Congress Moves toward New Protections for Whistleblowers Who Disclose Securities Violations Internally

On September 23, 2019, a bipartisan group of Senators introduced legislation (the “Whistleblower Programs Improvement Act”) to extend Dodd-Frank anti-retaliation protection to whistleblowers who disclose securities violations to their employers but have not reported the violations to the Securities and Exchange Commission (SEC). Senate No. 2529, 116th Cong., 1st Sess. This bill would also bar mandatory arbitration agreements and establish a deadline for SEC action on whistleblowers’ applications for monetary awards.

The Sarbanes-Oxley Act of 2002 (“SOX”) prohibits publicly-traded companies and many of their subsidiaries, affiliates, and contractors from retaliating against employees who lawfully report a perceived violation of federal securities laws (or certain other federal laws) to the SEC, another federal agency, Congress, or the whistleblower’s employer. 18 U.S.C. § 1514A(a). However, SOX generally does not protect whistleblowers working at privately owned businesses. SOX also imposes significant procedural barriers when whistleblowers seek to assert retaliation claims.

In an attempt to expand whistleblower protections, Congress in 2010 provided in the Dodd-Frank Act that “no employer” may retaliate against a whistleblower for disclosing securities law violations. The Dodd-Frank Act also reduced the procedural barriers to retaliations claims and enhanced the remedies available to successful plaintiffs in retaliation cases. However, in 2018 the Supreme Court held that the Dodd-Frank anti-retaliation provisions do not protect an individual who has not submitted a tip to the SEC. Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018). As a result, only those who provide the SEC with information relating to a securities law violation are now “whistleblowers” within the scope of the Dodd-Frank anti-retaliation provisions. In practice, many whistleblowers make disclosures to their employers but not the SEC, and consequently are not now protected by the Dodd-Frank anti-retaliation provisions.

S. 2529 would amend the definition of “whistleblower” in Section 21F of the Exchange Act, 15 U.S.C. § 78u-6, so that it encompasses many individuals who disclose securities violations to their employers, even if the violations are not disclosed to the SEC. This would certainly be movement in the right direction, but it is only a half-step toward protecting the full universe of securities law whistleblowers. Rather than extending protection to all whistleblowers who report fraud or other securities violations only to their employers, the protections added by S. 2529 would reach only employees of (i) entities registered or required to register with the SEC, and (ii) self-regulatory organizations and state securities agencies. Consequently, the proposed amendments would benefit those working in public companies and in many financial industry firms, but would not protect the far more numerous employees at private companies not registered with the SEC.

S. 2529 also addresses delays in the SEC’s evaluation of claims for monetary awards. Section 3(b) of the bill would amend the Exchange Act to provide that the SEC must reach an initial decision regarding a whistleblower award “not later than 1 year” after the whistleblower’s claim was required to filed with the SEC. The one-year period would begin only after the SEC successfully resolved the enforcement action resulting from the whistleblower’s disclosure, and the deadline could be extended by the SEC for up to 360 days. Even if this provision becomes law, it should not be expected to eliminate the lengthy period (often several years) between the whistleblower’s disclosure to the SEC and the SEC’s decision regarding a monetary award.

Additionally, S. 2529 would bar employers from requiring that Dodd-Frank protections be waived as a condition of employment. In particular, any agreement requiring an employee to submit a Dodd-Frank retaliation claim to an arbitrator, rather than filing the claim in court, would be invalid. A comparable provision is already part of the SOX whistleblower protections. 18 U.S.C. § 1514A(e).

Finally, S. 2529 contains several provisions of importance to employees in the commodities sector, including language that would (i) extend anti-retaliation protection to certain employees who inform their employers about violations within the jurisdiction of the Commodity Futures Trading Commission (CFTC) but do not disclose the violations to the CFTC, and (ii) impose a deadline for CFTC decisions on whistleblower awards.

The SEC-related provisions in S. 2529 are very similar to provisions in a bill (H.R. 2515) passed by the House in July 2019 with an unusual degree of bipartisan support (410 to 12). In view of (i) the broad support for the House bill, (ii) the fact that S. 2529 is sponsored in part by Sen. Charles Grassley, a Republican and a supporter of whistleblower protections, and (iii) the strong interest in Washington currently with regard to whistleblower issues, there may be sufficient momentum to carry S. 2529 or similar provisions through Congress, probably as part of a broader piece of legislation. But regardless of the immediate fate of S. 2529, it seems likely that employees who disclose securities law violations to their employers will ultimately be given Dodd-Frank protection even if they have not reported the violations to the SEC, at least if the employer is a public company or a SEC-registered member of the securities industry.

Whistleblower Aid, Inc.

The foregoing is provided by Whistleblower Aid, for general information purposes and is not intended to be, and should not be taken as, legal advice.

See https://whistlebloweraid.org/contact/#whistleblower-contact for guidance on how to contact Whistleblower Aid.

Photo by Maria Oswalt on Unsplash.