SEC Whistleblower Reform Law Would Strengthen Protections for SEC Whistleblowers
Congressman Al Green, Chair of the House Financial Services Committee Subcommittee on Oversight and Investigations, has introduced the Whistleblower Protection Reform Act of 2021 (WPRA), which would strengthen protections for SEC whistleblowers and enhance the SEC Whistleblower Program. The WPRA is being introduced the same week that Ms. Frances Haugen, a former Facebook product manager, testified at a Senate hearing about Facebook business practices that pose a threat to public health and safety and potentially mislead Facebook shareholders.
Ms. Haugen’s disclosures have already had a tremendous impact and may finally spur Congress to regulate social media companies and enact federal privacy legislation. Her courageous whistleblowing is but one example of the tremendous impact that truth-tellers can have when they oppose and expose wrongdoing.
Since the inception of the Dodd-Frank Act (DFA) SEC Whistleblower Program, more than 40,000 whistleblowers have filed tips with the SEC. Those tips have enabled the SEC to obtain orders against wrongdoers for more than $4.8 billion in monetary sanctions, halt ongoing fraud schemes, return funds to defrauded investors, and significantly improved the SEC’s ability to detect and halt ongoing violations of the federal securities laws. Surely the courageous truth-tellers that come forward deserve credible protection against retaliation. Indeed, former SEC Chair Jay Clayton recognized in a statement about proposed amendments to the SEC whistleblower rules that “retaliation protections are a key component of the whistleblower program.” Similarly, former Chair Mary Jo White noted in a speech titled The SEC as the Whistleblower’s Advocate that “[s]trong enforcement of the anti-retaliation protections is critical to the success of the SEC’s whistleblower program.” The WPRA would afford SEC whistleblowers genuine protection against retaliation.
Rep. Green introduced a similar bill in the 116th Congress (the Whistleblower Protection Reform Act of 2019, H.R. 2515) and the House enacted it by an overwhelming bipartisan majority of 410-12 in July 2019. Unfortunately, a bipartisan Senate companion bill (Whistleblower Programs Improvement Act, S. 2529) sponsored by Senators Grassley, Baldwin, Durbin, and Ernst during the 116th Congress did not proceed to a vote. If Congress is serious about protecting Ms. Haugens and other whistleblowers that report potential violations of the federal securities laws to the SEC or Congress, then it should promptly enact the WPRA. Failing to provide credible protection against retaliation will dissuade whistleblowers from coming forward. And protecting internal whistleblowing (a primary objective of the WPRA) would benefit publicly traded companies and other SEC registrants by providing an early warning of fraud and an opportunity to investigate and remedy fraud and other violations of securities laws.
Strengthening the Whistleblower Protection Provision of the Dodd-Frank Act
The WPRA would clarify that internal disclosures are protected under the whistleblower protection provision of the DFA. In the wake of the Supreme Court’s ruling in Digital Realty, Inc. v. Somers, DFA whistleblower protection is limited to whistleblowers that have reported a potential violation of the federal securities laws to the SEC (internal disclosures are not protected unless the whistleblower has also disclosed the violation to the SEC prior to suffering retaliation).
Digital Realty’s narrowing of Dodd-Frank whistleblower protection was precipitated by a drafting error in the DFA. The WPRA corrects this error by adding a separate definition of “whistleblower” for the anti-retaliation provision:
Solely for the purposes of subsection (h)(1), the term ‘whistleblower’ shall also include any individual who takes an action described in subsection (h)(1)(A), or two or more individuals acting jointly who take an action described in subsection (h)(1)(A), including as part of the job duties of such individual or individuals.
The WPRA further effectuates Congressional intent in enacting the DFA by clarifying that a whistleblower is protected against retaliation for providing information “regarding any conduct that has occurred, is ongoing, or is about to occur that the whistleblower reasonably believes constitutes a violation of any law, rule, or regulation subject to the jurisdiction of the Commission” to:
(I) a person with supervisory authority over the whistleblower at the whistleblower’s employer, where such employer is an entity registered with or required to be registered with the Commission, a self-regulatory organization, or a State securities commission or office performing like functions; or
(II) such other person working for the employer described under subclause (I) who has the authority to investigate, discover, or terminate misconduct.
In other words, the WPRA would bring internal disclosures within the ambit of protected conduct, which is consistent with most federal whistleblower protection laws.
Post-Digital Realty, companies regulated by the SEC have been concerned that whistleblowers will report fraud directly to the SEC rather than reporting internally, i.e., they will bypass corporate compliance programs to raise their concerns with the SEC. As the WPRA would encourage internal whistleblowing, companies should support the WPRA. In an amicus curiae brief that was filed in Digital Realty, Senator Grassley noted that “the testimony to Congress suggests that members of the business community, while advocating for internal reporting requirements, assumed or took for granted that Dodd-Frank’s anti-retaliation provisions apply to internal whistleblowers” and that “the business community  successfully lobbied the SEC to adopt rules favoring internal reporting.” Brief for Senator Charles Grassley as Amicus Curiae, 2, Digital Realty Trust, Inc. v. Paul Somers, No. 16-1276 (U.S. Supreme Court, 2018), available at https://bit.ly/2UXMyy5. Companies that seek to encourage internal reporting should support the WPRA.
In addition to expanding DFA protected conduct to encompass internal whistleblowing, the WPRA would amend various aspects of the DFA whistleblower protection provision to conform to the common features of most modern federal whistleblower protection laws, such as the anti-retaliation provisions of the Taxpayer First Act and Anti-Money Laundering Act.
Clarifying the Burden of Proof
Subsequent to the enactment of the Dodd-Frank Act, the Supreme Court’s decision in Univ. of Tex. Sw. Med. Ctr. v. Nassar, 570 U.S. 338 (2013) elevated the burden of proof in DFA whistleblower cases to “but-for” causation. Imposing this onerous causation burden on DFA retaliation plaintiffs dissuades employees from engaging in protected conduct because the remedy to combat retaliation is weak.
In contrast to the DFA, most of the federal whistleblower protection laws enacted since 1989 employ a “contributing factor” causation standard. The WPRA would employ “contributing factor” causation in DFA retaliation cases, i.e., a whistleblower would prevail “upon a showing that protected conduct was a contributing factor in the unfavorable personnel action alleged in the complaint.” Contributing factor causation would be established by showing that the decision-maker knew of the protected conduct and took the retaliatory action “within a period of time such that a reasonable person could conclude that the protected conduct engaged in by the whistleblower was a contributing factor in the personnel action.” In other words, knowledge and close temporal proximity would suffice to prove causation.
Prohibiting Post-Employment Retaliation
The WPRA would clarify that the DFA prohibits post-employment retaliation against a whistleblower. As many SEC whistleblowers cooperate with SEC investigations and enforcement actions years after they are no longer employed by the company whose misconduct they reported, it is critical to provide robust protection against retaliation post-employment. Indeed, Ms. Haugens reported her concerns to the SEC and Congress after she resigned from her position at Facebook.
Failing to prohibit post-employment retaliation could give an SEC whistleblower’s former employer free rein to retaliate against and intimidate the whistleblower to try to dissuade the whistleblower from further cooperating with an SEC investigation or testifying in a judicial or administrative action stemming from the whistleblower’s disclosure. Moreover, as documented in an article titled Whistleblowers Need Not Apply, whistleblower job applicants that confront blacklisting lack an adequate remedy to combat this pernicious form of retaliation. Often, the “negative trail follows whistleblowers, labeling them as disloyal, suspicious, and, ultimately, not ideal employees, and, thus, unable to find work.”
Clarifying that the DFA prohibits post-employment retaliation is important in light of some decisions construing the False Claims Act’s analogous whistleblower provision to exclude relief for retaliatory acts occurring post-employment. See, e.g., Potts v. Ctr. for Excellence in Higher Educ., Inc., 908 F.3d 610, 618 (10th Cir. 2018); Fitzsimmons v. Cardiology Assocs. of Fredericksburg, Ltd., Civil Action No. 3:15CV72, 2015 WL 4937461, at *7 (E.D. Va. Aug. 18, 2015). Fortunately, a well-reasoned recent Sixth Circuit decision rejects the Tenth Circuit’s erroneous construction of the scope of FCA whistleblower protection. See United States ex rel. Felten v. William Beaumont Hosp., 993 F.3d 428 (6th Cir. 2021). But in light of the circuit split on this issue, the WPRA would provide important clarification that the DFA prohibits prohibit post-employment retaliation.
Authorizing Compensatory Damages
Unlike nearly all whistleblower protection laws, the DFA does not authorize compensatory damages, i.e., damages for emotional distress and reputational harm. If a whistleblower suffers harassment or a hostile work environment without suffering economic damages (lost wages), the whistleblower could not recover damages in a DFA retaliation action. The WPRA fixes this significant deficiency by authorizing prevailing whistleblowers to recover compensatory damages (in addition to economic damages and attorneys’ fees).
Clarifying that Oral Disclosures Are Protected
In what appears to have been a solution in search of a problem, the SEC amended Exchange Act Rule 21F-2(a) in September 2020 to limit protected whistleblowing under the DFA anti-retaliation provision to written disclosures (oral whistleblowing, such as statements made to SEC Staff during an interview, are not protected). This interpretation is contrary to the plain meaning of the DFA. Indeed, the second form of protected conduct set forth in the whistleblower protection provision of the DFA – “initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission” – contemplates protection for oral disclosures. The writing requirement is also a significant departure from a well-developed body of precedent construing similar whistleblower protection laws.
Moreover, excluding oral disclosures from the ambit of DFA whistleblower protection is inconsistent with the remedial purpose of the statute (providing robust protection to whistleblowers) and the SEC’s interest in encouraging whistleblowers to come forward. If a whistleblower cooperates with an SEC investigation by providing important information during an interview with SEC staff without also documenting that information in a written submission, the SEC would apparently look the other way if the whistleblower suffers retaliation due to their cooperation with an SEC investigation. That is an odd position for a civil law enforcement agency that has a strong interest in ensuring that employees of registrants and other entities subject to SEC jurisdiction can testify without fear of reprisal.
The WPRA clarifies that both oral and written reporting to the SEC are protected.
Authorizing Jury Trials
The WPRA clarifies that DFA authorizes a trial by jury and that DFA whistleblower retaliation claims are not subject to mandatory arbitration.
Eliminating the “Duty Speech” Loophole
The WPRA eliminates the “duty speech” loophole by clarifying that whistleblowing is protected when it occurs in the course of the whistleblower performing their job duties. This clarification is important because some judges are willing to modify whistleblower protection laws to create a “duty speech” loophole requiring a whistleblower to overcome the presumption that they are merely acting in accordance with their employment obligations or job duties. See, e.g., Yuhasz v. Brush Wellman, Inc., 341 F.3d 559, 568 (6th Cir.2003) (denying whistleblower protection where the plaintiff was “simply performing his ordinary duties” when he told his employer that certifications were illegal and that other companies had incurred FCA liability for similar acts); United States ex rel. Ramseyer v. Century Healthcare Corp., 90 F.3d 1514, 1522-23 (10th Cir.1996) (finding no notice where plaintiff regularly communicated with her superiors about noncompliance as part of her job responsibilities).
A Tenth Circuit decision adopting a broad duty speech loophole essentially excludes from the ambit of False Claims Act whistleblower protection any employee working in a compliance role. See United States ex rel. Reed v. KeyPoint Government Solutions, 2019 WL 1907853 (10th Cir. Apr. 30, 2019). To avoid a judicial amendment of the DFA whistleblower protection provision that would exclude compliance personnel from the ambit of the statute, it is important to clarify that “duty speech” whistleblowing is protected.
Strengthening the SEC Whistleblower Reward Program
The WPRA would also strengthen several aspects of the SEC Whistleblower Program:
Clarifying the Scope of Monetary Sanctions on Which a Whistleblower Award Can be Based
A September 2020 amendment to the rules governing the SEC Whistleblower Program clarifies that the SEC pays awards based on collected monetary sanctions from deferred prosecution agreements and non-prosecution agreements entered into by the Department of Justice or a settlement agreement entered into by the SEC to settle a covered judicial or administrative proceeding. As discussed in the adopting release, this interpretation is consistent with the DFA. To avoid any ambiguity, the WPRA amends the DFA to reflect the SEC’s interpretation of the scope of monetary sanctions on which a whistleblower award can be based.
Significantly, the WPRA would authorize the payment of awards from “any monies recovered by a bankruptcy trustee as a result of the original information provided by a whistleblower.” That change would address a significant weakness in the SEC Whistleblower Program – recoveries from bankruptcy proceedings are not deemed collected monetary sanctions that qualify for a whistleblower award. As Harry Markopolos points out in a September 14, 2018 comment letter to the SEC,
It is important for corporate whistleblowers to know they will be rewarded for turning in their company even if exposing the fraud ends up bankrupting the company. Accounting fraud is a scourge that raises the cost of capital for every honest company that keeps an accurate set of books. The Commission needs to make clear that the whistleblower program rewards accountants who come in and expose cooked books. A real-world example is WorldCom, where the company’s Chief Audit Executive, Cynthia Cooper, turned whistleblower, sending WorldCom spiraling into bankruptcy.
The bankruptcy loophole in the SEC Whistleblower Program is highlighted in a recent Wall Street Journal article titled Whistleblower Thought He Would Get a Big Payout. Instead He Got Nothing and Went Broke, The Wall Street Journal (June 27, 2021). Mr. John McPherson provided “extraordinary and continuing” assistance in helping the SEC shut down an alleged $1.4 billion investment scam but because the target company declared bankruptcy and the SEC never collected financial penalties it was owed, McPherson did not receive a whistleblower award. Investors, however, were able to recoup more than $1 billion through the bankruptcy process.
Funding the SEC Office of the Whistleblower
The SEC Office of the Whistleblower (OWB) is funded from the budget of the Division of Enforcement, the “cop on the beat” enforcing federal securities laws with inadequate resources. But each year, the number of whistleblower tips increases significantly. For example, the OWB received 6,911 whistleblower tips during FY 2020, which represents a nearly 31% increase over the number of tips it received in FY 2018.
Diverting limited resources from the understaffed “cop on the beat” to fund the OWB is not a viable option. As the SEC states in a recent budget justification, “maintaining a vigorous program to deter misconduct and punish securities law violators is critical to protecting investors and promoting confidence in the integrity of our markets.” But Congress can enable the OWB to increase its staffing without using taxpayer dollars by permitting the OWB to fund its operations from the Investor Protection Fund (IPF). The IPF is financed entirely through monetary sanctions paid to the SEC by securities law violators and is used to pay whistleblower awards. No money is taken or withheld from harmed investors to pay whistleblower awards. Increasing the budget of the OWB without using taxpayer dollars is an innovative solution to enable the OWB to address a staffing shortage.
Requiring Timely Processing of Whistleblower Award Applications
When the SEC takes an enforcement action based on a whistleblower’s disclosures, the SEC does not simultaneously pay an award to the whistleblower. Instead, the whistleblower must submit an application for an award within 90 calendar days of the SEC posting the action on its Notices of Covered Action page. It currently takes the OWB about 2 to 3 years to review an application for an award and make a determination about whether the whistleblower will receive an award and the amount of the potential award (ranging from 10 to 30% of the total monetary sanctions collected). As SEC investigations often last 2 to 4 years prior to the SEC taking an enforcement action, it can take nearly a decade from the filing of a Form TCR until the whistleblower finds out if they will receive an award.
The WPRA would require the SEC to issue an initial award determination within one year of the deadline to apply for an award. Recognizing the challenges that the SEC faces in making complex determinations concerning applications for whistleblower awards, the WPRA permits extensions of that deadline in certain circumstances. This requirement is substantially similar to a provision in the Whistleblower Programs Improvement Act (S. 2529) that was introduced in the 116th Congress.
Nullifying September 2020 Rule Restricting Awards for Related Actions
In August 2020, SEC Chair Gensler suspended the implementation of a September 2020 amendment to the SEC whistleblower rules that precludes the SEC in some instances from making an award in related enforcement actions brought by other law-enforcement and regulatory authorities if a second, alternative whistleblower award program might also apply to the action. The WPRA would clarify that when the SEC determines whether to pay an award to a whistleblower in a related action, the SEC may not consider whether another whistleblower reward program has a more direct or relevant connection to such related action based on information provided by such whistleblower.
Avoiding Arbitrary Reductions of Whistleblower Awards
The September 2020 amendments to the SEC whistleblower rules suggest that the SEC can arbitrarily reduce a whistleblower award if it determines that an award would be larger than reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers to come forward. Arbitrarily reducing the dollar value of an award creates uncertainty, thereby discouraging prospective whistleblowers from reporting fraud to the SEC.
Congress set forth in the DFA criteria for the SEC to employ to determine award percentage and did not include in the criteria any direction to arbitrarily reduce awards that would be large in absolute terms. Due to a well-founded concern about dissuading whistleblowers from coming forward, Chair Gensler has suspended implementation of this aspect of the September 2020 SEC whistleblower rule amendments.
The WPRA clarifies that when the SEC determines a whistleblower award (ranging from 10 to 30% of the total monetary sanctions collected), the SEC will not lower an award based on its dollar amount.