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SEC Clarifies Whistleblower Provisions

Author: Scarinci Hollenbeck|August 19, 2015

The Securities and Exchange Commission (SEC) recently published guidance that clarifies who qualifies as a whistleblower under the Dodd-Frank Act.

SEC Clarifies Whistleblower Provisions

The Securities and Exchange Commission (SEC) recently published guidance that clarifies who qualifies as a whistleblower under the Dodd-Frank Act.

The agency elected to clarify its position in the wake of legal disputes over whether an employer must report misconduct directly to the SEC in order to be eligible for the law’s anti-retaliation protections.

Definition of Whistleblower Under Dodd-Frank and SEC Interpretive Rules

Under Dodd-Frank, a “whistleblower” is defined as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the [SEC], in a manner established by rule or regulation, by the [SEC].” A separate provision prohibits an employer from retaliating against any lawful act done by the whistleblower. The qualifying activities set forth in the anti-retaliation provision include providing information to the SEC, participating in SEC actions, and “making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 . . . [the Securities Exchange Act of 1934], section 1513 (e) of title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.”

In an attempt to rectify the ambiguity created when the two provisions are read together, the SEC rules implementing Dodd-Frank also include two definitions of “whistleblower.” Rule 21F-9(a) addresses eligibility for monetary awards, while the requirements for anti-retaliation protections are set forth in Rule 21F-2(b)(1). Rule 21F-9(a) provides, in relevant part, that, “[t]o be considered a whistleblower under Section 21F …, [an individual] must submit [his or her] information … by either of these methods: (1) Online, through the Commission’s website …; or (2) By mailing or faxing a Form TCR … to the SEC Office of the Whistleblower ….” Meanwhile, 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.”

Legal Questions Regarding Who Qualifies as Whistleblower

Despite the SEC’s attempt to clarify the definition of whistleblower, legal disputes have still arisen. In Asadi v. G.E. Energy (USA), LLC, the Fifth Circuit Court of Appeals interpreted the Dodd-Frank provisions to restrict the scope of protection to those who report directly to the SEC. In reaching its decision, the federal appeals court failed to give deference to the SEC’s interpretive rules. However, other courts have reached the opposite conclusion.

The SEC’s interpretive guidance is intended to further clarify the agency’s position. It states that Rule 21F-9(a) is strictly procedural and applies only to help determine an individual’s status as a whistleblower for purposes of Section 21F’s award and confidentiality provisions. As further explained in the guidance:

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. “[W]e have consistently understood Rule 21F-9(a) as a procedural rule that applies only to help determine an individual’s status as a whistleblower for purposes of Section 21F’s award and confidentiality programs.

In support of its position, the SEC highlighted that an alternative approach would be inconsistent with its goals in implementing the whistleblower program. “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 guidance states. “Providing equivalent employment retaliation protection for both situations removes a potentially serious disincentive to internal reporting by employees in appropriate circumstances.”

SEC Clarifies Whistleblower Provisions

Author: Scarinci Hollenbeck

The agency elected to clarify its position in the wake of legal disputes over whether an employer must report misconduct directly to the SEC in order to be eligible for the law’s anti-retaliation protections.

Definition of Whistleblower Under Dodd-Frank and SEC Interpretive Rules

Under Dodd-Frank, a “whistleblower” is defined as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the [SEC], in a manner established by rule or regulation, by the [SEC].” A separate provision prohibits an employer from retaliating against any lawful act done by the whistleblower. The qualifying activities set forth in the anti-retaliation provision include providing information to the SEC, participating in SEC actions, and “making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 . . . [the Securities Exchange Act of 1934], section 1513 (e) of title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.”

In an attempt to rectify the ambiguity created when the two provisions are read together, the SEC rules implementing Dodd-Frank also include two definitions of “whistleblower.” Rule 21F-9(a) addresses eligibility for monetary awards, while the requirements for anti-retaliation protections are set forth in Rule 21F-2(b)(1). Rule 21F-9(a) provides, in relevant part, that, “[t]o be considered a whistleblower under Section 21F …, [an individual] must submit [his or her] information … by either of these methods: (1) Online, through the Commission’s website …; or (2) By mailing or faxing a Form TCR … to the SEC Office of the Whistleblower ….” Meanwhile, 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.”

Legal Questions Regarding Who Qualifies as Whistleblower

Despite the SEC’s attempt to clarify the definition of whistleblower, legal disputes have still arisen. In Asadi v. G.E. Energy (USA), LLC, the Fifth Circuit Court of Appeals interpreted the Dodd-Frank provisions to restrict the scope of protection to those who report directly to the SEC. In reaching its decision, the federal appeals court failed to give deference to the SEC’s interpretive rules. However, other courts have reached the opposite conclusion.

The SEC’s interpretive guidance is intended to further clarify the agency’s position. It states that Rule 21F-9(a) is strictly procedural and applies only to help determine an individual’s status as a whistleblower for purposes of Section 21F’s award and confidentiality provisions. As further explained in the guidance:

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. “[W]e have consistently understood Rule 21F-9(a) as a procedural rule that applies only to help determine an individual’s status as a whistleblower for purposes of Section 21F’s award and confidentiality programs.

In support of its position, the SEC highlighted that an alternative approach would be inconsistent with its goals in implementing the whistleblower program. “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 guidance states. “Providing equivalent employment retaliation protection for both situations removes a potentially serious disincentive to internal reporting by employees in appropriate circumstances.”

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