SEC Supports Protections for Dodd-Frank Whistleblowers Who Report Internally

April 15, 2016
Matthew LaGarde

The U.S. Securities and Exchange Commission (SEC) continues to demonstrate its commitment to providing broad protections to whistleblowers who oppose securities laws violations. Most recently, the SEC moved to file an amicus brief in Danon v. The Vanguard Group, Inc., a Dodd-Frank retaliation claim currently pending before the U.S. District Court for the Eastern District of Pennsylvania. (See Motion of Securities and Exchange Commission for Leave to File Amicus Brief, Danon v. The Vanguard Group, Inc., No. 15-6864 (Mar. 28, 2016).)

The Danon brief will mimic one the SEC filed before the 6th Circuit in February in Verble v. Morgan Stanley Smith Barney, LLC, in which it called for Dodd-Frank protections to extend to whistleblowers report securities violations internally. The SEC’s continued advocacy is critical because it demonstrates to the courts that the agency responsible for implementing the Dodd-Frank Act supports a broad interpretation of the whistleblower protection provision and has supported that interpretation with exhaustive reasoning.

Internal Reporting and Whistleblower Protections

The issue prompting the SEC’s intervention revolves around the scope of the whistleblower protection provision contained in Section 21F of the Dodd-Frank Act, codified at 15 U.S.C. § 78u-6(h). The statute provides that no employer may discriminate against a “whistleblower” because that employee (i) provided a whistleblower tip to the SEC; (ii) participated in an investigation or other action of the SEC relating to such a tip; or (iii) made “disclosures that are required or protected under the Sarbanes-Oxley Act of 2002…and any other law, rule or regulation subject to the jurisdiction of the Commission.” 15 U.S.C. § 78u-6(h)(1)(A).

The Sarbanes-Oxley Act of 2002 (SOX) protects employees of publicly traded companies and their contractors who, among other things, disclose information relating to securities laws and violations to “a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct).” 18 U.S.C. § 1514A(a)(1).

Thus, the Dodd-Frank Act would appear to protect employees who disclose securities violations internally. In a separate section of the statute, however, the Dodd-Frank Act defines “whistleblower”—and remember, the Act purports to protect “whistleblowers” who make reports—as “any individual who provides…information relating to a violation of the securities laws to the Commission[.]” 15 U.S.C. § 78u-6(a)(6). Accordingly, there is a tension between the statutory definition of “whistleblower” and the breadth of protections ostensibly offered by the statute’s anti-retaliation provision.

The SEC quickly recognized this issue, and addressed it in its Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, 75 Fed. Reg. 70488 (Nov. 17, 2010) (“Proposed Rules”), and later in the final rule it issued on enforcing the Act’s whistleblower protection provision. See Securities Whistleblower Incentives and Protections, 75 Fed. Reg. 34300-01 (June 13, 2011).

In the rule, the SEC made clear that:

Section 21F(h)(1)(A)(iii)—which incorporate the anti-retaliation protections specified in Section 806 of the Sarbanes-Oxley Act, 18 U.S.C. 1514A(a)(1)(C)—provides anti-retaliation protections for employees of public companies … when these employees report to … (iii) a person with supervisory authority over the employee or such other person working for the employer who has authority to investigate, discover or terminate misconduct.

Id. at 34304. The SEC has not changed its position since then, and has consistently supported an interpretation of the Dodd-Frank Act in which the anti-retaliation provision is read broadly to include whistleblowers who only report securities laws violations internally.

Defending the Protections for Dodd-Frank Whistleblowers

Since 2011, there have been over 20 decisions (not including controlled district court decisions following circuit court rulings) in which courts have opined on whether Dodd-Frank’s anti-retaliation provision protects internal whistleblowers. At least 16 courts—including the 2nd Circuit Court of Appeals—have determined that it does offer those broad protections, while at least seven courts—including the 5th Circuit Court of Appeals—have come to the opposite conclusion. The SEC has interjected as amicus curiae in several of those decisions and, as the controversy continues, has not stopped applying pressure to courts to adopt its reasonable interpretation of the statute.

In the amicus brief it filed with the 6th Circuit, the SEC provided two “programmatic interests” in a broad reading of the whistleblower protection provision. First, a broad reading of the provision “helps protect individuals who choose to report potential violations internally in the first instance (i.e., before reporting to the Commission) and thus is an important component of the overall design of the whistleblower program.” Id. Second, invalidating the rule would “substantially weaken[]” the SEC’s ability to “pursue enforcement actions against employers that retaliate against individuals who report internally.” Id.

The SEC also provided two business-friendly reasons in support of its position. First, the SEC noted that securities laws “recognize that internal company reporting by employees and others is important for deterring, detecting and stopping unlawful conduct that may harm investors.” Brief of the SEC, Amicus Curiae in Support of the Appellant, Verble v. Morgan Stanley Smith Barney, LLC, No. 15-6397, at 4 (Feb. 4, 2016) (“Verble Brief”). The agency explained that allowing companies to investigate, rectify and/or self-report illegal conduct will save “large expenditures of government and shareholder resources.” Id.

Second, the SEC “carefully calibrated the rules implementing the monetary award component of the whistleblower program to ensure that individuals were not disincentivized from first reporting internally.” Id. at 9. The SEC did this because “allow[ing] a company a reasonable period of time to investigate and respond to potential securities laws violations (or at least begin an investigation) prior to [an individual making a report] to the Commission” is “consistent with the Commission’s efforts to encourage companies to create and implement strong corporate compliance programs.” Proposed Rules at 70516.

A Unique Set of Circumstances in Pennsylvania               

The decision of the Eastern District of Pennsylvania will be particularly important because the whistleblower was an attorney. Under the implementing rules of the Sarbanes-Oxley Act, an attorney may only report securities violations to the SEC in limited situations: “where an attorney reasonably believes it is ‘necessary’ to report to the Commission to prevent a securities law violation that will cause substantial financial injury, or to correct past violations of similar severity where the attorney’s services were used.” Verble Brief at 7 n.8 (citing 17 C.F.R. §205.3(d)(2)). Importantly, the SEC further noted that “even when such disclosure to the Commission is permitted, an attorney will typically need to report internally first in order to satisfy the requirement that disclosure to the Commission may be necessary.” Id. Thus, not only does reporting to the SEC without reporting internally—done so that the whistleblower may avail herself of all possible whistleblower protections—fail to accomplish certain goals of the securities laws, but also attorneys lack even the option of doing so.

The SEC spent much of the brief it submitted to the 6th Circuit—which it has moved to submit unchanged to the Eastern District of Pennsylvania—explaining that the court should defer to its interpretation because the statutory text is ambiguous and the SEC’s interpretation is reasonable. This article does not address the SEC’s (correct and well-reasoned) argument for why its position deserves deference. Instead, this article focuses on why the resolution of this issue is so important.

Dodd-Frank vs. SOX Protections

It is true that, were the courts ultimately to reject the SEC’s interpretation and require whistleblowers to report to the SEC to garner Dodd-Frank protections, many whistleblowers could simply seek refuge under SOX, which unambiguously provides protection to employees of publicly traded companies who report securities violations internally. However, despite amendments to SOX made by the Dodd-Frank Act, there are still significant differences in the quality of protections available to whistleblowers under Dodd-Frank as compared to SOX.

  • First, successful Dodd-Frank litigants are entitled to two-times back pay, while SOX contains no such multiplier.
  • Second, Dodd-Frank complaints may be brought directly in federal court, whereas complaints under SOX must be filed with the Occupational Safety and Health Administration (OSHA) of the Department of Labor (DOL). While the DOL under the Obama Administration has been a strong defender of employee rights, requiring whistleblowers to exhaust their administrative remedies nevertheless imposes a significant additional burden on whistleblowers before they can obtain relief.
  • Third, and perhaps most importantly, the Dodd-Frank Act provides a significantly more generous statute of limitations. While SOX claims must be filed within 180 days, the Dodd-Frank Act allows whistleblowers to file retaliation claims within three years of the time at which they knew or should have known of the retaliatory act.

Whistleblowing Helps Prevent Illegal Activity

Depriving whistleblowers of these significantly augmented protections in the face of the implementing agency’s objections would be a mistake. Whistleblowers take an enormous risk when they decide to oppose illegal activity within their organizations, frequently torpedoing their own careers in the process. Not only is their own company likely to be unreceptive to whistleblowers’ attempts to bring the company into compliance, but to the extent the retaliation they endure does eventually result in the loss of their job, they will often find themselves blacklisted within their industry and unable to find new work.

This risk is reflected in the rewards provided by the SEC Whistleblower Program, but there are any number of reasons that a whistleblower could report securities violations internally for which she chose not to pursue a whistleblower reward. It is imperative that we protect these whistleblowers as well, lest otherwise well-intentioned employees, concerned with their families and their futures, decide that the risk of opposing illegal activity too far outweighs the reward. The culture of silence created by that calculus likely played a role in allowing the financial crisis, provoking the passage of the Dodd-Frank Act.  Limiting the Act’s anti-retaliation provision to only those whistleblowers who report to the SEC would significantly temper its ability to prevent the very crises it was written to prevent.

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