The Current State of SEC Whistleblower Guidance

New guidance from the Securities and Exchange Commission clarifying the scope of anti-retaliation protections under the Dodd-Frank Act could cause just as much headache for compliance programs as it provides reassurance. Prepare to revisit your anti-retaliation policies and procedures.

Issued on Aug. 4, the guidance affirms the SEC’s view that a person is not required to report misconduct to the SEC to qualify for anti-retaliation protections under the Dodd-Frank Act; an employee is protected even if he or she reports misconduct to the compliance officer or through similar internal channels. Reporting to the SEC is only necessary if the person is trying to collect a whistleblower reward or heightened confidentiality protections under the statute.

“Under our interpretation, an individual who reports internally and suffers employment retaliation will be no less protected than an individual who comes immediately to the Commission,” the SEC said in its guidance. “Providing equivalent employment retaliation protection for both situations removes a potentially serious disincentive to internal reporting by employees in appropriate circumstances.”

The guidance comes at a time when district courts across the country continue to grapple with the ambiguity created by Section 21F of the Securities Exchange Act, which governs the scope of anti-retaliation protections (and which the Dodd-Frank Act expanded and enhanced). On one hand, Section 21F(h)(1) prohibits employers from retaliating against employees for disclosing alleged securities law violations. On the other hand, Section 21F also defines a “whistleblower” as “any individual who provides ... information relating to a violation of the securities laws to the Commission.”

“The guidance confirms the view the SEC has taken in several cases in amicus briefs, so the view expressed in the guidance is not a surprise.”
Jason Halper, Partner, Orrick

To resolve this ambiguity, the SEC said it created two separate definitions of “whistleblower”—one for the whistleblower bounty provision, the other for the anti-retaliation provision. “We adopted Rule 21F-9(a) to specify the reporting procedures that must be followed by an individual who seeks to qualify as a whistleblower under Rule 21F-2(a) and, thus, to be eligible for an award and the heightened confidentiality protections,” the SEC said in its guidance.

The definition of a “whistleblower” for purposes of anti-retaliation protections afforded by Section 21F(h)(1), the SEC went on to say, are a different matter. “This definition—unlike the whistleblower definition in Rule 21F-2(a) that applies to the award and confidentiality provisions—does not require reporting in accordance with Rule 21F-9(a)’s procedures,” the SEC said.

Good News vs. Bad News

Until now, the SEC has never taken a formal position on whether a person who discloses potential securities law violations directly to his employer, rather than the SEC, can be afforded protections under the Dodd-Frank Act. “The guidance confirms the view the SEC has taken in several cases in amicus briefs, so the view expressed in the guidance is not a surprise,” says Jason Halper, a partner with the law firm Orrick.

At a cursory level, compliance officers should welcome this position; it prevents a perverse incentive where employees who report wrongdoing to the SEC first get anti-retaliation protection, while those who report to the compliance officer do not. Dig deeper, however, and the situation gets more complicated, because whistleblower protections are governed by two different laws: the Sarbanes-Oxley Act of 2002, and the Dodd-Frank Act of 2010.

Dodd-Frank, for example, allows double back pay for retaliation claims, while SOX provides only for a single back pay award. Dodd-Frank also gives whistleblowers more time (six years) to bring a retaliation claim.

If the courts decide to interpret Dodd-Frank as the SEC just has—which is a big if; more on that momentarily—“then whistleblowers have a stronger financial incentive to bring claims under Dodd-Frank instead of Sarbanes-Oxley,” says Steven Pearlman, a partner at the law firm Proskauer, and co-head of the firm’s whistleblowing and retaliation group. “It means they can recover higher damage awards, which is obviously very troubling for companies.”

The SEC guidance also “threatens to protect undeserving employees,” says Daniel Prywes, a partner with law firm Bryan Cave. Although many employees are legitimate whistleblowers who deserve help, he says, companies also have unhappy employees who make complaints hoping to insulate themselves from discipline or termination. If courts follow the SEC’s lead in granting protection to internal whistleblowers, that makes it “much riskier for employers to discipline or terminate that under-performing employee,” Prywes adds.

From a practical standpoint, that means employers will need to be much more careful and build a much stronger case for disciplining or terminating an employee, “because that person likely will allege retaliation,” Prywes says.

Circuit Split

Now back to the courts. How important the SEC’s guidance will be to companies hinges on how much federal courts apply “Cheveron deference”—the legal principle that courts should defer to an administrative agency’s interpretation of a statute when the law is ambiguous and the agency’s interpretation is reasonable. “If a court were to find that the statutory language is ambiguous, then it’s very likely to follow the SEC’s interpretation,” Prywes says.

SEC’S INTERPRETIVE GUIDANCE

In its interpretive guidance, the SEC cited three main reasons for why it reached the conclusion that it did: 
First, as the text of Rule 21F-2(b)(1)states, “for purposes of Section 21F’s employment retaliation protections, “an individual qualifies as a whistleblower entitled to the employment retaliation protection whenever he or she makes any of the broader array of disclosures specified in Section 21F(h)(1)(A). The fact that Rule 21F-2(b)(1) expressly and specifically applies in the employment retaliation context demonstrates that it should control over Rule 21F-9(a).
Second, Rule 21F-2(b)(1)(iii) expressly provides that “[t]he anti-retaliation protections apply whether or not [an individual] satisf[ies] the requirements, procedures and conditions to qualify for an award.” As Rule 21F-2(a)(2) makes plain, the reporting procedures specified in Rule 21F-9(a) are among the procedures that an individual must follow to recover an award. The contrast between these provisions further supports our interpretation that the availability of employment retaliation protection is not conditioned on an individual’s adherence to the Rule 21F-9(a) procedures.
Finally, our interpretation best comports with our overall goals in implementing the whistleblower program. Specifically, by providing employment retaliation protections for individuals who report internally first to a supervisor, compliance official, or other person working for the company that has authority to investigate, discover, or terminate misconduct, our interpretive rule avoids a two-tiered structure of employment retaliation protection that might discourage some individuals from first reporting internally in appropriate circumstances and, thus, jeopardize the investor-protection and law-enforcement benefits that can result from internal reporting.
Source: SEC.

The first real case to test that theory is pending in the 2nd Circuit Court of Appeals, where the court heard oral arguments in June in the case Berman v. Neo@Ogilvy. The core question before the court is whether Dodd-Frank whistleblower protections apply to individuals who only report internally to their employers about alleged securities law violations as opposed to the SEC. 

The U.S. Chamber of Commerce issued an amicus brief, strongly arguing that whistleblower protections apply only to complaints made to the SEC. The SEC’s interpretation of Dodd-Frank “would greatly expand the number of employees authorized to pursue the enhanced remedies of the Dodd-Frank Act and the period of time in which they may sue for alleged retaliation,” the Chamber said.

The Chamber went on to state that the “carefully delineated procedures established just a few years earlier in the Sarbanes-Oxley Act would become largely moot.” Such an interpretation would deprive companies of the “limitations and protections furnished under that earlier law.”

So far the only other federal circuit court to address the issue is the 5th Circuit Court of Appeals in a case called Asadi v. G.E. Energy. In that case, decided in 2013, the court came down against the SEC, holding that individuals who blow the whistle internally—as opposed to going to the SEC directly—are not entitled to Dodd-Frank whistleblower protections.

If the 2nd Circuit supports the SEC guidance and splits with the 5th Circuit, the issue could go before the U.S. Supreme Court. That may explain why the SEC decided to issue its guidance now, Pearlman says, “to stake out its position.”

It seems “pretty clear” Congress intended for Dodd-Frank protections to apply only to individuals who report alleged securities violations at the SEC level, says William Mateja, a principal in the law firm Fish & Richardson. “I’m going to predict the Supreme Court is going to hear this case.”

Building a Defense

Prywes advises companies to be “much more rigorous” in ensuring that they have good business justification for taking adverse employment action.

They also need to be able to “demonstrate legitimate, non-retaliatory reasons for their termination decisions,” Pearlman says. “They need to be able to show through good documentation and testimony that an employees’ termination, demotion, or adverse employment action was a result of factors that had nothing to do with the protected activity, or that they would have taken the same action regardless of the protected activity.”

Employers need to make sure that they have strong anti-retaliation measures, Pearlman says. That includes creating a speak-up culture and making clear to employees that retaliation is strictly prohibited, he says.

“Whistleblowing is a fact of life now for companies,” Halper says, so it’s more important than ever that companies have procedures in place to respond not only to the whistleblower complaint, but also to the whistleblower, he says.

“Employers should listen to complaints and investigate them, even if they seem far-fetched at first,” Prywes says. Employers also should keep in contact with the employees who reported the complaint, letting them know that an investigation is underway and that the complaint is taken seriously.