities laws.

Protecting Internal Disclosures About Potential Violations of Federal Securities and Commodities Laws

In the wake of the Supreme Court’s ruling in Digital Realty, Inc. v. Somers, a whistleblower must report a securities law violation to the SEC or a commodities law violation to the CFTC to qualify for whistleblower protection under the Dodd-Frank Act.  The WPIA effectuates Congressional intent in enacting the Dodd-Frank Act by clarifying that whistleblowers disclosing potential violations of federal securities or commodities laws to their employers are protected from retaliation.

In particular, the WPIA amends the SEC whistleblower protection provision in the Dodd-Frank Act, 15 U.S.C. § 78u–6, by protecting whistleblowers providing information regarding any conduct that they reasonably believe constitutes a violation of any law, rule, or regulation subject to the jurisdiction of the SEC to—

(I) a person with supervisory authority over the whistleblower at the employer of the whistleblower, if that employer is an entity registered with, or required to be registered with, the Commission, a self-regulatory organization, or a State securities commission or office performing like functions; or

(II) another individual working for the employer described in subclause (I) who the whistleblower reasonably believes has the authority to— (aa) investigate, discover, or terminate the misconduct; or (bb) take any other action to address the misconduct.

As amended by the WPIA, Section 922(h) of the Dodd-Frank Act would provide broader protection than the whistleblower protection provision of the Sarbanes-Oxley Act in that SOX generally covers just employees of public companies and their subsidiaries, affiliates, and contractors.  Section 922(h) of the Dodd-Frank Act would cover employees of entities registered with the SEC, a self-regulatory organization, or a State securities commission or office performing like functions.  For example, the amended Section 922(h) would protect employees of privately owned broker-dealers and investment advisers, and employees of hedge funds that are registered with the SEC (hedge funds with regulatory assets under management in excess of $100 million).

The WPIA amends the CFTC whistleblower protection provision in the Dodd-Frank Act, 7 U.S.C. §  26, by protecting whistleblowers providing information regarding any conduct that they reasonably believe constitutes a violation of any law, rule, or regulation subject to the jurisdiction of the CFTC to—

(I) a person with supervisory authority over the whistleblower at the employer of the whistleblower, if that employer is an entity registered with, or required to be registered with, the CFTC, a self-regulatory organization, or a State securities commission or office performing like functions; or

(II) another individual working for the employer described in subclause (I) who the whistleblower reasonably believes has the authority—(aa) to investigate, discover, or terminate the misconduct; or (bb) to take any other action to address the misconduct.

The WPIA would also promote uniformity and consistency in these two anti-retaliation provisions by adding to Section 922 a provision in the CFTC anti-retaliation law barring the use of non-disclosure agreements to impede whistleblowing and barring pre-dispute arbitration agreements (codified at 7 U.S.C. § 26(n)).  The same statutory text is included in similar whistleblower protection laws, including the anti-retaliation provisions of the Sarbanes-Oxley Act (18 U.S.C. § 1514A(e)), Consumer Financial Protection Act of 2010 (12 U.S.C. § 5567(d)) and Taxpayer First Act (26 U.S.C. § 7623(d)(5)).

Timely Processing of Whistleblower Award Applications

The whistleblower reward programs at the SEC and CFTC have been effective in combatting fraud and protecting investors.  For example, whistleblower disclosures to the SEC have enabled the SEC to recover more than $2 billion in financial remedies, including penalties and disgorgement.  The SEC Whistleblower Program, however, has been stymied by delays in processing awards for applications. According to Dave Michael’s article in the Wall Street Journal “SEC Whistleblower Payouts Slow Amid Deluge of Reward Seekers,” it takes two to four years for the SEC to determine whether a whistleblower will receive an award, and that process begins only after the SEC has taken an enforcement action, which is often years after the whistleblower disclosed the violation to the SEC.

The WPIA would require the SEC and CFTC to issue an initial award determination within one year of the deadline to apply for an award.  The SEC and CFTC would have the ability to extend this deadline for up to an additional year for good cause, such as where an award claim is complex or entails more than one whistleblower.

This new requirement for the SEC and CFTC to make a whistleblower award determination within one year of the deadline for applying for an award will apply prospectively and will not impose a deadline on the SEC or CFTC governing the processing of pending whistleblower award applications.

Statement of Sponsors of Whistleblower Programs Improvement Act

press release announcing the intorduction of the WPIA includes the following statements by three of the sponors of this important legislation:

“There’s no reason why those who want to report wrongdoing internally should face potential retaliation from the exact people they are reporting to. Internal disclosures can be the fastest and most effective way for a company to remedy problems, prevent fraud and protect investors. Our bill will ensure that those who do the right thing and report violations will be protected,” Grassley said.

“If we strengthen and empower whistleblowers, we can do a better job of holding corporate America accountable,” Baldwin said. “This bipartisan legislation seeks to extend critical protections for those who want to blow the whistle on crime, fraud and abuse so we can hold bad actors accountable and protect those who are doing the right thing.”

“There has long been a bipartisan consensus that if whistleblowers are being retaliated against for reporting wrongdoing, Congress has a responsibility to step in. Whistleblowers deserve to be protected. Period,” Durbin said.

© 2019 Zuckerman Law

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About this Author

Jason Zuckerman, Whistleblower Litigation Attorney, Washington DC  Law Firm
Principal

Described by the National Law Journal as a “leading whistleblower attorney,” Jason Zuckerman litigates whistleblower ...

(202) 262-8959
Matthew Stock, CPA, Auditor, Zuckerman Law Firm
Certified Public Accountant

Matthew Stock is an associate at Zuckerman Law, where his practice focuses on representing whistleblowers in whistleblower rewards and whistleblower retaliation cases. He is also a Certified Public Accountant, Certified Fraud Examiner, and former KPMG external auditor.

As an auditor, Mr. Stock developed an expertise in financial statement analysis, internal controls testing, and fraud recognition. At Zuckerman Law, Mr. Stock uses his auditing experience to help whistleblowers investigate and disclose to the government complex financial frauds. In addition, Mr. Stock routinely assists whistleblowers in Sarbanes-Oxley whistleblower retaliation cases analyze a wide range of accounting issues, including revenue recognition, earnings management, and financial statement fraud.

202-930-5901