The SEC Weighs In on Reporting Related to COVID-19

As previously reported, the SEC is actively responding to the new wave of issues presented by the coronavirus (COVID-19).  However, as early as January 30, 2020, SEC Chairman Jay Clayton issued a statement identifying coronavirus as a potential concern.

Chairman Clayton’s statement advised that he had instructed the staff to monitor and provide guidance to issuers regarding coronavirus-related disclosures.  Chairman Clayton highlighted the effect of coronavirus as “an uncertain issue where actual effects will depend on many factors beyond the control and knowledge of issuers.”

Fast-forwarding nearly two months, the impact of coronavirus is more significant than many imagined, and the current situation will likely cause companies across the country to examine reporting obligations.

Following the Chairman’s January 2020 statement, the SEC issued a joint statement in February 2020 from SEC Division of Corporation Finance Director Bill Hinman, SEC Chief Accountant Sagar Teotia, PCAOB Chairman William D. Duhnke III, and Chairman Clayton which outlined reporting considerations related to coronavirus.

In the joint statement, the leaders emphasized: “[H]ow issuers plan and respond to the events as they unfold can be material to an investment decision, and we urge issuers to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements.”  The leaders stressed “the need to consider potential disclosure of subsequent events in the notes to the financial statements in accordance with guidance included in Accounting Standards Codification 855, Subsequent Events[.]”  The statement also conveyed the message that the SEC wants to help issuers, including granting relief from deadlines as appropriate and providing guidance to issuers regarding reporting.

In a press release released in March, companies were reminded “to provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments.”  The Commission further outlined disclosure considerations:

Disclosure Considerations for All Companies

The Commission encourages all companies and other related persons to consider their activities in light of their disclosure obligations under the federal securities laws. For example, where a company has become aware of a risk related to the coronavirus that would be material to its investors, it should refrain from engaging in securities transactions with the public and to take steps to prevent directors and officers (and other corporate insiders who are aware of these matters) from initiating such transactions until investors have been appropriately informed about the risk.

When companies do disclose material information related to the impacts of the coronavirus, they are reminded to take the necessary steps to avoid selective disclosures and to disseminate such information broadly. Depending on a company’s particular circumstances, it should consider whether it may need to revisit, refresh, or update previous disclosure to the extent that the information becomes materially inaccurate.

Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding the coronavirus, can take steps to avail themselves of the safe harbor in Section 21E of the Exchange Act for this information.

Please contact a Jackson Lewis attorney for assistance examining your organization’s reporting obligations related to coronavirus.

The SEC Reacts to COVID-19

Over the last few weeks, the SEC identified key initiatives it is implementing to address the effects of the coronavirus (COVID-19) on the nation and its financial markets. https://www.sec.gov/sec-coronavirus-covid-19-response The Commission stressed that it has remained fully operational and continues to process normal daily activities while undertaking additional initiatives to combat the impact of COVID-19.  Id.  It is continuously issuing new orders in response to the fast-changing landscape.

On March 10, the Commission began transitioning its employees to a telework posture, which is now fully functional.  Id.  It continues to create new taskforces to monitor markets and engage with market participants to understand actual market impacts as well as to forecast potential impacts.  Id.  The SEC is also working to provide guidance to market participants and targeted regulatory assistance to vulnerable or critical areas.  Id.  The Commission is also continuing to investigate and bring enforcement actions, including issuing trading suspensions related to COVID-19.  Id.

Recently, the Commission announced it relaxed certain deadlines and requirements. In particular, the SEC:

Please contact a Jackson Lewis attorney with any questions.

Congress Considers Proposed Protections for Intelligence Community Whistleblowers

The United States House Oversight and Reform Subcommittee on Government Relations is considering proposed changes to protections available to U.S. Intelligence Community (IC) whistleblowers.

The Subcommittee’s January 28, 2020, public hearings received testimony from David K. Colapinto, National Whistleblower Center, Glenn A. Fine, U.S. Department of Defense, Elizabeth Hempowicz, Project on Government Oversight, Michael E. Horowitz, U.S. Department of Justice, and Paul Rosenzweig, R Street Institute.

The witnesses emphasized that whistleblowers’ disclosures should be pursued – not the whistleblowers personally – and that the whistleblower’s motive, whether benign or otherwise, should not determine whether the whistleblower’s disclosure is valid. Each stressed the need for greater and more robust whistleblower anonymity and confidentiality protections.

The witnesses recommended:

  • Broadening avenues through which protected disclosures can be made, and eliminating bureaucratic and process bottlenecks that slow the ability to bring information forward;
  • Rebalancing burdens of proof to give whistleblowers greater parity with civilian whistleblowers;
  • An expansive definition of adverse personnel actions to include public harassment, retaliatory investigations, and security clearance actions;
  • Establishing anonymity and confidentiality protections to address outing of whistleblowers by any individual who learns of the whistleblower’s identity; and
  • Granting testimonial subpoena power to enable the inspectors general (IGs) to conduct thorough assessments of both the whistleblower’s disclosure and the investigations of retaliatory personnel actions.

As a further deterrent, the witnesses recommended restoring claimants’ rights to pursue civil remedies for violations of the disclosure-without-consent rule, and to provide damages for whistleblower confidentiality breaches. Claimants should be allowed, the witnesses urged, access to federal courts and jury trials after exhausting administrative remedies up through the Merit Systems Protection Board (MSPB) on retaliation claims. Pointing to the deterrent effect in Title VII employment discrimination cases that grant the right to jury trial, the witnesses urged a similar arrangement to better protect federal whistleblowers. They testified that persistent, unresolved issues with the current claim adjudication process (in which the MSPB is the sole forum of last resort) leave whistleblowers vulnerable and send a message that they are not protected by the system.

Finally, on process delays at MSPB, the witnesses noted that not only does the MSPB lack a quorum of standing members (since January 2017), but it lacks any members whatsoever due to executive and legislative branch inaction. Further, even when the board is up and running, an estimate shows that the MSPB would need at least three years to address the existing backlog of more than 2,000 cases, not considering the nearly 60 cases added to the backlog each month.

Please contact a Jackson Lewis attorney with any questions.

New York Enacts Legislation Related to Board Diversity

New York recently enacted the “Women on Corporate Boards Study” law (S. 4278), joining a growing number of states requiring organizations to report their board composition. The new law applies to domestic and foreign corporations “authorized to do business” in the state. Given the expanse of companies doing business in New York, this law may have a broad reach and impact organizations based far from New York.

New York’s new law mandates a study on the number of female directors on the boards of corporations doing business in New York. Under the new law, both foreign and domestic corporations, including publicly traded and privately held, are required to report the number of directors appointed to their board and to report how many directors are female. The New York Department of State will collaborate with the Department of Taxation and Finance to conduct the study, which will include an analysis of the change in the number of women directors compared to prior years and the collective percentage of women directors on all such boards. The initial study will be published by February 1, 2022.

In support of the legislation, New York State Senator Liz Krueger noted that “New York is home to some of the world’s largest and most influential corporations, so what we do here reverberates far beyond our borders.”

Other States Promoting Diversity on Boards

Board diversity has been gaining traction (see Seeking Unity, Not Uniformity*: Diversity and the Corporate Board of Directors), and New York is not the only state implementing laws related to diversity on corporate boards. California, Colorado, Illinois, Maryland, Massachusetts, Michigan, New Jersey, Ohio, Pennsylvania, and Washington have similarly introduced or passed legislation or resolutions related to board diversity. Some highlights include:

  • California: Requires publicly held corporations with principal executive offices in California to have at least one female board director by the end of 2019. By the end of 2021, at least three female directors must sit on boards with six or more directors. (For boards with five or fewer directors, the numbers decrease.) For more information, see California Law Pushes Virtue of Diversity Requiring Females on Boards of Directors and JL Live: Corporate Board Diversity.
  • Maryland: Requires certain corporations to report the number of female board members and the total number of board members on an annual basis.
  • Illinois: Requires publicly held domestic and foreign corporations with a principal executive office in Illinois to report, beginning no later than January 1, 2021, the number of women and minority board members on an annual basis. See New Illinois Law Requires Corporations to Report Diversity on Corporate Boards for more information.

What’s Next?

According to the state’s press release on the new law, the New York legislation will take effect on June 27, 2020. Board diversity likely will remain a hot topic on both the state and federal level as we move into the new decade. For example, at the federal level, in November 2019 the U.S. House of Representatives passed the “Improving Corporate Governance Through Diversity Act of 2019” (H.R. 5084), which would amend the Securities Exchange Act of 1934 to require certain organizations to disclose the gender, race, ethnicity, and veteran status of their board of directors, nominees, and executive officers. The bill also requires the U.S. Securities and Exchange Commission to create a Diversity Advisory Group, which would ultimately “make[] recommendations of strategies that issuers could use to increase gender, racial, and ethnic diversity among board members.”

In addition to legislative initiatives at the federal and/or state level, we have also seen in recent proxy seasons an increase in the call for board diversity by large institutional investors, proxy voting firms and by activists, all seeking best practices for board and corporate governance.  Thus, whether prompted by legislation or otherwise, we expect that the call to diversify the appointment of directors to corporate boards may intensify in the coming years.

Preventing Retaliation Claims During and After an Internal Investigation

When an employee reports a concern regarding fraudulent or illegal behavior, an employer’s immediate response is likely to open an investigation, stop any wrongdoing, and take appropriate corrective action. In the race to manage a challenging situation, it is easy to overlook the possibility that an investigation not conducted properly might actually create additional liability, even if the original allegations are unfounded. Given the ongoing influx of whistleblower claims, employers should be alert to preventing potential retaliation claims arising out of internal investigations.

What laws should you be aware of?

A plethora of federal, state, and local laws prohibit employers from taking adverse actions against employees who report concerns such as safety violations, fraud, or discrimination; and against employees who participate in any related investigation.

Some whistleblower and anti-retaliation provisions are well known, such as those found in:

  • The Sarbanes-Oxley Act (SOX) and The Dodd-Frank Act;
  • The False Claims Act; and
  • Title VII of the Civil Rights Act of 1964.

However, the legal protections for whistleblowers who report alleged violations of law go far beyond these statutes. For example, in addition to investigating claims under SOX, the Occupational Safety and Health Administration (OSHA) is also responsible for investigating whistleblowing claims in more than 20 other federal statutes covering a broad range of industries and activities, including:

  • The Affordable Care Act;
  • The Consumer Financial Protection Act;
  • The Food Safety Modernization Act;
  • The Asbestos Hazard Emergency Response Act; and
  • The Consumer Product Safety Improvement Act.

How should you take action?

Because there are abundant protections for employees who make complaints, employers should strive to conduct their investigations in a manner that does not create additional liability. Depending on the circumstances, this may include:

  • Establishing strong anti-retaliation policies that cover protected activity and provide multiple avenues to report alleged misconduct;
  • Informing employees reporting concerns and those participating in an investigation that retaliation is strictly prohibited and that they should report any perceived retaliation immediately;
  • Making explicit to those accused of potential misconduct that retaliation against employees who have either complained or participated in an investigation is prohibited and that violating this policy can lead to disciplinary action up to and including termination; and
  • Independently reviewing personnel decisions regarding employees who have complained or otherwise participated in an investigation.

For more guidance in lowering the risk of retaliation claims while conducting internal investigations, please contact a Jackson Lewis attorney.

Teri Wilford Wood Speaks on Board Diversity

Ever since California enacted legislation in 2018 requiring a certain number of female board directors for publicly-held corporations with principal executive offices in California, board diversity continues to be a significant topic.  Maryland, Massachusetts, Colorado, Illinois, New York, Ohio, Washington, New Jersey, Michigan and Pennsylvania have introduced or passed legislation or resolutions related to board diversity.  Likewise, in November 2019, the U.S. House of Representatives passed the “Improving Corporate Governance Through Diversity Act of 2019” (H.R. 5084) related to, among other things, board diversity.

Teri Wilford Wood, a member of the Corporate Governance and Internal Investigations Practice Group, recently spoke on the topic of board diversity, providing additional insight on the issue.  Given the significant level of activity in this area, we anticipate board diversity will remain an important topic in 2020.

Dodd-Frank Whistleblower Claims are Arbitrable, Second Circuit Holds

In a win for employers, the Second Circuit Court of Appeals recently held that whistleblower claims under the Dodd-Frank Act are arbitrable.  Daly v. Citigroup Inc., 939 F.3d 415 (2d Cir. 2019).  The Second Circuit also held that a plaintiff’s failure to exhaust administrative remedies related to a Sarbanes-Oxley Act claim serves as a jurisdictional bar, warranting dismissal of the claim.

Overview

The plaintiff, a former employee, brought suit against the employer alleging, among other things, whistleblower retaliation claims under the Dodd-Frank Act (“Dodd-Frank”) and the Sarbanes-Oxley Act (“SOX”).  The employer (1) filed a motion to compel arbitration of certain claims, including the Dodd-Frank claim; and (2) sought dismissal of the SOX claim.

The district court concluded that although the plaintiff’s SOX claim was not arbitrable, the remainder of her claims (including Dodd-Frank) were arbitrable.  The district court dismissed the plaintiff’s SOX claim because she did not file a complaint with the Occupational Safety and Health Administration (“OSHA”) in a timely manner, thus failing to exhaust her administrative remedies.  The Second Circuit affirmed.

Arbitrability of Dodd-Frank Whistleblower Claims

In determining the arbitrability of the Dodd-Frank whistleblower claim, the Second Circuit examined the statutory text and framework.

The court noted that although SOX contains an anti-arbitration provision, Dodd-Frank does not.  This was significant:  “[N]othing in Dodd-Frank’s text suggests that claims arising thereunder are nonarbitrable.  Dodd-Frank amended several statutory provisions to include anti-arbitration provisions but did not do so with respect to its own whistleblower provision….Congress’s failure to attach an anti-arbitration provision to the Dodd-Frank whistleblower provision…while simultaneously amending similar statutory regimes to include the same, is a strong indication of its intent not to preclude Dodd-Frank whistleblower claims from arbitration.”

Further, the court underscored that the SOX anti-arbitration provision was limited to “this section,” i.e., SOX’s whistleblower provision.  The court observed, “The Dodd-Frank cause of action, by contrast, is not located in the same section, or even the same title, of the federal code.”  The court noted that even if ambiguity existed, it “still could not infer that Congress intended to extend” SOX’s anti-arbitration provision to Dodd-Frank given the differences between the two statutes.

Finally, the plaintiff argued that the court cannot separate her various claims (including Title VII, Equal Pay Act, and Dodd-Frank) from her SOX claims “because they arise out of the same act of whistleblowing.”  The court rejected this argument: “We cannot simply lump all of the plaintiff’s claims together for purposes of determining their arbitrability, even if they pertain to the same conduct….The plaintiff’s SOX whistleblower claim cannot save her otherwise arbitrable claims from their fate.”

SOX’s Administrative Exhaustion as a Jurisdictional Prerequisite to Federal Court Lawsuit

The Second Circuit affirmed dismissal of the plaintiff’s SOX claim because she filed her complaint with OSHA at least two years after-the-fact, and not within the 180-day deadline.  The Second Circuit addressed uncertainty regarding whether dismissal was proper under Rule 12(b)(1) (lack of jurisdiction) or Rule 12(b)(6) (failure to state a claim), and ultimately concluded “…the text of SOX makes clear that Congress intended for its administrative exhaustion requirements to be a jurisdictional prerequisite to suit in federal court.”

The plaintiff asserted a “continuing violation” argument, claiming that her alleged continued difficulty in securing employment essentially caused the deadline to be extended.  However, the court rejected the argument and affirmed dismissal of the SOX claim.

Over $2 Billion in Sanctions Ordered by the U.S. Securities and Exchange Commission

In its 2019 Annual Report to Congress, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) whistleblower program announced a “momentous milestone”: The SEC has ordered over $2 billion in sanctions since the inception of the whistleblower program.

The Report outlined other key statistics from FY 2019.  Approximately $60 million was awarded to eight individuals in FY 2019.  Further, the Commission received over 5,200 tips in FY 2019, representing “the second largest number of tips received in a fiscal year.”  The Report noted that from FY 2012 to FY 2019, whistleblower tips to the Commission increased by approximately 74 percent.

The Report also highlighted current trends in whistleblower activity.  International activity was significant, as evidenced by the fact that in FY 2019 individuals from 70 foreign countries submitted whistleblower tips to the Commission.  In FY 2019, three of the whistleblower award recipients “were located abroad, or reported conduct that was occurring abroad, demonstrating the international reach of the program.”  Moreover, several award recipients “reported misconduct that was impacting retail investors, furthering a Commission priority to protect the Main Street investor.”  The Report noted that seven of the eight individuals who received whistleblower awards “reported their concerns to the company.”  Another trending category was cryptocurrencies, which accounted for nearly 300 tips in FY 2019.

The Report underscored the Office of the Whistleblower “continues to view anti-retaliation protections as a high priority to ensure that whistleblowers can report to the Commission without fear of reprisal.”  Similarly, the Report noted the Office of the Whistleblower “continues to work with investigative staff to identify and investigate practices in the use of confidentiality and other kinds of agreements, or engagement in other practices, to interfere with individuals’ abilities to report potential wrongdoing to the Commission.”

As evidenced in the SEC’s Report, the whistleblower program remains in full swing.  Being familiar with the SEC whistleblower program’s activities and priorities can provide valuable information as employers evaluate their policies and procedures.

Who is the Audience for an Internal Investigation Report?

Too often, internal investigators mistakenly conclude that their reports are for the exclusive review of decision-makers.  Sometimes, this may be true.  However, more often than not, there are two audiences of which an investigator should be mindful – a primary audience and a secondary audience.

The primary audience is the immediate recipient(s) of the report.  This can be a manager, a human resources director, the general counsel’s office, the president or chief executive officer, an audit committee, or the board of directors.  This audience is responsible for digesting the report and making business decisions based on the report.

The secondary audience includes third parties that may review the report for any number of reasons, but who are most often assigned to analyze and question the report.  These third parties can be regulatory bodies, government agencies, an opposing attorney, a court, jurors, or external auditors.  The secondary audience is often looking for fault and/or non-compliance.

Both audiences are equally important and neither audience’s role should be ignored by the report’s author.

The primary audience must understand the findings and conclusions in order to make appropriate decisions impacting an organization.  The primary audience should understand what took place, when it took place, and how, if at all, the underlying facts might relate to company policies or the law.  The primary audience must also understand possible options for remedial steps like training, disciplinary action against someone who violated policy, or termination of an employee.

The secondary audience must understand the same issues as the primary audience.  However, the secondary audience must also understand a number of key points important to legal defenses:  (1) the company takes allegations of wrongdoing seriously; (2) it employs measures to address wrongdoing; (3) it responds to allegations of wrongdoing with a prompt and thorough investigation of the facts; (4) it remedies any wrongdoing; (5) it prohibits retaliation; and (6) the company directs and encourages employees and management alike to comply with laws, regulations, and internal policies.

Report authors should avoid the trap of thinking an investigative report will only be reviewed by internal decision-makers.  While the primary, internal audience is important, the secondary audience is often the one analyzing the report for fault, mistakes, misstatements, or other blemishes that may result in company liability.

The Importance of Developing an Investigation Plan

The importance of a prompt and thorough internal investigation is more evident than ever, and an effective investigation plan can protect the company’s interests when reviewing internal complaints.  Consider the following when developing an investigation plan.

Take Necessary Immediate Action: When receiving a complaint, outline the issues involved to determine if there are any necessary immediate action items. Should the company separate the employees involved (e.g., implement schedule changes or a leave of absence, with an eye toward avoiding negative action against the complainant)? Is there threat of imminent harm to an individual? Will the investigation be compromised if the company does not take immediate action?

Review: Review applicable policies (e.g., harassment, work rules, progressive discipline) and company practices related to the outlined issues. Review personnel files and other documents to assess whether there is a history of improper conduct, similar complaints in the past, and information relating to motive or bias.

Identify An Investigator: Who has experience and/or training for this particular complaint? Consider whether the identified investigator is directly or indirectly involved with the complaint. Is the individual a close friend of or in a subordinate position to the complainant or the accused? If yes, the investigator may not be perceived as objective. Will the investigator be an effective witness in future administrative or civil proceedings? Is the investigator knowledgeable of company policies? Depending on the circumstances, assistance from an outside investigator or legal counsel may be necessary. Consider whether there are threats of legal action, serious acts, previous lawsuits by the complainant, or whether the company failed to act on prior known complaints.

Develop An Interview Strategy: At the onset, identify key witnesses, when and where to conduct each interview (off-site, in private, conference room), and prepare a list of questions for each interviewee. Reference the outline of issues to ensure questions are tailored to elicit critical information and details associated with each issue. Anticipate that the witness list may be subject to change as the interviews progress. If necessary, witnesses may also be taken out of order and questions may be modified.

Preserve Evidence: Through the course of an investigation, key documents, files, audio and visual recordings may be identified. Take measures to preserve these sources of information as needed. In light of potential allegations of cyberbullying and harassment, ask an employee if they are willing and able to provide a copy of any purported harassing or discriminatory on-line post or text message. Further, ask the employee to retain the information until otherwise informed. Document such a request in the investigation plan.

With these investigation plan practices in mind, the company may be better prepared to resolve workplace disputes and establish it conducted a reasonable, good faith investigation.

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