The SEC’s Interpretative Guidance on Internal Whistleblowing Under the Dodd-Frank Act

On August 4, 2015, the U.S. Securities and Exchange Commission (SEC) issued an interpretive rule stating that whistleblowers who report misconduct internally—not just those who report to the SEC—are protected by the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This guidance is the SEC’s first formal pronouncement on the scope of the Dodd-Frank retaliation provision, and it comes at a time when the potential looms for a possible split among the federal courts of appeals on this important issue.

In its guidance, the SEC articulates its view that there are two types of whistleblowers covered under Dodd-Frank. The SEC acknowledges that the law does, indeed, require an individual to have reported directly to the SEC to be eligible for a bounty award and the enhanced confidentiality protections of the statute. To be protected from retaliation, however, the SEC opines—in contradiction of a decision from the Fifth Circuit Court of Appeals—that an individual need only have reported his concerns internally to his employer or to the SEC. 

Although the SEC has long taken the position informally that internal whistleblowing is protected under Dodd-Frank’s anti-retaliation provisions, the interpretive rule formalizes its interpretation and gives three reasons for its position. First, the SEC explained that the statutory language prohibiting retaliation specifically protects whistleblowers that make “disclosures” that are protected under other securities laws, such as the Sarbanes-Oxley Act of 2002, which protects individuals who internally report securities law violations.

Second, the SEC cited a Dodd-Frank regulation that provides that the anti-retaliation protections apply “whether or not” a whistleblower satisfies the procedural requirements to qualify for a whistleblower award from the SEC (which requires direct disclosure to the SEC).  The SEC believes this regulation eliminates any requirement to report any alleged violations directly to the SEC to qualify for Dodd-Frank’s retaliation protections. Third, the SEC reasoned that protecting internal whistleblowing best serves the purposes of Dodd-Frank, preventing a “two-tiered structure” that protects whistleblowers who report directly to the SEC, but does not offer retaliation protection to internal whistleblowers raising similar concerns. 

The SEC’s guidance is significant. Dodd-Frank provides enhanced recoveries (including double back pay) for retaliation claims, direct access to federal courts, and a much longer time period to bring these claims than is available under Sarbanes-Oxley. If the courts agree that Dodd-Frank protects internal reporting of potential securities violations, it will change the whistleblower landscape for employers. 

Despite the SEC’s official pronouncement, for now the only appellate decision on the issue holds that an individual is not entitled to the protections of the anti-retaliation provisions of the law unless he has reported his concerns directly to the SEC. Lower federal courts are split on the issue, and some have reached the same conclusion that the SEC urges in its guidance. The issue is now before two other courts of appeal, and the SEC has filed friend of the court briefs in both cases, taking the same position as in its guidance.

It will be interesting to see whether and how the SEC’s formal guidance affects how the courts address and rule on this issue. If a circuit split develops, the issue could ultimately be presented to the Supreme Court of the United States, promising another examination of statutory language and purpose in a whistleblower law, much like the ones we have seen in the Court’s decisions interpreting the Sarbanes-Oxley Act. We will monitor these developments closely and keep you advised.