Dodd-Frank Wall Street Reform

A month into the Trump presidency, there have been a number of important statements from the executive branch on the regulation of executive compensation impacting the financial services industry. On February 3, 2017, President Trump issued a statement on the core principles for regulating the U.S. financial system (“Core Principles”). The statement requires the Treasury and all heads of member agencies of the Financial Stability Oversight Council to report within 120 days (by June 3, 2017) all existing laws, treaties, guidance, regulations, etc., that promote the Core Principles, and all such laws, etc., that inhibit the Core Principles. The Core Principles provide some insight into future regulation or repeal efforts by the Trump administration impacting executive compensation.

The Core Principles

The Core Principles include empowering Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth. This statement appears to favor a more hands-off approach to individual investment decisions. The Core Principles also require regulations that foster economic growth through more rigorous regulatory impact analysis addressing “systemic risk and market failures, such as moral hazard and information asymmetry.” This would presumably require a more extensive review of the regulatory cost of compliance favoring deregulation. However, the focus on systemic risk arising from moral hazard and information asymmetry could impact executive compensation to the extent compensation practices are seen to further individual conduct that could lead to systemic risk. The Core Principles further require regulations to enable American companies to be competitive with foreign firms in domestic and foreign markets and to advance American interests in international financial regulatory negotiations and meetings. The other Core Principles include preventing taxpayer-funded bailouts; making regulations more efficient, effective, and appropriately tailored; and restoring public accountability within federal financial regulatory agencies and rationalizing the regulatory framework, arguably all in favor of deregulation or possibly regulation by stated principles rather than by strict construction.

Potential Impact on Executive Compensation

Based on review of the Core Principles and recent regulatory statements from the Trump administration, including the reduction of two regulations for every one regulation added, the re-proposed rules under Section 956 of Dodd-Frank are not likely to be approved in their final form given the scope and breadth of the regulations. Arguably, these rules would go against the Core Principles favoring deregulation and could inhibit American competitiveness with foreign firms in domestic and foreign markets as to the recruitment and retention of talent. Also, given that the re-proposed regulations were based on international executive compensation standards (particularly, regulatory guidance promulgated in Europe), adopting the re-proposed rules might not be viewed as advancing American interests in international financial regulatory negotiations.

Presumably in furtherance of these Core Principles, on February 6, 2017, the Acting Chairman of the SEC, Michael S. Piwowar, issued a statement requesting comments from the public within the next 45 days (by March 23, 2017) on the challenges that issuers are facing with compliance with the CEO pay ratio disclosure rule under Dodd-Frank. The CEO pay ratio disclosure rule requires public companies to disclose the ratio of the median of the annual total compensation of all employees to the annual total compensation of the CEO. Gathering data to prepare the calculation has been challenging for large employers with a diverse domestic and global workforce, and the ratio itself has been criticized as not providing meaningful information. Based on comments, the SEC Acting Chairman stated that SEC staff will be directed to determine whether additional relief is appropriate. As to the review of other executive compensation provisions under Dodd-Frank that are currently in effect, such as say-on-pay and clawback requirements, they likely will be subject to the overall regulatory review, but their repeal might not be first on the agenda.

The final area of interest is President Trump’s pre-election criticisms of the treatment of carried interests, which generally are tax-favored partnership interests that, when sold, frequently generate profits that are paid to private equity fund managers as compensation. However, that compensation may be taxed at a long-term capital gains rate of 20 percent or less, rather than as ordinary income. Thus far under the new presidency, there have been no official statements in this area, but the discussion of carried interests could become part of the broader tax reform agenda expected from the Trump administration.

This year, financial services organizations can expect a new direction on executive compensation to take shape.

A version of this article originally appeared in the Take 5 newsletter Five Employment Issues Under the New Administration That Financial Services Employers Should Monitor.”

On the campaign trail, President Trump vowed to “dismantle” Dodd-Frank. Dodd-Frank was enacted in the wake of the 2008 financial crisis to curtail risky investment activities and stop financial fraud through increased oversight and regulation of the banking and securities industries. Among other things, it amended the Sarbanes-Oxley Act, Securities Exchange Act, and Commodity Exchange Act to include monetary incentives for individuals to blow the whistle on suspected financial fraud and stronger protections for whistleblowers against retaliation by their employers. President Trump has criticized Dodd-Frank, arguing that it is overbroad and inhibits economic growth. Now that he is in office, President Trump has the statute squarely in his crosshairs, and he is poised to impact its whistleblower protections on the legislative, administrative, and judicial fronts.

From a legislative standpoint, President Trump has wasted no time in seeking to roll back Dodd-Frank’s statutory framework. Only two weeks after his inauguration, he issued an EO titled “Core Principles for Regulating the United States Financial System,” which directs the Treasury Secretary to consult with the heads of financial agencies, including the Commodity Futures Trading Commission and the Securities and Exchange Commission (“SEC”), to find ways to conform U.S. financial regulations, including Dodd-Frank, to the Trump administration’s “Core Principles.” These “Core Principles” (detailed in the second article of this Take 5) are broad-sweeping and include, among other things, requiring “more rigorous regulatory impact analysis” for new laws and “mak[ing] regulation efficient, effective, and appropriately tailored.” While the precise scope of these principles is undefined (perhaps intentionally so), they appear to demonstrate a clear first step toward deregulation in the financial sector and may be a shot across the bow signaling the President’s intent to scale back—or at least halt any expansion of—Dodd-Frank, including its whistleblower protections.

Additionally, President Trump is well positioned to substantially affect the SEC’s administrative enforcement of Dodd-Frank’s whistleblower laws. Dodd-Frank created the SEC Office of the Whistleblower (“OWB”) to enforce its comprehensive whistleblower program. As reported in the 2016 Annual Report to Congress on the Dodd-Frank Whistleblower Program, since the OWB was established, the SEC has (i) awarded more than $100 million in bounty awards to whistleblowers who provided information leading to successful enforcement actions, (ii) independently sued employers for retaliating against employees for reporting alleged securities violations, and (iii) made it a top priority to find and prosecute employers that use confidentiality, severance, and other agreements that impede their employees from communicating with the SEC.

The SEC’s enforcement agenda could change significantly, however, under the Trump administration. Specifically, in 2017, President Trump will have the opportunity to appoint four out of the five SEC Commissioners (three seats are now vacant, and another will become vacant in June). He has nominated Jay Clayton—a corporate attorney who has spent his career representing financial services firms in business transactions and regulatory disputes—to fill one of those vacancies and serve as SEC Chair. New SEC leadership may result in the potential replacement of the sitting OWB Chief and alter the OWB’s current enforcement strategies. Thus, through his administrative appointments, President Trump may attempt to temper the SEC’s aggressiveness and focus when it comes to enforcement of Dodd-Frank’s whistleblower protections to more closely reflect his vision for less onerous regulation of the financial sector.

The President is also uniquely situated to influence the application of Dodd-Frank in the courtroom. Indeed, President Trump has inherited more than 100 federal court vacancies that he must fill, including one on the U.S. Supreme Court, giving him the opportunity to shape how Dodd-Frank’s whistleblower laws will be interpreted and applied by federal judges across the country. One of the most critical issues that hangs in the balance is whether an employee who reports an alleged securities violation only to his or her employer, and not to the SEC, is protected by Dodd-Frank’s anti-whistleblower retaliation provision. At present, there is a circuit court split on this issue. In 2013, the U.S. Court of Appeals for the Fifth Circuit held in Asadi v. G.E. Energy United States, LLC, that an employee who only reports a suspected violation internally is not a protected whistleblower for the purposes of Dodd-Frank’s anti-relation provision. In 2015, however, the Second Circuit Court of Appeals reached the opposite conclusion in Berman v. Neo@Ogilvy LLC. The question has since come before the Sixth Circuit Court of Appeals (which declined to rule on it) and is currently pending before the Courts of Appeals for the Ninth and Third Circuits, and it will almost certainly end up before the U.S. Supreme Court for resolution. Accordingly, President Trump’s federal judicial appointments—particularly his nomination of Judge Neil Gorsuch to the U.S. Supreme Court—may play a pivotal role in establishing exactly who is protected under Dodd-Frank’s proscription against whistleblower retaliation.

Ultimately, it is unlikely that President Trump will actually be in a position to completely “dismantle” Dodd-Frank. Yet, there is no question that he has at his disposal the power to greatly impact the statute at the legislative, administrative, and judicial levels, and there is little doubt that change is on the horizon.

A version of this article originally appeared in the Take 5 newsletter Five Employment Issues Under the New Administration That Financial Services Employers Should Monitor.”

Lauri F. RasnickWe previously reported that on June 9, 2015, six federal agencies (“Agencies”) subject to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Act”) issued much-anticipated joint final standards (“Final Standards”) in accordance with Section 342 of the Act for assessing the diversity policies and practices of the entities that they regulate (“Covered Entities”). See our earlier client advisory for an overview of the Final Standards which are divided into five general categories: (i) organizational commitment to diversity and inclusion, (ii) workforce profile and employment practices, (iii) procurement and business practices (or supplier diversity), (iv) practices to promote transparency of organizational diversity and inclusion, and (v) entities’ self-assessment.

The Final Standards were published in the Federal Register and became effective on June 10, 2015.  It has now been over a year since the issuance and publication of the joint final standards with little further guidance provided to employers.

Just last month, however, a Frequently Asked Questions (“FAQs”) on the Final Standards was issued by the Board of Governors Reserve System, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency.  In the FAQs, the agencies set forth several key points:

  • Assessments of regulated entities should be self-assessments.
  • It is recommended that self-assessments cover the standards set forth in the Final Standards but can include additional issues as well.
  • Self-assessments should be conducted on an annual basis.
  • Information concerning a regulated entity’s self-assessment should be voluntarily provided to the Director of the Office of Women and Minority Inclusion of the entity’s primary federal regulator within 90 days of the close of the calendar year.
  • Information concerning a regulated entity’s diversity and inclusion efforts should be published on its website or otherwise communicated.
  • In terms of defining “diversity”, there is no preclusion in an entity defining it more broadly than including women and minorities.
  • Regulated entities’ self-assessments of their diversity policies and practices, and the provision of such assessments to their respective regulators, are voluntary.

The agencies further clarify that an entity’s diversity policies and practices will not be assessed by its primary federal regulator and examinations by regulators will not consider compliance with the Final Standards. Rather, the agencies are relying on the regulated entities to engage in self-assessment.  In addition, the agencies state that they will be using the information provided through self-assessments to monitor progress and trends, identify best practices and possibly highlight certain practices or successes anonymously.

While compliance with the Final Standards is not mandatory, many firms are interested in improving their diversity and inclusion efforts and can look to the Final Standards for ways to engage in self-analysis and development. In this vein, employers should consider in what ways they are currently implementing actions envisioned by the Final Standards and what other actions may be taken.  Even this exercise can be beneficial.  Many employers that go through this analysis identify shortcomings and develop goals and plans for improvement, all of which can go a long way to ultimately increasing diversity.

A featured story on Employment Law This Week is the new legislation proposed in Congress that aims to clarify whistleblower policies.

The Whistleblower Augmented Reward and Non-Retaliation Act would expand protections for those who blow the whistle on financial crimes. The bill would also resolve a circuit court split on the definition of “whistleblower,” expanding the scope of the term to specifically include employees who only report violations internally, without filing with the SEC or CFTC. The WARN Act aims to broaden monetary incentives for whistleblowers, and increase the scope of protected activities and prohibited retaliation. Whether or not this bill moves forward, we’re likely to see some movement soon on the circuit conflict it addresses, either by legislation or by the courts.

View the episode below or read more about this legislation in an earlier post on this blog.

On February 25, 2016, Congressman Elijah E. Cummings (D-MD) and Senator Tammy Baldwin (D-WI) introduced the Whistleblower Augmented Reward and Nonretaliation Act of 2016 (or WARN Act of 2016) (pdf). The bill proposes expanded protections for individuals who blow the whistle on financial fraud and securities violations and, if enacted, could have significant implications for financial services employees and employers alike.  Specifically, the WARN Act of 2016 aims to strengthen the protections and incentives available to financial crimes whistleblowers by amending the Financial Institutions Anti-Fraud Enforcement Act (“FIAFEA”), Federal Deposit Insurance Act (“FDIA”), Securities and Exchange Act (“SEA”), Commodity Exchange Act (“CEA”), and Sarbanes-Oxley Act (“SOX”).

Under the FIAFEA and FDIA, for example, individuals who report banking fraud can receive awards based on the amount of money recovered as a result of the information they provide. Currently, however, there are monetary caps on these incentive awards. The WARN Act of 2016 would eliminate those caps and permit FIAFEA and FDIA whistleblowers to receive 10 to 30 percent of the total amounts recovered—essentially amending these statutes to include whistleblower “bounty” programs mirroring those under the SEA and CEA created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).

The WARN Act of 2016 would expand the scope of employee activities protected by the FDIA’s existing anti-whistleblower retaliation provision. It would also add a whistleblower anti-retaliation provision to the FIAFEA entitling covered employees who suffer adverse personnel action for assisting with the prosecution of certain violations (e.g., mail fraud, wire fraud, or bank fraud) to recover full reinstatement, double back pay damages with interest, and litigation costs and attorneys’ fees in a civil lawsuit. The revised FIAFEA would further require the Attorney General to issue regulations compelling covered employers to educate, train, and notify employees, including by posting information on their website homepages, about employee rights and remedies under the statute.

The Act also bolsters the whistleblower anti-retaliation provisions created by the Dodd-Frank amendments to the SEA, CEA, and SOX. For example, the SEA and CEA define the term “whistleblower” to include only those who report suspected violations externally to the SEC or CFTC. Employers have relied on this to argue that the anti-retaliation protections of these statutes do not apply to employees who only report violations internally, and there is currently a circuit court split on the issue. The WARN Act of 2016 would resolve the dispute by eliminating the narrow definitions of “whistleblower” under these statutes, apparently establishing once and for all that employees who only report alleged violations internally, but not to the SEC or CFTC, are covered.

In addition, the proposed legislation would expand the scope of activities protected, and adverse personnel actions prohibited, by the SEA, CEA, and SOX anti-whistleblower retaliation provisions; amend the remedies available under the SEA and CEA  anti- retaliation provisions to include compensatory damages and punitive damages of up to $250,000, and those available under the SOX anti-retaliation provision to include double back pay and punitive damages of up to $250,000; and broaden the prohibitions against waiver of any whistleblower rights or remedies under the SEA and CEA (including waivers often contained in standard confidentiality and settlement agreements).

The bill has been referred to the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs for review, and whether it will garner any meaningful support remains to be seen. If it passes, employers will need to provide proper training on the revised regulations, ensure they have comprehensive programs in place for internal reporting and investigation of alleged financial and securities violations and employee retaliation claims, and revisit their confidentiality agreements, settlement agreements, and similar documents to ensure compliance with the Act’s enhanced prohibitions against the waiver of whistleblower rights.

Employment Law This Week – Epstein Becker Green’s new video program – features an interview with attorney John Fullerton, a founding contributor to this blog.

Mr. Fullerton discusses the lack of clarity on what constitutes a whistleblower. Marketing firm Neo@Ogilvy has decided not to appeal to the U.S. Supreme Court in a case that would have tested the definition of a whistleblower under the Dodd-Frank Act. At issue is whether an employee can be eligible for anti-retaliation protection under the Dodd-Frank Act even if he or she does not provide information of corporate wrongdoing directly to the SEC. The U.S. Court of Appeals for the Fifth Circuit says “no,” but the Second Circuit disagrees.

Click below to view the episode and also see our earlier post “2nd Circuit Expands Dodd-Frank Anti-Retaliation Protection to Cover Internal Whistleblowing.”

On September 10, 2015, the Second Circuit Court of Appeals ruled in Berman v. Neo@Ogilvy LLC that an employee who reports an alleged securities violation only to his or her employer, and not to the SEC, is nevertheless covered by the anti-retaliation protections afforded by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).

Berman, a former finance director of Neo@Ogilvy, claimed that his employer and its corporate parent, WPP Group USA, Inc., violated the whistleblower protections of Dodd-Frank by wrongfully terminating him for raising concerns internally about business practices that allegedly constituted accounting fraud.  The companies moved to dismiss the claim, arguing that Berman was not a whistleblower subject to protection under Dodd-Frank because he did not report the alleged violations to the SEC.  The District Court agreed.

In a 2-1 decision, the Second Circuit reversed the District Court’s decision on appeal.  The Court found that the provisions of Dodd-Frank are ambiguous as to whether an employee who reports an alleged violation internally, but not to the SEC, qualifies as a whistleblower.  On the one hand, Section 21F(a)(6) of Dodd-Frank limits the definition of “whistleblower” to include only those individuals who provide information relating to an alleged securities violation to the SEC.  Yet, on the other hand, Section 21F(h)(1)(A) of Dodd-Frank’s retaliation protection provision prohibits retaliation against individuals who make disclosures that are, inter alia, required or protected under the Sarbanes-Oxley Act of 2002 (“SOX”), and SOX protects employees who make internal complaints of suspected securities laws violations without reporting them to outside agencies.

Finding that these were conflicting statutory provisions, the Court deferred to the SEC’s interpretation of the statute, under which an individual is a “whistleblower” if he or she provides information pursuant to Section 21F(h)(1)(A) of Dodd-Frank, which, as explained above, prohibits retaliation against employees for making internal complaints that would be protected by SOX.  Accordingly, the Court held that under SEC Rule 21F-2, “Berman is entitled to pursue Dodd-Frank remedies for alleged retaliation after his report of wrongdoing to his employer, despite not having reported to the Commission before his termination.”

Judge Dennis Jacobs, dissenting, opined that Dodd-Frank is “unambiguous”:  Section 21F(a)(6) is controlling because it defines who is a “whistleblower” under the relevant section of the statute and expressly provides that only those who report to the SEC can qualify.   Judge Jacobs pointed out that Dodd-Frank Section 21F(h)(1)(A), which the majority found creates ambiguity by incorporating protections provided by SOX, does not expand the statutory definition of whistleblower under Dodd-Frank, but instead identifies which acts done by whistleblowers are protected by Dodd-Frank.  In other words, according to Judge Jacobs, Section 21F(h)(1)(A) does not apply to protect a person unless he or she qualifies as a “whistleblower,” as the term is defined by Section 21F(a)(6).  Judge Jacobs criticized the majority for disregarding the plain text of Dodd-Frank’s definition of whistleblower and creating an ambiguity in the statute that does not exist solely to expand the reach of the anti-retaliation provisions of Dodd-Frank.

Notably, the Second Circuit’s decision creates a split in authority with the Fifth Circuit Court of Appeals, which came down the opposite way when faced with the same issue in 2013.  As a result, this issue is almost surely headed to the Supreme Court for resolution. Further, in holding that Dodd-Frank provides a private right of action for those who report violations only internally, the Second Circuit’s decision may lead to significantly more whistleblower retaliation claims in the future because, in comparison to the SOX whistleblower protections, Dodd-Frank offers a much longer statute of limitations, double back pay damages, and no administrative exhaustion requirement.

On August 4, 2015, the SEC issued an “Interpretation of the SEC’s Whistleblower Rules Under Section 21F of the Securities Exchange Act of 1934.” (pdf).  Unsurprisingly, and consistent with the position that it has been taking in amicus briefs on the issue, the SEC states that a whistleblower need not report suspected wrongdoing to the Commission in order to be protected by the anti-retaliation provisions of Dodd-Frank.  Rather, internal whistleblowing that is protected under the Sarbanes-Oxley Act is protected activity sufficient to state a claim under Dodd-Frank, according to the SEC.  We recently posted a video discussion of this very topic (here), noting that there is currently a sharp split of judicial authority on this critical question, and that the issue may well be headed to the Supreme Court for resolution.  The Fifth Circuit held in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013), that a Dodd-Frank whistleblower must report wrongdoing to the Commission to be protected by that statute; a decision from the Second Circuit on the issue is pending in Berman v. Neo@Ogilvy LLC, 14-4626 (2d Cir.).  Ultimately, of course, it is the job of the courts to determine what Congress intended in the Dodd-Frank Act, but if the issue does indeed reach the Supreme Court – and in every federal district and appellate court case until that time – those favoring a broad interpretation of the definition of a “whistleblower” under the Dodd-Frank anti-retaliation provision will surely be citing the SEC’s new interpretation of its regulations.

 

On June 10, 2015, the much-anticipated joint final standards (“Final Standards”) issued by six federal agencies (“Agencies”) in accordance with Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Act”) for assessing the diversity policies and practices of the entities that they regulate (“Covered Entities”) were published and became effective.   Covered Entities include financial institutions, investment banking firms, mortgage banking firms, asset management firms, brokers, dealers, financial services entities, underwriters, accountants, investment consultants, and providers of legal services.  In issuing the Final Standards, the Agencies stated that their goal is to provide a framework for an entity “to create and strengthen its diversity policies and practices . . . and to promote transparency of organizational diversity and inclusion.”

My colleagues Lauri Rasnick and Dean Singewald have written an Act Now Advisory describing the Final Standards and explaining important steps financial services employers should take now.

Read the full Act Now Advisory here.

Last week, the U.S. Securities and Exchange Commission’s Office of the Whistleblower, created in 2011 pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, released its mandated report to Congress on operations for Fiscal Year 2014, ending on September 30, 2014.  A number of interesting facts, statistics and developments were reported.  Here is a selection of particularly relevant highlights:

  • FY 2014 was the most active year yet in terms of whistleblower awards. The SEC has made awards to 14 whistleblowers since inception of the program, including 9 in 2014 alone.
  • “To date, over 40% of the individuals who received awards were current or former employees;” another 20% were company consultants or contractors, or had been solicited to act as consultants.
  • According to the SEC, over 80% of those receiving awards reportedly raised their concerns internally to supervisors or compliance professionals before going to the SEC, which means nearly 20% are still skipping internal whistleblower reporting policies and systems.
  • “Several of the cases in which a whistleblower received an award concerned firms involved in the financial services industry, with some involving broker-dealers.”  Alleged wrongdoing included on-going Ponzi schemes, false or misleading statements in offering memoranda or marketing materials, and false pricing information.
  • On September 22, 2014, the SEC authorized payment of its largest whistleblower award to date — over $30 million.  This was the fourth overseas whistleblower to receive an award, highlighting that whistleblowers around the world are eligible for awards and the importance for employers of implementing whistleblower and compliance policies globally.
  • On August 29, 2014, the SEC authorized its first award to a compliance or audit professional – over $300,000 to an auditor who blew the whistle internally and waited 120 days before reporting to the SEC, during which time the company had taken no action on the allegations.  The auditor therefore satisfied one of the exceptions to exclusion from eligibility for awards for compliance and audit professionals.
  • On July 31, 2014, the SEC issued an award of over $400,000 to an independent agent of an insurance company, who had “aggressively worked internally to bring the securities law violation to the attention of appropriate personnel in an effort to obtain corrective action” regarding misleading descriptions of financial products.  Although the SEC did not disclose the name of the whistleblower or the company, the whistleblower himself went to the press after receiving the award, identifying himself as well as his employer in telling his story.
  • On June 16, 2014, the SEC exercised its own anti-retaliation enforcement authority for the first time, charging a hedge fund advisory firm with retaliating against its head trader for reporting prohibited principal transactions to the SEC.  The alleged retaliatory acts included removing the whistleblower from his position and making him a compliance assistant, stripping him of supervisory responsibility, and making him investigate the very wrongdoing he reported to the SEC without any meaningful resources to do so.  The firm and its owner paid $2.2 million to settle the charges – with full disclosure by the SEC of, and publicity regarding, the identity of the firm and its owner.

The full report is available on the SEC’s Office of Whistleblower website – click here.