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Dodd-Frank’s Whistleblower Provision Is Putting Your Company in the Crosshairs: Practical Tips for Avoiding Whistleblower Retaliation Claims

Tuesday, September 27, 2011

A version of this article was originally published in the September 2011 issue of The HR Specialist. It is reprinted here with permission.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or the Act), passed in the wake of the financial crisis, imposes significant reforms on the financial system and also affects human-resources professionals who need to be familiar with Dodd-Frank’s whistleblower and anti-retaliation provisions. Below is a brief summary of these provisions and practical recommendations to help your organization avoid retaliation claims.

Dodd-Frank provides powerful financial incentives to employees and other potential whistleblowers who voluntarily report suspected violations of the federal securities laws to the Securities and Exchange Commission (SEC). If the SEC brings a successful enforcement action, the whistleblower will receive between 10 and 30 percent of the total monetary sanction (provided the sanction is $1 million or more). Controversially, the Act empowers whistleblowers to bypass their company’s internal reporting and compliance policies and go directly to the SEC with their concerns.

Under the Act, a whistleblower is defined as an individual who provides the SEC with information about a possible violation of federal securities laws that has occurred, is ongoing or is about to occur, provided the whistleblower has a reasonable basis for the belief. The protections from retaliation (discharge, demotion, suspension, direct or indirect threats, harassment or discrimination in any other manner in the terms and conditions of employment) apply regardless of whether the whistleblower ultimately receives the potentially massive financial award.

With that brief overview of the whistleblower and anti-retaliation provisions, assume that an employee in the accounting department of your organization sends an e-mail to his department head (bypassing his direct supervisor) about a possible securities law violation and that you have been consulted on how to address the situation. Below are five recommendations to help avoid a retaliation claim.

1. Be inclusive when deciding whether the complaint or information constitutes protected activity. Dodd-Frank’s anti-retaliation provisions are broad and as a result, you should err on the side of caution and assume, until an investigation clearly demonstrates otherwise, that the individual would be considered a whistleblower under the anti-retaliation provisions of the law and that the employee has a subjective reasonable belief that misconduct occurred and is a violation of the law. A hasty dismissal of the complaint as without merit, absent strong supporting evidence, carries substantial risk.

2. Get the word out. Consider informing people in the employee’s supervisory chain, human resources, compliance, the legal department and senior management (depending on the size of the organization) that a complaint has been made and divulge the identity of the whistleblower, while simultaneously reiterating to such individuals your company’s anti-retaliation policy; that the complaint will be investigated in accordance with your company’s policy; that the matter is not to be discussed orally or in writing with the complainant or anyone else, except in the course of the company’s investigation; and that no employment action may be undertaken without consulting the appropriate personnel (e.g., human resources, the individual’s supervisor, compliance, etc.). Some practitioners and commenters advise that only those with a “need to know” should be informed, the logic being a supervisor cannot retaliate if he or she does not know about the complaint; however, there are problems with this approach. First, in the event retaliatory action is taken, the company may be in the position of trying to prove a negative (in our example, that the direct supervisor did not know about the complaint); it is very difficult to prove a lack of knowledge. Second, it is possible that the direct supervisor could find out about the complaint independently and take prohibited retaliatory action in violation of company policy. While each situation is different, it is often better to take proactive steps to ensure no retaliation occurs than to leave the situation to chance and hope people adhere to your policies in the absence of guidance.

3. Communicate promptly with the whistleblower. The employee should be promptly thanked for bringing the matter to the company’s attention; informed of the company’s policy prohibiting retaliation; informed that an investigation will commence shortly (or is already underway); and told the identity of the person designated to address any concerns he has as the process moves forward, particularly if the employee believes he is being subject to retaliation. Communication is key, and if the employee perceives that the company is disregarding or minimizing his complaint (a likely result if he is met with silence) he is more likely to perceive retaliation is occurring and go to the SEC or retain counsel if he has not already done so.

4. Maintain communication after the investigation is concluded and the matter is resolved. After concluding the internal investigation and remedying the violation, if any, you should maintain contact with the employee to ensure that the employee is not subjected to retaliation, so he knows the company takes its anti-retaliation policy seriously.

5. Promptly remediate retaliatory action if it occurs. In the event you learn of retaliatory action at any point in the process, it must be promptly and appropriately remediated, the employee should be informed as to how that was accomplished (without disclosing confidential personnel information), and you should ensure that the action taken was sufficient. With regard to the sufficiency of the action taken, it may be appropriate to consult with the employee to ensure that the contemplated personnel action will solve the problem. When remediating retaliatory conduct, it also is important to ensure that the steps taken are not themselves perceived as retaliatory. For example, if the best course of action is to transfer the employee out of a retaliating supervisor’s department, consider whether the employee would consider the transfer to be a demotion, such as in cases in which the destination department is less prestigious or offers fewer advancement opportunities.

Although the particular course of action you take will vary based on your company’s policies and the particular facts, following the steps above should significantly minimize the risk of retaliation claims when responding to whistleblower complaints (and other employment-related claims as well).

Russell E. Adler

Written by

Russell E. Adler

More Resources on the Dodd-Frank Act

For additional information, please visit Pepper's Financial Services Resource Center.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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