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SEC Exposes Teeth of Dodd-Frank Whistleblower Rules

Authors: Robert L. Hickok and Gay Parks Rainville


Reprinted with permission from the March 4, 2014 issue of The Legal Intelligencer. © 2014 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

In recent months, the U.S. Securities and Exchange Commission (SEC) has proactively reassured investors that it is enforcing its rules that implement the "Securities Whistleblower Incentives and Protection" provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, set forth in Section 21F of the Securities Exchange Act of 1934. On Oct. 1, 2013, the SEC announced that it had issued an award of more than $14 million to a whistleblower whose information led to a successful enforcement action. The SEC's 2013 Annual Report to Congress advised, inter alia, that the SEC's Office of the Whistleblower (OWB) was actively coordinating with its Enforcement Division staff to "identify matters where employers may have taken retaliatory measures against individuals who reported potential securities law violations or have utilized confidentiality, severance, or other agreements in an effort to prohibit their employees from voicing concerns about potential wrongdoing."

On Feb. 20, the SEC filed an amicus brief in a case pending in the U.S. Court of Appeals for the Second Circuit, Liu v. Siemens A.G., (No. 13-4385), to make clear that, under its rules, the term "whistleblower" includes individuals who report alleged wrongdoing through a company's internal reporting system as well as individuals who report to the SEC itself. The SEC's brief follows on the heels of the Fifth Circuit's recent ruling in Asadi v. GE Energy (USA) LLC, 720 F.3d 620, 625 (5th Cir. 2013), which rejected the SEC's broad definition of "whistleblower" and held instead that the "plain language and structure" of the Dodd-Frank Act establishes "only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC." If the Second Circuit defers to the SEC's interpretation of "whistleblower," then its decision will create a split among the circuits.

Statutory and Regulatory Context

Enacted in 2010, the Securities Whistleblower Incentives and Protection provisions of Dodd-Frank offer powerful financial incentives to employees and other potential whistleblowers to report directly to the SEC suspected violations of the federal securities laws by public companies and/or their subsidiaries. The act directs the SEC to pay awards, subject to certain limitations and conditions, to any one or more whistleblowers who "voluntarily" provide the SEC with "original information" about a violation of the securities laws that leads to a "successful enforcement" action resulting in monetary sanctions exceeding $1 million. Section 21F further requires that an eligible whistleblower receive an award equal to 10 to 30 percent of the total monetary sanctions imposed in the SEC action or related actions. Section 21F also protects employee-whistleblowers from retaliation for disclosing such information to the SEC or for making reports required or protected under Sarbanes-Oxley or the Exchange Act. Specifically, Section 21F prohibits employers from firing, demoting or discriminating against a whistleblower "because of any lawful act done by the whistleblower" in:

  • Providing information to the SEC in accordance with the Dodd-Frank whistleblower provisions.
  • Assisting in any SEC investigation or judicial or administrative action based upon or related to such information.
  • "In making disclosures that are required or protected under" various federal securities laws, including the Sarbanes-Oxley Act.

In May 2011, the SEC adopted final rules implementing Section 21F, which incorporated the following economic incentives to encourage employee-whistleblowers to report possible securities law violations to their companies before contacting the SEC:

  • Giving whistleblower credit to an employee who reports original information internally—regardless of whether the employee reports the information to the SEC—if his or her company passes the information to the SEC; and attributing any additional information to the employee that the company may gather from an internal investigation initiated by the employee's internal report.
  • Allowing (but not requiring) the SEC to consider a whistleblower's participation in (or interference with) a company's internal compliance system when determining the amount of his or her award.
  • Extending the "look back" time period from 90 days to 120 days for a whistleblower to report to the SEC after making an internal report and still be treated as though he or she had reported to the SEC as of the earlier date.

In addition, the SEC's Section 21F rules sought to clarify an ambiguity in the Dodd-Frank anti-retaliatory protections by providing that an employee is a "whistleblower" if he or she "provide[s] the information" in the manner delineated above, including the third category, (iii) "in making disclosures that are required or protected under" various federal securities laws. It is this category of protected whistleblower activity, set forth in Section 21F(h)(1)(A)(iii) of the Exchange Act, that is at the heart of the conflict between the Fifth Circuit's decision in Asadi and the position the SEC articulates in its amicus brief in Liu.

Whether 'Whistleblower' Includes Internal Reporters

In July 2013, the Fifth Circuit held in Asadi that Section 21F creates a private right of action only for individuals who provide information relating to a violation of the securities laws to the SEC, rejecting contrary rulings by several district courts in other circuits as well as the SEC's Section 21F rule that extends Dodd-Frank's whistleblower protections to individuals who report internally to their employers and not to the SEC.

In Liu, the lower court dismissed the plaintiff's retaliation suit on grounds that Section 21F does not protect overseas employees from retaliation. The court refrained from deciding whether the plaintiff was also ineligible because he did not report the alleged securities laws violation to the SEC after his employment ended. Nonetheless, the SEC squarely addresses this issue in its amicus brief.

The SEC argues in that brief that its interpretation of Section 21F is entitled to deference under Chevron U.S.A. v. Natural Resources Defense Council, 467 U.S. 837 (1984), which applies the following two-step analysis: First, the court must consider "whether there is an 'unambiguously expressed intent of Congress' on 'the precise question at issue'"; second, the court must determine "whether the agency's interpretation is reasonable, which means the interpretation is rational and not inconsistent with the statute." The SEC goes on to answer the first question in the negative by explaining that "Congress did not unambiguously limit employment anti-retaliation protections in Section 21F(h)(1) to only those individuals who provide the commission with information relating to a securities law violation." The SEC's brief explains that "there is ambiguity on this issue given the considerable tension between clause (iii) of Section 21F(h)(1)(A), which ... lists a broad array of whistleblowing activity to entities and persons other than just the commission, and Section 21F(a)(6), which defines 'whistleblower.'" The brief goes on to explain that the SEC's interpretation of "whistleblower" as including those employees who make clause (iii) disclosures "that are required or protected under" various federal securities laws is reasonable because it (1) "resolves the statutory ambiguity in a manner that effectuates the broad employment anti-retaliation protections that clause (iii) contemplates"; (2) "avoid[s] disincentivizing individuals from reporting internally first in appropriate circumstances"; and (3) "enhances the commission's ability to bring enforcement actions when employers take adverse employment actions against employees for reporting securities law violations internally."

Unsettled Law

Given the unsettled law on this issue, companies should assume that Section 21F's anti-retaliation provisions do apply to employees who report possible securities laws violations internally but not to the SEC. They also must continue to maintain and implement a strong internal compliance and reporting program and reassure employees that internal reports of possible wrongdoing will be taken seriously and will not result in retaliation.

Robert L. Hickok and Gay Parks Rainville

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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