We published an article with Thomson Reuters Practical Law summarizing key employment issues for financial services employers, highlighting those rules applicable to registered representatives regulated by Financial Industry Regulatory Authority (FINRA). With Thomson Reuters Practical Law’s permission, we have attached it here.
Featured on Employment Law This Week: The Securities and Exchange Commission (“SEC”) recently issued the largest whistleblower awards under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in history.
Affirming the payout of over $49 million to two whistleblowers and over $33 million to a third for information that led to successful securities law prosecutions. Dodd-Frank established the whistleblower “bounty” program in 2010, and the SEC reports that it has awarded more than $262 million so far, to 53 whistleblowers.
Watch the segment below and read our recent post.
On March 13, 2018, Washington Governor Jay Inslee signed bill HB 1298, the Washington Fair Chance Act (“Act”), which prohibits employers from asking job applicants about arrests or convictions until after the employer has determined that the applicant is “otherwise qualified” for the job. The Act goes into effect on June 7, 2018.
The new law rounds out “ban-the-box” legislation on the West Coast and makes Washington the eleventh state nationwide to enact a “ban-the-box” law that covers both public and private sector employers. Under the Act, “employer” is defined broadly to include “public agencies, private individuals, businesses and corporations, contractors, temporary staffing agencies, training and apprenticeship programs, and job placement, referral, and employment agencies.”
Specifically, the Act makes it unlawful for employers to seek information from individuals about their criminal record, orally or in writing, prior to determining that the applicant is otherwise qualified for the position. An individual is “otherwise qualified” if he or she meets the “basic criteria for the position as set out in the advertisement or job description without consideration of a criminal record.” Once an employer determines that the applicant is otherwise qualified for the position, it may inquire into or obtain information about the candidate’s criminal record.
Additionally, the Act prohibits employers from doing any of the following prior to determining an individual’s qualifications:
- Including questions on employment applications inquiring into an applicant’s criminal record (arrests or convictions).
- Obtaining information through a criminal history background check.
- Advertising employment openings in a manner that excludes people with criminal records from applying (e.g., ads stating “no felons” or “no criminal records”).
- Implementing policies that automatically or categorically exclude individuals with a criminal record from consideration for employment.
The Act contains exemptions for employers:
- Hiring individuals who would have unsupervised access to children under the age of 18 or vulnerable persons.
- That are expressly permitted or required to consider an applicant’s criminal record under federal or state law.
- Hiring nonemployee volunteers.
- That are required to comply with the rules or regulations of a self-regulatory organization, as defined in section 3(a)(26) of the Securities and Exchange Act of 1934.
Notably, the Act does not require employers to “provide accommodations or job modifications in order to facilitate the employment or continued employment of an applicant or employee with a criminal record or who is facing pending criminal charges.”
Further, the Act permits cities and other localities to enact “ban-the-box” laws that provide “additional protections to applicants or employees with criminal records.” Thus, for example, Seattle’s more restrictive “ban-the-box” law will remain in effect. Unlike the Act, Seattle’s law requires an employer to give an applicant the opportunity to explain his or her criminal record before taking any adverse action against the applicant based on that record. Accordingly, employers are advised to review and, if necessary, conform their current policies to both the Act and any applicable local law.
Alyssa Muñoz, a Law Clerk – Admission Pending (not admitted to the practice of law) in the firm’s New York office, contributed significantly to the preparation of this post.
On March 19, 2018, the SEC issued an Order jointly awarding two whistleblowers more than $49 million, and awarding a third whistleblower more than $33 million, for reporting information to the SEC that led to its successful prosecution of an enforcement action against the perpetrators of securities violations.
In 2010, the Dodd-Frank Act amended the Securities Exchange Act of 1934 to include Section 21F, entitled “Securities Whistleblower Incentives and Protection.” Among other things, Section 21F established a whistleblower “bounty” program that entitles individuals who voluntarily provide the SEC with original information that leads to a successful SEC enforcement action resulting in monetary sanctions greater than $1 million to receive an award of between 10 and 30 percent of the total sanctions collected.
The awards announced earlier this week are the largest awards issued to whistleblowers since the inception of the whistleblower “bounty” program. The previous record was set by a $30 million award in 2014. To date, the SEC has awarded more than $262 million to whistleblowers.
These recent awards are a good reminder that employers must be more diligent and cautious than ever when it comes to securities compliance and investigating internal complaints by would-be whistleblowers, as the awards available to tipsters under the “bounty” program are a tremendous incentive to report to the SEC. This is likely the reason why the program has been steadily gaining traction, with the number of whistleblower tips submitted to the SEC increasing every year since its inception. Indeed, in its last Annual Report to Congress on the Whistleblower Program, the SEC’s Office of the Whistleblower reported that from FY 2012 to FY 2017, the number of whistleblower tips received by the SEC had grown by almost 50 percent.
Featured on Employment Law This Week: Supreme Court: Dodd-Frank Protections Are Limited
Dodd-Frank whistleblower protections are limited – The Supreme Court has ruled that whistleblower protections under the Dodd-Frank Act apply only to those who report violations to the SEC. The Act protects whistleblowers from termination, demotion, and harassment. People who report to the SEC, other regulatory or law enforcement agencies, or to company management are still protected under the 2002 Sarbanes-Oxley Act. Dodd-Frank’s anti-retaliation provision permits whistleblowers to recover double back pay damages – Sarbanes Oxley does not.
Watch the segment below and read our recent post.
Following is an excerpt:
The European Union’s (“EU’s”) General Data Protection Regulations (“GDPR”) go into effect on May 25, 2018, and they clearly apply to U.S. companies doing business in Europe or offering goods and services online that EU residents can purchase. Given that many U.S. companies increasingly are establishing operations and commercial relationships outside the United States generally, and in Europe particularly, many may be asking questions akin to the following recent inquiries that I have fielded concerning the reach of the GDPR:
What does the GDPR do? The GDPR unifies European data and privacy protection laws as to companies that collect or process the personally identifiable information (“PII” or, as the GDPR calls it, “personal data”) of European residents (not just citizens). …
Featured as our top story on Employment Law This Week: Me too At Work – Sexual misconduct in the C-Suite leads to shareholder lawsuits.
Last month on Employment Law This Week, you heard that sexual misconduct allegations would start impacting shareholder value and reputation. Well, now we’ve got a case study in Wynn Resorts. After the Wall Street Journal uncovered multiple sexual misconduct allegations against Casino mogul Steve Wynn, the company’s stock fell nearly 20%. Wynn resigned a week later, but the company’s troubles were far from over. The company’s stock has lost $3 billion in value. The first shareholder lawsuit was filed the day Wynn resigned, and to date three suits by shareholders claim that Wynn and the Board breached their fiduciary duties to the company and its shareholders. Bill Milani, from Epstein Becker Green, has more.
Watch the segment below and read our recent post.
Financial institutions and advisers that manage retirement plan assets and are subject to the regulations of the Department of Labor (“DOL”) under the Employee Retirement Income Security Act of 1974, as amended, (“ERISA”) regarding fiduciary duties (the “Fiduciary Rule”) may also be subject to state law violations for failure to comply with the Fiduciary Rule. The Enforcement Section of the Massachusetts Division of the Office of the Secretary of the Commonwealth (the “Massachusetts Enforcement Section”) filed an administrative complaint (the “Complaint”) on February 15, 2018 against Scottrade, Inc. (“Scottrade”) claiming violations of a Massachusetts statute due to alleged violations of the Fiduciary Rule. Given the relief requested in the Complaint and the potential precedent for other states, this action has the potential to be significant, not only for Scottrade, but for other advisers and financial institutions.
Current Status of the Fiduciary Rule
In November 2017, the DOL announced an extension of the applicability date of certain prohibited transaction exemptions under the Fiduciary Rule from January 1, 2018 to July 1, 2019. However, the extension did not apply to the Fiduciary Rule’s “impartial conduct standards” in dealing with retirement investors. The impartial conduct standards require advisers and financial institutions to give advice that is in the “best interest” of the retirement investor, charge no more than reasonable compensation, and refrain from making misleading statements.
The DOL’s November 2017 announcement also addressed the extension of its temporary enforcement policy through July 1, 2019. Pursuant to the temporary enforcement policy, the DOL will not to pursue claims against fiduciaries who are working diligently and in good faith to comply with the Fiduciary Rule and related exemptions or treat those fiduciaries as being in violation of the Fiduciary Rule and related exemptions.
Contents of the Complaint and Relief Requested
The Complaint alleges that, although Scottrade added new policies to comply with the impartial conduct standards, Scottrade expanded the scale and scope of the sales practices that the new policies were designed to curtail. The new policies stated that “the firm does not use or rely upon . . . contests . . . or other actions or incentives that are intended or reasonably expected to cause associates to make recommendations that are not in the best interests of Retirement Account clients or prospective Retirement Account clients.” Nevertheless, Scottrade launched two sales contests that ran in violation of these new policies that were designed to ensure compliance with the Fiduciary Rule. One of the contests placed explicit emphasis on generating retirement assets, which are covered by the Fiduciary Rule. The Complaint notes that Scottrade “failed to take any meaningful steps to remove retirement assets from the scope of the contests or ensure compliance with the Fiduciary Rule.”
Accordingly, the Complaint charges that Scottrade, by “knowingly violating its own internal policies related to the Fiduciary Rule” and failing to act in good faith to comply with the Fiduciary Rule, violated Section 204(a)(2)(G) of the Massachusetts Uniform Securities Act and the regulations thereunder (the “Act”). The section of the Act authorizes the imposition of an administrative fine, the suspension or revocation of registration or any other appropriate action if an investment adviser has “engaged in any unethical or dishonest conduct or practices in the securities, commodities or insurance business.” The Complaint further alleges that Scottrade violated Section 204(a)(2)(J) of the Act because Scottrade “failed reasonably to supervise . . . investment adviser representatives . . . to assure compliance with this chapter [of the Act].”
The relief requested in the Complaint is extensive. The Massachusetts Enforcement Section requests that an order be entered that, among other things, requires Scottrade to cease and desist from further conduct in violation of the Act, censures Scottrade, compels Scottrade to disgorge all profits and other remuneration from the alleged violation, and imposes an administrative fine on Scottrade.
Takeaways from the Complaint
The Complaint puts Massachusetts advisers and financial institutions that manage retirement plan assets on notice that state regulators are monitoring compliance with the impartial conduct standards and that the regulators will take action under Massachusetts law to stop conduct that they view as non-compliant. The Complaint should also serve as a warning to all advisers and financial institutions, as regulators in other states may begin to take actions under state law similar to that taken by the Massachusetts Enforcement Section. Any such actions will be pursuant to state law because the DOL, and not the states, has the authority to enforce ERISA.
To mitigate the risk of a state enforcement action, advisers and financial institutions should first review their internal compliance manuals to ensure that they are consistent with the impartial conduct standards. Second, advisers and financial institutions should review actual practices and procedures to ensure that they comply with the Fiduciary Rule, as well as internal compliance manuals. Non-conforming manuals and non-compliant practices should be corrected as soon as possible.
On February 21, 2018, the U.S. Supreme Court resolved a circuit split and ruled in Digital Realty Trust, Inc. v. Somers that Dodd-Frank’s anti-whistleblower retaliation provision (15 U.S.C. § 78u–6(h)) does not protect employees who report alleged securities violations only to their employers, and not to the SEC.
Paul Somers (“Somers”), a former Vice President of Portfolio Management for Digital Realty Trust, claimed that his employer violated the whistleblower protections of Dodd-Frank by terminating him in retaliation for complaining to management about suspected securities violations, including the elimination of required internal controls and financial misconduct by his supervisor. Somers never reported the alleged violations to the SEC. Digital Realty Trust therefore moved to dismiss the claim on the ground that Somers was not a “whistleblower” under Dodd-Frank because the statute’s definition of “whistleblower” only covers individuals “who provide . . . information . . . to the [SEC].”
The District Court denied the motion. It held that whether an employee who reports an alleged violation internally, but not to the SEC, qualifies as a whistleblower is ambiguous under Dodd-Frank. Given the apparent ambiguity, the Court deferred to the SEC’s interpretation of the statute set forth in SEC Rule 21F-2, which provides that an individual is a Dodd-Frank “whistleblower” even if he or she only reports internally. The Ninth Circuit Court of Appeals affirmed, joining the Second Circuit’s position on the issue (previously discussed here) and adding to a split with the Fifth Circuit, which had reached the opposite conclusion and held that Dodd-Frank does not protect employees who only report suspected violations internally.
The Supreme Court reversed the Ninth Circuit, however, and finally resolved the split in authority, holding that “Dodd-Frank’s text and purpose leave no doubt that the term ‘whistleblower’ . . . carries the meaning set forth in the section’s definitional provision.” The Supreme Court ruled that because Somers did not provide information to the SEC before his termination, he did not qualify as a “whistleblower” at the time of the alleged retaliation and is ineligible to seek relief under Dodd-Frank’s anti-retaliation provision.
The impact of this ruling on the whistleblower landscape remains to be seen. It may reduce the number of frivolous whistleblowers and whistleblower lawsuits since employees might be reluctant to pursue baseless allegations of securities violations if they have to first report them to the SEC before they can invoke Dodd-Frank’s protections against retaliation. Further, employers should take note that the Supreme Court made clear in its decision that an employee who reports misconduct both to the SEC and internally is a protected whistleblower, and can recover under Dodd-Frank’s anti-retaliation provision by proving that the retaliation was the result of the internal whistleblowing, without demonstrating that the retaliation was motivated by the SEC disclosure.
The United States Department of Labor’s Office of Federal Contract Compliance Programs (“OFCCP”) recently sent 1,000 Corporate Scheduling Announcement Letters (“CSALs”) to 515 federal government contractors. The CSALs provide advance notice that contractor establishments may be audited by the OFCCP during the scheduling cycle, which ends September 30, 2018, to ensure compliance with the contractors’ non-discrimination/affirmative action obligations.
The CSALs were sent on February 1, 2018, to the attention of the Director of Human Resources of the contractor establishments appearing on the FY2018 Scheduling List. Scheduling Letters will be sent to contractor establishments, beginning March 19, 2018, to commence the compliance review process.
According to the OFCCP, the purpose of the CSAL is fourfold:
- To provide personnel at each establishment with at least 45 days’ advance notice to obtain management support for compliance and self-audit efforts;
- To encourage contractors to take advantage of compliance assistance offerings;
- To encourage contractors to focus on self-audit efforts that, if problems are identified and addressed, will save the OFCCP time and resources when doing its review; and
- To help contractors manage/budget the amount of time required for the review. Contractors receiving CSALs should take advantage of the advance notice to ensure their affirmative action programs are in compliance and that any potential issues have been addressed in advance of the audit.
Contractors subject to a compliance review need to be vigilant in responding to the audit. It appears that the OFCCP continues to take a “deep dive” approach, which includes in-depth, time-consuming reviews of contractors’ hiring, compensation, and other employment data for statistical indicators of possible discrimination. In recent years, the number of audits conducted by the OFCCP has dropped, while the enforcement approach has expanded.
According to a report by Bloomberg Law, through the third quarter of FY2017, the number of audits closed by the OFCCP was 915, down from 1,700 the prior year; yet the OFCCP collected $23.1 million in settlements in FY2017 – more than double the prior year when it collected $10.5 million. This should certainly get the attention of all federal government contractors. While the number of audits by the OFCCP has decreased, the costs associated with defending an audit, and the settlement payouts, for contractors have increased.
What Employers Should Do Now
Contractors need to apprise appropriate personnel at each of their facilities to monitor incoming mail for receipt of the CSAL and Scheduling Letter, with forwarding instructions if received.
Contractors that receive a CSAL should take advantage of the advance notice by conducting a self-audit to ensure that their affirmative action programs are in compliance and that any potential issues have been addressed in advance of the audit. Once a Scheduling Letter has been issued, contractors will only have 30 days within which to respond, and the OFCCP has made clear that extensions of time of no more than 15 days will not be given lightly.
Contractors subject to a compliance review need to pay particular attention to their hiring practices and compensation systems. An impact ratio analysis should be performed, examining applicants and hires to determine if there are statistical results pointing to adverse impact and, if so, what the explanation is for the hiring decisions. A compensation analysis should also be conducted, with explanations provided if significant pay disparities exist.
The list of establishments that receive CSALs is generated by the OFCCP’s neutral-based Federal Contractor Selection System. If contractors have concerns about whether or not they received a CSAL at any of their facilities, they may make inquiry about whether an establishment was mailed a CSAL by e-mailing a written request on company letterhead to the Division of Program Operations at OFCCP-DPO-Scheduling@dol.gov.