If asked to identify the most significant provisions in the Dodd-Frank Wall Street Reform Consumer Protection Act, few executives would identify the Act’s whistleblower provisions. Yet the whistleblower provisions – by creating incentives for employees to circumvent internal reporting mechanisms and raise issues directly with the government – may prove to be the most challenging management provisions in the Act.
By creating a mechanism for employees with knowledge of potential securities or commodity law violations to become multi-millionaires, the Act incentivizes employees to report suspected violations directly to the Securities Exchange Commission and the Commodity Futures Trading Commission. To counteract these incentives, corporations should critically analyze the effectiveness of their compliance programs, be prepared to quickly conduct internal investigations to meet certain deadlines established by the proposed rules implementing the Act, and be prepared to quickly report potential violations of the law to the SEC and CFTC.
Increased Management Challenges
The Act provides that if a whistleblower provides “original information” to the SEC or CFTC of a securities or commodity law violation, which results in a settlement or fine in excess of $1 Million, the agencies are obligated to pay the whistleblower a bounty of 10-30% of the value of the recovery. With recent SEC and CFTC settlements in the hundreds of millions of dollars, the incentives are obvious. A relatively modest $50 Million settlement will result in a whistleblower bounty ranging from a minimum of $5 Million to $15 Million. As if to illustrate the economics, the DOJ ’s award of a $96 Million False Claims Act whistleblower award in October to a former employee of a pharmaceutical company caught the eye of attorneys watching the new Dodd-Frank millionaire program.
Faced with the prospect of whistleblowers becoming multi-millionaires, it should be no surprise that plaintiff law firms are circling the wagons to get their share of the new bounty program. A one-minute internet search of “whistleblower law firms,” provides insight as to what corporations may be facing. The ink was barely dry on the Act when a whistleblower law firm announced that it had filed the first Dodd-Frank whistleblower claim within 48 hours of the passage of the Act. From whistleblower advertisements during the showing of the movie “Wall Street: Money Never Sleeps” to whistleblower seminars, the plaintiff law firms are organizing to take advantage of this new revenue stream.
With the Act providing a mechanism for whistleblowers to remain anonymous by proceeding through an attorney, the management challenges are significant. Employees have an incentive to remain employed with the corporation and attempt to better the record to increase the penalty and their reward. The management challenges will be most significant, however, during periods of corporate uncertainty. Managing employees with performance issues and managing potential lay-offs will be exacerbated by the anti-retaliation provisions of the Act. These provisions will create a significant incentive for employees to report potential issues to the agencies in an attempt to protect their jobs.
How To Prepare
So what should corporations do? The first step is to admit that the Dodd-Frank whistleblower provisions have fundamentally changed the corporate compliance landscape. With the SEC estimating that the new provisions will result in 30,000 new tips a year to the SEC, there is little doubt that a multi-faceted response is needed.
Of course, the first line of defense is to establish a culture of compliance where potential violations do not occur. Every management team likes to believe that they have such a culture, but is the belief well-founded? Corporations should critically evaluate their internal compliance procedures, compliance infrastructure and compliance culture to assess whether their compliance program is well-designed to prevent and detect violations of the law.
The second line of defense is to maintain a culture that requires employees to raise potential problems internally. The difficulty in establishing a culture of raising potential issues should not be underestimated. It takes courage for employees to report problematic behavior by supervisors or colleagues. Corporations should critically evaluate whether employees understand that they are obligated to report red flags and non-compliant behavior. Benchmarking, independent interviews and employee surveys are a few tools to test employees knowledge and comfort with the corporation’s hotline and internal reporting mechanisms.
Finally, managed processes, with identified resources, should be developed to allow the organization to quickly and thoroughly investigate potential wrongdoing so that an informed decision can be made whether the corporation should report the matter directly to the government. With a proposed 90-day deadline for employees to report issues to the SEC after reporting the issue internally, corporations need to be prepared to fully investigate allegations in a very short time-period so that it can evaluate whether there is an issue to report.
Peggy A. Heeg, co-chair of Fulbright & Jaworski’s Corporate Governance Practice Group, represents companies, officers and special committees in conducting internal investigations, regulatory compliance and related party transactions. Ms. Heeg is a partner in the Houston office.
Are you interested in being a #CEO? Join us for a two-day seminar in February on how to achieve—and excel in—the #CEO role. Early bird pricing is in effect, so register today! eventbrite.com/e/aspiring-ceo…