Thursday, July 11, 2019

House passes Dodd-Frank whistleblower fix along with small package of securities bills

By Mark S. Nelson, J.D.

The House passed five securities-related bills covering a range of topics, chief among them a bill to correct the drafting errors contained in the Dodd-Frank Act’s whistleblower provision. Other bills passed by the House deal with investment research for small companies, the Investment Company Act’s diversified company threshold, and rural issuers. The House also passed a resolution lauding the important role played by state securities regulators.

Whistleblowers. A bill sponsored by Rep. Al Green (D-Texas), the Whistleblower Protection Reform Act of 2019 (H.R. 2515), would legislatively reverse the Supreme Court's Somers decision. The justices held in that case that a person must, under the plain meaning of the Dodd-Frank Act, report to the SEC in order to enjoy the anti-retaliation provisions of that law. The bill would extend anti-retaliation protections to whistleblowers who report alleged wrongdoing through a corporate compliance program. The House FSC approved the bill by voice vote. The full House passed the bill by a margin of 410-12.

On the floor, House Financial Services Committee Chairwoman Maxine Waters (D-Calif) emphasized that Congress, in drafting the Dodd-Frank Act, did not intend the result reached by the Supreme Court in Somers and that lawmakers did not wish to discourage whistleblowers from reporting to their employers.

“By clarifying that whistleblowers who only report alleged misconduct to the[ir] employers are also protected by the antiretaliation provisions in the Dodd-Frank Act, this bill would encourage employees to communicate potential securities law violations to their employers without fear of being fired before they are able to report to the SEC,” said ChairwomanWaters.

Representative Andy Barr (R-Ky) further explained the situation as it currently exists: "For these reasons, many companies have implemented strong internal reporting measures to detect and mitigate potential wrongdoing before harm spreads. But if internal whistleblowers who report potential securities law violations internally are not protected from retaliation, what good are these internal reporting systems that these companies have voluntarily established?"

During consideration of the bill by the House FSC, Rep. Green told members that the Somers decision undermines corporate compliance reporting by incentivizing employees to go first to the SEC. On the House floor, Rep. Green highlighted the challenges of being a whistleblower: “These are the people who are willing to put their livelihoods on the line. These are the people who are willing to take that step that many of us would not take because, when you take that step as a whistleblower, you will sometimes stand alone. But they understand that it is better to stand alone than never to stand at all, and in so doing, they are protecting us: consumers, members of the public.”

Representative Bill Huizenga (R-Mich), co-sponsor of the bill, noted in committee that the bill is carefully drafted to clarify the anti-retaliation provisions in the Dodd-Frank Act and that it would ensure that internal reports cannot be used against whistleblowers. He also emphasized on the House floor that the revised statutory language would offer whistleblowers an alternative to “automatically escalating” a matter to the SEC: “[i]nternal reporting may be more efficient and practical in some cases as employers have a chance to correct, self-report, or take other action.”

Diverse goals inform other securities bills. The remainder of the securities bills taken up by the House address a range of issues, including: 
  • Investment research on small issuers—Under the Improving Investment Research for Small and Emerging Issuers Act (H.R. 2919), the SEC would be required to study why investment research on smaller companies is sparse. The bill would direct the SEC to mull demand from institutional and retail investors, consider the presence of absence of competition for research, conflicts of interest, and the costs and payments mechanisms employed by the research industry. Moreover, the SEC would have to consider any unique challenges for minority-, women-, and veteran-owned businesses in getting research coverage. The SEC would have to report its findings to Congress. The bill was agreed to by voice vote.
  • Diversified company threshold—The Expanding Investment in Small Businesses Act of 2019 (H.R. 3050) would require the SEC to study whether the existing 10 percent threshold for diversified investment companies contained in Investment Company Act Section 5(b)(1) is working as intended. Specifically, the SEC would have to consider the companies now limited by the rule, how diversified companies’ investing goals have changed regarding smaller issuers and issuers in industries with few competitors, the impact on small and emerging growth companies, and the ability of funds to mange liquidity risk. The SEC would be authorized to solicit public comments on the study but, in any event, must report its findings to Congress. Currently, “diversified company” means a management company for which: “75 per centum of the value of its total assets is represented by cash and cash items (including receivables), Government securities, securities of other investment companies, and other securities for the purposes of this calculation limited in respect of any one issuer to an amount not greater in value than five per centum of the value of the total assets of such management company and to not more than 10 per centum of the outstanding voting securities of such issuer.” The bill passed by a vote of 417-2.
  • Rural issuers—The Expanding Access to Capital for Rural Job Creators Act (H.R. 2409) would continue lawmakers’ recent trend of increasing the scope of the duties performed by the SEC’s Advocate for Small Business Capital Formation. This most recent proposal would authorize the Advocate to examine issues facing rural area small businesses. Recent amendments to Exchange Act Section 4(j), the provision targeted by the bill, have spotlighted the unique issues faced by minority- and women-owned small businesses, and by small businesses affected by natural disasters. The bill passed by a vote of 413-7.
  • Federal and state regulators—A House resolution (H. Res. 456) expresses support for state securities regulators’ investor protection and investor education missions while also urging the SEC to “maintain and expand voluntary collaboration with State securities regulators.” In 1996, Congress, among other things, sought to reallocate duties between federal and state securities regulators (See, Jim Hamilton, Securities Reform: National Securities Markets Improvement Act of 1996 Law & Explanation (1996), a Wolters Kluwer publication). For example, NSMIA amended Securities Act Section 18 to exempt “covered securities” from certain state regulations. As a more recent example, changes made by the SEC to Regulation A now preempt state regulation of certain higher dollar offerings. Still, state securities regulators retain many authorities, especially regarding enforcement. The House resolution specifically recognizes the “grassroots” character of state securities regulations. According to a statement by Michael Pieciak, president of the North American Securities Administrators Association, “[a]s NASAA proudly celebrates its centennial anniversary, we are humbled to be honored by the House of Representatives and appreciate its affirmation of the vital role NASAA members serve in protecting Main Street investors and facilitating responsible capital formation for small businesses across our country.” The resolution passed by voice vote.