On Point: Congress and the SEC clash over Dodd-Frank

By Howard Rubin and Don Stait The Daily Record Newswire On Dec. 2, 2009, in the wake of the biggest U.S. economic collapse since the Great Depression, Congress proposed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Employees who contributed original information that led the Securities and Exchange Commission to recover monetary sanctions of $1 million or more in criminal and civil proceedings were to receive between 10 and 30 percent of any monetary sanctions imposed. The legislation was designed to be an enforcement tool. President Obama signed the act into law on July 21, 2010. Implementation of the law slowed because of a change in Congress' political makeup. Early this year the SEC opened a public comment period prior to publishing rules for enforcement. One of the most frequent and significant comments to the SEC was that the statute encouraged whistleblowers to bypass companies' internal reporting mechanisms and thus deny companies the ability to address problems themselves. Many commentators urged the SEC to require whistleblowers to report violations internally before bringing the violations to the SEC. On May 25, the SEC adopted final rules implementing the whistleblower provisions of the statute without including a requirement to report violations internally first. Instead, the SEC included incentives it hoped would encourage employees to report violations internally. Specifically, the rules make the whistleblower eligible for an award if the whistleblower reports the violation internally and the company reports the violation to the SEC. Also, the SEC will treat the informant as a whistleblower as of the date of the internal report, which prevents anyone else from going directly to the SEC thereafter and claiming the award themselves. Finally, if the violation is reported internally, the SEC will use that as a factor to increase the whistleblower's award. Apparently unhappy with the decision to leave out a requirement to report violations internally, the U.S. House of Representatives last month introduced the Whistleblower Improvement Act of 2011 (H.R. 2483). The legislation would deny any award granted under the whistleblower protection program to employees who fail to report the violation to their employers before reporting such information to the SEC. The whistleblower would be required to report the violation to the SEC within 180 days of making the internal report. The bill contains exceptions to the internal reporting requirement if the SEC were to determine that the violating company has no internal reporting system; the company has no policy prohibiting retaliation for reporting misconduct; or the misconduct was committed at the highest level of the company such that an internal report would have been useless. Under the bill, an award would also be denied to a whistleblower who has legal, compliant or similar responsibilities for or on behalf of an entity and has a fiduciary or contractual obligation to investigate or respond to internal reports of misconduct or violations or to cause such entity to investigate or respond to the misconduct or violations, if the information learned by the whistleblower during the course of his or her duties was communicated to such a person with the reasonable expectation that such person would take appropriate steps to so respond. Finally, the bill requires the SEC to notify the employer of the allegations prior to taking any enforcement action. The employer would then be given time to investigate the allegations and take remedial action if necessary. Employers who respond in good faith would be treated as self-reporters. The bill, which has been referred to the House Committee on Financial Services, would weaken the enforcement powers of Dodd-Frank, but it is a long road from committee to the president's desk. EEOC releases semiannual regulatory agenda By October, the Equal Employment Opportunity Commission intends to issue a final rule clarifying the meaning of the "reasonable factors other than age" defense used against a federal age discrimination claim. Under existing case law, an employee who alleges age discrimination does not have to show intent to discriminate. It is sufficient to show that an employer's policy or procedure has the effect of discriminating against older employees (disparate impact). The employer can defend itself by showing that the adverse employment action is based on "reasonable factors other than age." But in a 2008 case, the U.S. Supreme Court held that the employer bears the burden of production and persuasion when using the RFOA defense. In response, the EEOC issued a notice of proposed rulemaking to address the scope of the RFOA defense. In February 2010, the EEOC issued its proposed rule explaining that the RFOA defense applies only if the challenged practice is not based on age, and that a neutral practice that disproportionately affects older workers can be justified only by showing that the practice is objectively reasonable when viewed from the perspective of a reasonable employer under similar circumstances. We will have to wait until the EEOC issues its final rule to find out if it clarifies the earlier explanation of the RFOA defense. ---------- Howard Rubin is a shareholder in Littler Mendelson's Portland office. Contact him at 503-221-0309 or hrubin@littler.com. Don Stait is Special Counsel in Littler Mendelson's Portland office. Contact him at 503-221-0309 or dstait@littler.com. Published: Fri, Aug 12, 2011