United States: Final Dodd-Frank Rules Confirm Whistleblower Protections

Last Updated: June 16 2011
Article by Paul R. Monsees

On May 25, 2011, the SEC issued final rules (http://tinyurl.com/42xxwqm) to clarify certain whistleblower provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (http://tinyurl.com/3kxwrnl). The key feature of the Act, enacted in July 2010, was to create a bounty or reward program that was designed to dramatically increase the number and quality of tips reported to the SEC about possible securities law violations. The Act also included protections for employees against retaliation for reporting information to the SEC. For example, the Act permits an employee to sue in court, rather than to pursue relief before the Department of Labor, and the suit can be filed up to six or, in some circumstances, 10 years later. Relief also can include double back pay. The SEC also reserved authority to address retaliation claims. Much like the whistleblower protections incorporated into other federal statutes in recent years, Dodd-Frank is expected to lead to a significant increase in the number and complexity of retaliation claims for employers.

Under Dodd-Frank, a person deemed a whistleblower may be eligible for a reward if he or she voluntarily submits "original information" to the SEC that leads to a successful SEC enforcement action. If the SEC recovers more than $1 million, the whistleblower is entitled to between 10 percent – 30 percent of the recovered sanctions. The new SEC rules offer significant detail about what constitutes a voluntary submission, original information, what counts toward the $1 million threshold for recovery, and other issues.

Anti-retaliation protections are applicable, even if someone who reports information is not eligible to receive a bounty. The SEC final rule provides that "the anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award." In other words, the standard is different for determining whether one is a whistleblower entitled to protection from retaliation or a whistleblower entitled to collect a bounty. The principal test for the retaliation provision is whether the person has a "reasonable belief that the information he is providing relates to a possible securities law violation ... that has occurred, is ongoing, or is about to occur." The "reasonable belief" standard will have both a subjective and an objective component: Does the employee "hold a subjectively genuine belief that the information demonstrates a possible violation, and that this belief is one that a similarly situated employee might reasonably possess?"

While whistleblower eligibility to receive a share of SEC sanctions will be determined at the end of an SEC enforcement action, protection from retaliation will be examined as of the time information about possible securities violations is reported.

The Dodd-Frank whistleblower protections bring further focus to the evolving law of retaliation and the difficulties that employers may face when addressing retaliation claims. For example, how will an employer conclude whether or not an employee held a "subjectively genuine belief" and whether the belief is one that another similarly situated employee "might reasonably possess"? How certain will they be that a court will agree with that assessment six or more years later?

Additional issues will arise based upon cases decided by the United States Supreme Court. For example, as we reported in our Legal News: Employment Law Update (January 31, 2011) (http://tinyurl.com/68h3tgt), the Supreme Court approved an "associational retaliation" claim, holding that the fiancé of an employee who filed a discrimination claim could proceed with his own retaliation claim that he was fired because of his fiancée's complaint. The fired fiancée in Thompson v. North American Stainless, LP (http://tinyurl.com/4p5mu8z) was determined to be "within the zone of interests" protected by Title VII. The SEC's goal in enacting the bounty and anti-retaliation provisions is to encourage the reporting of potential violations to aid in SEC enforcement efforts. There is little doubt that if someone with a very close relationship to a whistleblower is retaliated against, a court will rely on the "zone of interests" concept to similarly protect the victim of whistleblower retaliation. This issue could be especially troubling if the employer is not certain who the whistleblower is since the employee can bypass internal reporting requirements.

Other difficult questions will include what conduct actually constitutes retaliation. The Supreme Court has suggested, for example, that an employee who is excluded from an activity that is important for professional advancement could be a victim of retaliation.

We previously addressed the steps employees can take to help minimize the risk of retaliation claims, such as to ensure supervisors are trained on how to respond to a claim and to recognize conduct that could be deemed retaliatory. (See Legal News: Employment Law Update (April 11, 2011) (http://tinyurl.com/3oajb3o)). Maintaining clear records about performance reviews, salary adjustments, and disciplinary actions and the non-retaliatory reasons for them also will be essential since a claim might not be asserted for many years.

We will follow how the courts deal with the many issues presented by the Dodd-Frank Act and will report about further developments in future editions of Legal News: Employment Law Update.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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