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Update on SEC’s Interpretative Guidance for Whistleblower Retaliation Protections

In August 2015, the SEC issued interpretative guidance to clarify that an individual’s status as a whistleblower for purposes of the employment retaliation protections provided by Dodd-Frank does not require that the whistleblower report potential violations to the SEC.

Since its legislative rulemaking in 2011, the SEC has taken the position that individuals may qualify as whistleblowers entitled to Dodd-Frank’s employment-retaliation provisions, even if they do not report potential misconduct to the SEC.  In its rulemaking, the SEC identified a potential ambiguity with the scope of the employment-retaliation protections in Dodd-Frank. On the one hand, Congress provided a broad catchall provision that prohibits employers from “discharg[ing], demot[ing], suspend[ing], threaten[ing], harass[ing], directly or indirectly, or in any other manner discrimat[ing], against, a whistleblower in the terms and conditions of employment because of a lawful act done by the whistleblower . . . in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.”  15 U.S.C. § 78u-6(h)(1).  On the other hand, Congress narrowly defined the term whistleblower as “any individual who provides . . . information relating to a violation of the securities to the Commission, in a manner established, by rule or regulation, by the Commission.”  15 U.S.C. § 78u-6(a)(6).

In recognition of this ambiguity, in its rules, the SEC adopted the two separate definitions of “whistleblower:”  one to provide protection from employment retaliation and another to provide eligibility for a whistleblower award.  17 C.F.R. § 240.21F-2.  The latter is in line with Congress’s definition of whistleblower and requires the individual to follow detailed procedural rules to submit a tip to the SEC and qualify for an award. 

In Asadi v. G.E. Energy (U.S.A.), L.L.C., 720 F.3d 620, 630 (5th Cir. 2013), however, the Court of Appeals for the Fifth Circuit found that the SEC’s definitions were inconsistent and rejected the SEC’s “expansive interpretation of the term ‘whistleblower’ for purposes of the whistleblower-protection provision” under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).  In its recent guidance, the SEC acknowledged the Asadi decision and clarified its position that Dodd-Frank's employment-retaliation protections apply to any individual who makes a broad disclosure and that an individual’s status as a whistleblower does not depend on adherence to the reporting procedures to recover an award.

In September 2015, in Berman v. Neo@Ogilvie LLC & WPP Group USA, Inc., slip op. at 2 (2d Cir. Sept. 10, 2015), the Court of Appeals for the Second Circuit rejected the decision in Asadi and gave deference to the Commission’s reconciliation of the conflicting provisions on the scope of whistleblower retaliation protections.  The majority in Berman acknowledged the SEC’s August 2015 guidance.  The Asadi and Berman decisions create a circuit split that could end up before the Supreme Court in the near future.

Conclusion

Companies should be cautious in taking any action that could be perceived as retaliation against an individual who has reported misconduct internally to the company.  A violation of the anti-retaliation procedures of  Dodd-Frank could result in some harsh penalties against a company, including reinstatement of the whistleblower, double back pay, and payment of attorneys’ fees and other litigation costs.  Companies cannot rely on the employee’s failure to also report the alleged misconduct to the SEC to justify their adverse employment action against a whistleblower.

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About this Author

Mary P. Hansen, White Collar Criminal Defense Attorney, Drinker Biddle Law Firm
Partner

Mary Hansen is a partner on the firm’s White Collar Criminal Defense & Corporate Investigations team, where she focuses her practice on defending clients in regulatory investigations as well as white collar criminal proceedings in the securities industry.  She also assists clients with internal investigations and compliance and prevention strategies.

Prior to joining the firm, Mary was an Assistant Director of the U.S. Securities & Exchange Commission’s Division of Enforcement, where she was a member of the division’s Market Abuse and...

215-988-3317
William L. Carr, Corporate and Litigation Attorney, Drinker Biddle
Partner

William L. Carr is a member of the Governance and Corporate Law Disputes Team within the firm’s Litigation Group. William focuses his practice on securities litigation and accountants’ defense, internal investigations, white collar criminal defense and complex civil litigation. William has represented clients in a number of venues, including in state and federal courts and before federal grand juries and various federal agencies.

William also maintains the SECurities Law Perspectives blog, which provides reports, discussions and analyses on noteworthy trends in enforcement and regulatory activity of the U.S. Securities and Exchange Commission (SEC) and other agencies, such as the U.S. Commodity Futures Trading Commission (CFTC).

Prior to entering private practice, William served as a law clerk to the Honorable Joseph J. Rodriguez, U.S.D.J., in the United States District Court for the District of New Jersey.

215-988-2857
Daniel E. Brewer, Attorney, Drinker Biddle, Philadelphia, Commercial Litigation
Associate

Daniel E. Brewer has experience in a variety of complex commercial matters, including consumer class actions, complex business disputes, products liability, shareholder derivative actions and other corporate governance matters. In the course of his practice, Daniel handles many aspects of civil litigation, ranging from pre-litigation counseling, to discovery and dispositive motion practice, to trial advocacy and post-trial proceedings. He represents companies and individuals in a broad range of industries, including banking, telecommunications,...

215-988-3370