The whistleblower and “clawback” provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) raise concerns as to the coverage provided by their directors and officers (D&O) liability insurance programs.
The whistleblower protection provision of Dodd-Frank (Title IX, Subtitle B, Section 922) is especially notable as the provision establishes a potential bounty to individuals reporting “original information” to the Securities and Exchange Commission (SEC) regarding securities violations within their companies. If eligible, such “whistleblowing” activities could yield an award of 10 percent to 30 percent of the monetary sanctions imposed in an action, subject to a minimum sanction of $1 million.
Under Dodd-Frank, employees with information can consider two choices:
• report allegations to their audit committee’s hotline in an attempt to fix the issue; or
• report to the SEC and collect at least 10 percent of $1 million.
Although several experts forecast a torrent of whistleblower activity, the SEC has yet to establish and staff a new office receive, review, and enforce the program.
Dodd-Frank’s compensation “clawback” provision, technically known as “Recovery of Erroneously Awarded Compensation” (Title IX, Subtitle E, Sec. 954), builds on similar provisions established by Sarbanes-Oxley. It requires a company to:
• disclose of its policies on incentive-based compensation based on financial information that is required to be reported under the securities laws;
• establish a policy to recover (claw back) from any current or former executive any amount of incentive-based compensation paid to that exceeds the amount that would have been paid under an accounting restatement in the three years prior to the date on which the company was required to prepare the restatement.
Failure to comply with the “clawback” provisions could result in a de-listing from its exchange.
Given the potential of the whistleblower and “clawback” provisions of Dodd-Frank, policyholders and brokers need to pay particular attention to D&O policies' insured versus insured exclusion, personal conduct exclusions, the definition of loss, and investigation coverage, among others.