SECURITIES AND CORPORATE ALERT
Dodd-Frank Whistleblower Provisions Are a Game-Changer – Part II
ANTI-RETALIATION PROTECTIONS FOR WHISTLEBLOWERS IN THE FINANCIAL SERVICES INDUSTRY
One of the more vigorously-debated provisions of the massive Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) is the creation of a new Bureau of Consumer Financial Protection (the “Bureau”) within the Federal Reserve System to regulate consumer financial products and services. The term “consumer financial product or service” is defined very broadly (see below), and companies providing such services should be aware that Title X of Dodd-Frank contains provisions intended to protect “whistleblower” employees who work in the industry against termination or other forms of discrimination. These whistleblower protection provisions are similar to those contained elsewhere in Dodd-Frank that cover employees who provide information to, or assist in investigations by, the Securities and Exchange commission or the Commodity Futures Trading Commission. (See our related Securities and Corporate Alert, Dodd-Frank Act Whistleblower Provisions Are A Game Changer – Part I: “Bounty Payments and Anti-Retaliation Protections For Whistleblowers in Securities and Commodities Matter.
“Consumer Financial Product or Service”; Who is “Covered”
Consumer Financial Product or Service. The scope of consumer financial products and services covered by Title X is very broad and includes the following (subject to certain exceptions and exclusions identified in the act) if they are offered or provided for use primarily for personal, family, or household purposes:
- extending credit and servicing loans (including acquiring, purchasing, selling, brokering, or other extensions of credit);
- extending or brokering certain leases of personal or real property if they are the “functional equivalent” of purchase financing;
- providing real estate settlement services or performing appraisals of real estate or personal property;
- engaging in deposit-taking activities, transmitting or exchanging funds, or otherwise acting as a custodian of funds or any financial instrument for use by or on behalf of a consumer;
- selling, providing, or issuing stored value or payment instruments;
- providing check cashing, check collection, or check guaranty services;
- providing payments or other financial data processing products or services to a consumer by any technological means;
- providing financial advisory services to consumers on individual financial matters or relating to proprietary financial products or services, such as credit counseling, debt management or debt settlement, or avoiding foreclosure;
- collecting, analyzing, maintaining, or providing consumer report information or other account information;
- collecting debt related to any consumer financial product or service; and
- other financial products or services defined by the Bureau.
General Prohibition. In general, Section 1057 of Dodd-Frank prohibits individuals and entities that engage in offering or providing a consumer financial product or service (“covered persons”) and affiliated individuals and entities that provide certain services to covered persons (“service providers”) from terminating or otherwise discriminating against individuals who perform tasks related to offering or providing these services (“covered employees”) if they engage in activities protected by Title X. Protected activities include: (i) providing (or preparing to provide) information the employer, the Bureau, or a state or federal authority or law enforcement agency relating to a violation (or what the employee reasonably believes to be a violation) of Title X or any other law or rule subject to the jurisdiction of the Bureau; (ii) testifying (or preparing to testify) in any administrative or enforcement action related to any such law or rule; (iii) filing or instituting any proceeding under “any Federal consumer financial law” (as broadly defined); or (iv) objecting to, or refusing to participate in, any activity or assigned task that the employee reasonably believed to be in violation of any such law or rule.
Covered Employee’s Right of Action for Retaliation. Any employee who believes that he or she has been terminated or otherwise discriminated against in violation of Section 1057 may file a complaint with the Department of Labor not later than 180 days after the alleged violation. The Secretary of Labor (acting through her designees) is required to investigate the complaint and determine whether there is reasonable cause to believe that a violation occurred. If the Secretary finds such reasonable cause, she is required to issue a preliminary order requiring the violator to: (i) abate the violation; (ii) reinstate the complainant to his or her former status, with full back pay; (iii) pay compensatory damages to the complainant; and, if requested by the complainant, to pay reasonable costs and expenses (including expert witness fees) to the complainant. Either party may, within 30 days after receiving notice of the Secretary’s determination, object to the findings or preliminary order and request a hearing, but filing an objection does not stay any reinstatement in the preliminary order. The Secretary must issue a final order within 120 days after the hearing is concluded, and any party may appeal the final order in the United States Court of Appeals by filing a petition within 60 days after the final order is issued. If the Secretary has not issued a final order within 210 days after the complaint is filed or within 90 days after receipt of a written determination, the complainant may file a complaint in federal district court.
The evidentiary standards under Section 1057 are employee-friendly. The complainant must demonstrate only that his or her behavior (i.e., one of the protected activities described above) was a “contributing factor” in the unfavorable personnel action taken against him or her. The employer must then demonstrate by “clear and convincing evidence” that it would have taken the same unfavorable personnel action in the absence of the protected behavior by the employee. Finally, Section 1057 prohibits any agreement, policy, form, or condition of employment from waiving the rights contained in Section 1057, including predispute arbitration agreements, but not including certain collective bargaining agreements.
What Companies Should do Now. In its 2010 Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners reported that, in its study of cases of occupational fraud between January 2008 and December 2009, three times as many frauds were uncovered by tips as by any other method, including audits. To the extent that they have not done so already, companies subject to the new Dodd-Frank whistleblower protection provisions should review their internal reporting (such as “hotlines”), compliance (such as anti-retaliation), and governance policies and procedures. Some companies may need to implement additional procedures and/or management training programs to help managers to recognize and respond properly to internal whistleblower reports. Some practitioners have suggested that employment agreements that include agreements to arbitrate disputes covered by the whistleblower protections will need to be amended to eliminate these (now invalid) provisions. Adopting or revising internal procedures now may prevent or mitigate liability in the future.