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MAKING SENSE OF DODD-FRANK

The Dodd-Frank Act has broad and deep implications that will touch every corner of financial services and multiple other industries. This site, developed and maintained by attorneys at Stinson Leonard Street, is dedicated to making sense of this complex legislation and helping businesses understand how it will affect them specifically. Our Bloggers »

Dodd-Frank

Dodd-Frank and SOX Whistleblower Protections

by David Jenson   |   October 11, 2010

The cooperation of corporate whistleblowers may be a crucial element of a transparent and fully accountable market place.  However,  many employees with knowledge of violations remain silent for fear of retaliation from their employers.  The Sarbanes-Oxley Act attempted to increase the number of corporate insiders willing to come forward and blow the whistle by providing certain protections against retaliation for employees willing to cooperate in investigations. These protections, located at 18 U.S.C. 1514A, make it illegal for covered employers and their agents to “discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment” in retaliation for an employee’s cooperation in an investigation.   However, the law only applies to companies that either have registered securities under the Exchange Act or are subject to reporting requirements under Section 15(d) of the Exchange Act.

Since its passage, Section 1514A has been interpreted by the executive branch in a manner contrary to what its drafters intended.  Since 2002 the authors of the SOX whistleblower protection provision, Senators Patrick Leahy and Chuck Grassley, have been protesting interpretations by the white house, the SEC, and the Department of Labor that construe the whistleblower protections as not applying to employees of a non-public subsidiary of a public company.  The latest such protest came in the form of an October 6 letter from Senators Leahy and Grassley to Secretary of Labor Hilda Solis, after reports that the Department of Labor had dismissed more than 1,000 of the 1,600 cases that had been filed by whistleblowers alleging retaliation.  Reportedly, many of these cases were dismissed on the grounds that the employee alleging retaliation worked for a private subsidiary of a public company, and thus was not covered by the whistleblower protections.  The letter asserts that the Senators “strongly disagree with this legal interpretation,” which “erroneously excludes thousands of employees Congress meant to protect when it passed Sarbanes-Oxley and contradicts the spirit and intent of the overall legislation.” 

Section 929A of the Dodd-Frank Act attempts to clarify the issue by amending 18 U.S.C. 1514A(a) to make clear that the whistleblower protections apply not only to public companies, but also to “any subsidiary or affiliate whose financial information is included in the consolidated financial statements” of those companies.  Presumably this amendment will prevent a large number of claims under Section 1514A from being dismissed.  But, as the current controversy demonstrates, in the end it will all depend on the interpretation and implementation of the amendment by the Department of Labor and the Obama administration.   

This is just one more example of the wide reach of the Dodd-Frank Act.  Check back at Dodd-Frank.com frequently as we continue to analyze and monitor the implementation of this landmark legislation.