Whistleblowing Under Dodd Frank

By: Gregory Kowalsky

 

The Dodd Frank act has provided Wall Street with a host of new regulations to comply with.  One in particular that will have far reaching effects to every publicly traded corporation is section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (otherwise known as section 21f of the 1934 Securities Exchange Act).[1]  It provides that the SEC may pay awards to those persons who come forward with information that leads to the successful prosecution by the SEC of an enforcement action, which yields monetary awards of over 1 million dollars.[2]  Under the statute, “whistleblowers” who provide such information may be entitled to anywhere between 10% to 30% of the total award.[3]  This provision of the Dodd Frank Act didn’t take effect until August 12, 2011, so its ramifications may not be yet fully understood.

The provision allows for any employee who provides information “related to a possible violation of the federal securities laws” to the SEC to be eligible for a monetary award.[4]  On top of this, the employees are also protected from any negative retaliation that their employer might take in response to their ‘whistleblowing’.[5]  There was already a whistleblower protection statute in place prior to this Dodd Frank provision (Section 806), but it was much narrower.[6]  The Dodd Frank Act protects those who provide information that leads to any judicial, administrative or other related proceeding, not just those that are specifically related to shareholder protections.

This new statute is sure to have a strong effect on labor relations.  Since the American economy, and now the global economy as well, has been extremely unstable since 2008, and because the world of finance in America is ruled by securities laws and enforcement agencies such as the SEC, the DOJ, and the State Attorneys’ offices, the average employee is much more apt to identify securities violations.  Insider trading has become a household term.[7]  Regulatory bodies like the SEC are constantly watching average day-to-day financial transactions. The point of all this being that this new law is not only topical and current, but it is extremely necessary for our economy to make forward progress.

The SEC has limited investigatory and regulatory resources. In order for our economy to more forward and insulate itself from corporate greed and fraudulent practices, it is necessary that the American government begin to find ways to not only protect those that would do good, but to incentivize employees to keep watch over their employers.  For too long management has been allowed to hush those that would disagree with unsound and unethical business practices.  If the American industry is to evolve and get back to a place of investor trust and general public satisfaction, the government needs to expand their limited reach.  It is impossible to expect agencies of limited man power and monetary resources to have eyes everywhere.  The American industrialization of the late 1800s and early 1900s required ever evolving government regulations in reaction to labor exploitation in order to protect the “other 99%”.[8]  Therefore in order to bring general feelings towards big corporations back to a level of acceptable trust, the financial industry needs statutes like these.  Statutes that are going to provide incentives for those that would choose to do the right thing.  To protect those that are privy to corporate decisions but are excluded from the decision making process, we need government regulation.  This statute is likely to expand the bounds of every enforcement agency we have and will hopefully direct investor expectation in the right direction.

 


[1] Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), Pub. L. No. 111-203, 124 Stat. 1376.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Lucienne M. Hartmann, Whistle While You Work: The Fairytale-Like Whistleblower Provisions of the Dodd-Frank Act and the Emergence of “Greedy,” The Eighth Dwarf, 62 MERLR 1279, 1280 (2010); Sarbanex-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of 15 and 18 U.S.C.), amended by §§ 922, 929A, 124 Stat. at 1842, 1852.

[7] Bryan S. Schultz, Feigning Fidelity to Section 10(B): Insider Trading Liability After United States v. O’Hagan, 66 UCINLR 1411 (1997).

[8] See 29 U.S.C. § 157 (2006)

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