Do the whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) have the impact on compliance and ethics programs as the concerns that have been raised might indicate? The Health Care Compliance Association (HCCA) and Society of Corporate Compliance and Ethics (SCCE), conducted a survey to determine whether the added incentives for employees to take their claims outside the company provided under Dodd-Frank was affecting the structure of compliance and ethics programs.
HCCA and SCCE’s survey revealed that relatively little has changed as a result of Dodd-Frank. Respondents reported that the Dodd-Frank whistleblower provisions primarily led to increased communications to employees about what to do when encountering wrongdoing and greater training of managers about how to handle reported wrongdoing rather than wholesale changes to their compliance programs.
Dodd-Frank Whistleblower Provisions, SEC rules, and Proposed Legislation
Dodd-Frank, which was enacted on July 21, 2010, amended the Securities Exchange Act of 1934 to include certain whistleblower provisions that give whistleblowers a significant financial incentive to report violations. Under the Act’s provisions, whistleblowers would receive between 10 and 30 percent of any potential fines over $1 million collected by the U.S.government. An additional incentive for reporting violations to the government is that the Act does not require whistleblowers to report potential violations to an internal compliance program before reporting such violations to the government. The Act also provides for protections for the whistleblower against retaliation by an employer for reporting possible violations.
The Securities and Exchange Commission (SEC) issued a final rule implementing the whistleblower provisions of Dodd-Frank on May 25, 2011. Among the adopted rules governing the whistleblower provisions, the SEC adopted rules that are intended to incentivize internal reporting of potential violations. For example, under the rules, a whistleblower is allowed to obtain the same award when he or she reports internally and the company informs the SEC about the violation and a whistleblower’s voluntary particiaption in his or her company’s internal compliance and reporting program may increase the amount of an award. The rules became effective August 12, 2011.
On July 11, 2011, however, the “Whistleblower Improvement Act of 2011” was introduced in the House of Representatives in an attempt to modify the SEC’s whistleblower provisions. Under the bill, employees would be required to report any potential violation first to his or her employer before reporting to the SEC and then must report the potential violation to the SEC within 180 days to receive an award.
Conclusions of HCCA/SCCE Survey
Based on the survey results, HCCA and SCCE concluded that the whistleblower provisions of Dodd-Frank do not seem to have had a major impact on the structure of compliance programs. According to HCCA and SCCE, one possible explanation for the relative lack of change was that over 90 percent of respondents reported that anonymous helplines were in place in their employer’s organization and it is likely they had anti-retaliation policies in place. In addition, HCCA and SCCE found that the whistleblower provisions of Dodd-Frank had two positive impacts. First, according to the survey, 76 percent of respondents have increased communications about internal opportunities to report wrongdoing. HCCA and SCCE stated that “making employees more aware of the opportunity to report wrongdoing internally, and encouraging them to step forward, will likely foster greater willingness of employees to report internally when they see a potential violation.”
A second positive impact of Dodd-Frank appears to be increased training of managers, the survey noted. According to previous research done by HCCA and SCCE, managers receive a large portion of allegations of improper behavior. Therefore, it is critical that they understand how to handle those reports properly. HCCA and SCCE concluded that “Dodd-Frank appears to have accelerated the training process and may end up leading to faster, better handling of allegations.”
Addressing the Whistleblower Provisions
Legal experts have provided tips on how to address the whistleblower protections of Dodd-Frank. Communication and transparency are essential to the process. Recommendations include:
- Strengthening the tone at the top;
- Establishing training programs regarding laws that may be violated, whistleblower provisions, and the internal reporting process, including the employees obligation to report suspected wrong doing;
- Ensuring that the compliance program has strong mechanisms and guidelines in place to prevent, detect, and report misconduct;
- Encouraging employees to use internal reporting and ensuring that employees feel confident the report will be investigated and acted upon;
- Training for managers on how to best handle reports of violations;
- Ensuring that compliance programs includes nonretaliation policies and that employees and managers understand that retaliation is prohibited.
The survey results indicated that companies have taken a proactive approach to address and counteract the potential impact of Dodd-Frank, and further, revealed that for future changes, increased employee communication is expected by 74 percent of respondents and by 83 percent of those at publicly traded firms. Likewise increased manager communication about handling allegations of wrongdoing is expected by 66 percent of respondents overall and 72 percent of respondents in publicly traded companies.