United States: SEC Continues Its Efforts To Make Dodd-Frank Whistleblowing Easier

Last Updated: August 17 2015
Article by Edward T. Ellis, Kevin E. Griffith and Alexa J. Laborda Nelson

The Securities and Exchange Commission (SEC) recently issued interpretative guidance intended to advance the agency's position that a whistleblower is entitled to the anti-retaliation protections of the Dodd-Frank Wall Street Reform and Consumer Protection Act after making an internal complaint regarding possible securities law violations, even if the individual does not report directly to the SEC. The SEC's interpretation comes as no surprise, as it has taken this litigation stance since issuing its first Dodd-Frank regulation in 2011. The release of an official agency interpretation on August 4, 2015 may be the SEC's attempt to convince the courts to adopt its view. If the courts do, internal whistleblowers would have the benefit of Dodd-Frank's procedural process and remedies in addition to those under the Sarbanes-Oxley Act of 2002 (SOX).

The Basis for the SEC's Interpretation

The SEC admits the scope of the employment retaliation provision in Dodd-Frank is ambiguous. The Act unambiguously defines "whistleblower" as "any individual who provides... information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission."1 Such whistleblowers can be awarded a "bounty" of 10% to 30% of the monetary sanction the SEC obtains using the information in a successful enforcement action if the information is "original" (as interpreted by the SEC) and the sanction exceeds $1 million.

But, as the SEC also notes, the Act later includes a "prohibition against retaliation" that the SEC refers to as a "catchall provision." The SEC argues that this prohibition protects not only whistleblowers who provide information to the Commission, but also whistleblowers who make "disclosures that are protected under the Sarbanes-Oxley Act of 2002... and any other law, rule, or regulation subject to the jurisdiction of the Commission."2 The SEC's view is that, because SOX protects internal reporting, this "catchall" language was intended to extend Dodd-Frank's workplace retaliation protection to individuals who internally report violations of the Securities Exchange Act or the SEC's rules. Since the "catchall" anti-retaliation provision applies expressly to workplace retaliation, the SEC argues it should supplement the specific definition of "whistleblower," adding another layer of protection for employees who complain internally.

Finally, ignoring the existence of SOX, the SEC reasons that protecting employees who only report externally to the SEC, and not those who report internally, would have a chilling effect on the remedial purposes behind Dodd-Frank of uncovering, stopping and penalizing SEC violations and internal corporate fraud. Under the SEC's interpretation, employees are provided equal employment retaliation protection both for internal and external reporting.

The Counterargument

Some courts have taken the position that the SEC's interpretation is not supported by the plain text of Dodd-Frank. For instance, the SEC's interpretation is directly at odds with a decision issued by the U.S. Court of Appeals for the Fifth Circuit and other lower court decisions, which have examined the Act and held that Dodd-Frank's whistleblower protections do not apply unless the employee has provided information directly to the SEC. Not surprisingly, the SEC views these interpretations negatively and is working hard to advance its own interpretation, which has also been embraced by some courts.

In short, courts are split on whether Dodd-Frank requires employees to report externally to the SEC in order to garner anti-retaliation workplace protection. The SEC's new interpretive guidance affirms the SEC's expansive reading of the Act to include internal whistleblowers within Dodd-Frank's anti-retaliation protections.

The Implications of the SEC's Interpretation

Dodd-Frank protection would make some of the relief available that is not available to a prevailing whistleblower in a retaliation action brought under SOX. For instance, while Dodd-Frank's remedies are similar to those available under SOX, Dodd- Frank also allows for recovery of double the amount of back pay lost. The procedure for initiating a Dodd-Frank claim also differs from that under SOX as it does not require a whistleblower to initiate a claim with the Department of Labor, and provides a longer statute of limitations.

Will Courts Adopt the SEC's Interpretation?

Federal agency regulations, interpretations, and other pronouncements, such as litigation postures, are afforded different levels of deference by the courts. For example, an agency action that requires notice and comment, such as a rule, may have the force of law under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.3 Under the Chevron deference doctrine, the SEC's interpretation could alter how courts view Dodd-Frank's whistleblower protections. While the Securities Exchange Act and Dodd-Frank Act give the SEC rulemaking power, nothing in the Chevron deference doctrine gives the SEC the right to interpret the statute beyond its plain language. To earn Chevron deference from the courts, the SEC's interpretation must be based on a permissible reading of the Act's plain language. That means that the SEC's interpretation as formally published in the Federal Register is really just an enhancement of its litigation position.

An agency's interpretive rule is afforded a lower level of deference under Skidmore v. Swift & Co.,4 in which a court uses a number of factors to evaluate an agency's "power to persuade." The question then becomes: what level of deference, if any, should the courts give to the SEC's interpretative guidance? Chevron, Skidmore, or one of the other types of deference the U.S. Supreme Court has developed over the years?

Looking Forward

It appears that the SEC hopes its interpretation will influence court assessments of the scope of Dodd-Frank retaliation claims. The SEC has already petitioned the U.S. District Court for the Northern District of California for permission to file an amicus brief in response to an employer's Motion to Dismiss a former employee's Dodd-Frank retaliation claim. The brief the SEC seeks to file is the same as one it previously filed. This time, however, the SEC's motion highlights its recent interpretative guidance. In support of its motion, the SEC argues that, as the federal agency charged with administering Dodd-Frank, the SEC is best positioned to assist the trial court with its interpretation of Dodd-Frank and whether the Act protects internal whistleblowing. Amicus briefs at the trial level are extremely rare, so the Northern District of California must determine whether to accept the SEC's offer of assistance.

Should the split among the federal district courts and circuit courts of appeal regarding the scope of Dodd-Frank's anti-retaliation protections continue to expand, the issue could wind up before the U.S. Supreme Court. While this plays out in the courts, publicly traded companies covered by Dodd-Frank should be aware of the SEC's clear and unmistakable insistence on an enlarged definition of "whistleblower" and continue to be vigilant with their anti-retaliation policies and practices.

Footnotes

1 See 15 U.S.C. § 78u-6(a)(6).

2  See 15 U.S.C. § 78u-6(h)(1)(A)(iii).

3  467 U.S. 837 (1984).

4  323 U.S. 134 (1944).

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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Authors
Edward T. Ellis
Kevin E. Griffith
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