House Legislation Works Important Sarbanes-Oxley Reforms

The House Wall Street Reform and Consumer Protection Act, HR 4173, would amend two important sections of the Sarbanes-Oxley Act dealing with funds for defrauded investors and whistleblower protections. The legislation is set for floor debate this week and may pass the House by the end of the week.

The Fair Fund provision of the Sarbanes-Oxley Act takes the civil penalties levied by the SEC as a result of an enforcement action and directs them to a disgorgement fund for harmed investors. The legislation would increase the money available to compensate defrauded investors by revising the Fair Fund provisions to permit the SEC to use penalties obtained from a securities fraudster to recompense victims of the fraud even if the SEC does not obtain an order requiring the fraudster to disgorge ill-gotten gains. Currently, in some cases, a defendant may engage in a securities law violation that harms investors, but the SEC cannot obtain disgorgement from the defendant because the defendant did not personally benefit from the violation.

The legislation also closes a loophole in Sarbanes-Oxley whistleblower protection by including any subsidiary or affiliate of a company whose financial information is included in the consolidated financial statements of the company. Sarbanes-Oxley created federal whistleblower protections for employees when they disclose information about fraudulent activities within their companies. HR 4173 would eliminate a defense now raised in a substantial number of actions brought by whistleblowers and apply the Sarbanes-Oxley whistleblower protections to both companies and their subsidiaries and affiliates.

An earlier letter from Senator Patrick Leahy, author of the Sarbanes-Oxley whistleblower statute, to the Department of Labor emphasized that federal whistleblower protection extends to employees of subsidiaries of companies and that the DOL should not interpret the statute to exclude employees working for company subsidiaries.

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