Bipartisan Support for Restoring Dodd-Frank Whistleblower Protection for Internal Disclosures
By an overwhelming bipartisan majority of 410-12, the House passed the Whistleblower Protection Reform Act of 2019 (H.R. 2515), which would clarify that whistleblowers who report potential violations of securities laws to their employers are protected by the anti-retaliation provision of the Dodd-Frank Act. The legislation overturns the Supreme Court’s 2018 decision in Digital Realty, Inc. v. Somers, which limited Dodd-Frank whistleblower protection to disclosures to the Securities and Exchange Commission (SEC). Similar legislation will soon be introduced in the Senate and would hopefully be voted on this session.
Digital Realty’s narrowing of Dodd-Frank whistleblower protection was due to an apparent drafting error in Section 922 of the Dodd-Frank Act. Congress intended to protect both internal disclosures and disclosures to the SEC, but it included a definition of “whistleblower” in the statute that was inconsistent with the text of the anti-retaliation provision, which in turn expressly protects internal disclosures (by incorporating Sarbanes-Oxley protected conduct within the ambit of Dodd-Frank protected conduct). The definition of “whistleblower” in Section 922 appears to have been drafted solely for the provision creating the SEC whistleblower reward program and was not intended to apply to the anti-retaliation provision. H.R. 2515 corrects this error by adding a separate definition of “whistleblower” for the anti-retaliation provision.
Limiting Dodd-Frank protected conduct to disclosures to the SEC essentially excludes most corporate whistleblowers from Dodd-Frank whistleblower protection in that whistleblowers typically raise concerns internally prior to reporting a violation to a regulator or law enforcement). See, e.g., Ethics Resource Center 2011 National Business Ethics Survey. To learn more about the impact of Digital Realty, see our article Dodd-Frank Whistleblower Protection Post-Digital Realty.
H.R. 2515 enjoys broad bipartisan support because companies benefit from whistleblowers reporting potential violations of federal securities law internally, i.e., internal disclosures offer companies an opportunity to investigate and remedy the violation. As Senator Grassley pointed out in an amicus curiae brief that he submitted in Digital Realty,
[T]he 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. . . . Similarly, it was the business community that successfully lobbied the SEC to adopt rules favoring internal reporting. See 76 Fed. Reg. at 34,300, 34,323.
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.
HR 2515 is consistent with various provisions in the SEC whistleblower rules that incentivize internal whistleblowing. First, Rule 21F-6(a)(4) authorizes an increase in the award percentage where the whistleblower reported the possible securities violations through internal whistleblower, legal or compliance procedures. Second, under Rule 21F-4(c)(3), a whistleblower can get credit for information disclosed by a company to the SEC where the information results from an internal investigation of the whistleblower’s disclosure to the company, as long as the whistleblower also discloses the information to the SEC within 120 days of providing it to the company.
Significantly, a whistleblower is eligible for an award when the employer-provided information led to a successful enforcement action even if the information that the whistleblower originally provided to the employer would not have satisfied the “led to” requirements in the rules. Therefore, reporting internally and initiating an effective internal investigation can increase the probability of receiving an award, especially where the employer is motivated to address the misconduct. Recently the SEC awarded $4.5M to a whistleblower whose disclosures to his employer and regulators about a kickback scheme in Brazil led to a $30M enforcement action. According to the SEC’s press release announcing the award, this is the first award in which the whistleblower got credit for information that a company provided to the SEC following an internal investigation prompted by a whistleblower’s internal disclosure.
Revised Section 922 of Dodd-Frank
As revised by HR 2515, Section 922 of Dodd-Frank would define the term “whistleblower” as follows (the bolded text is the new definition of “whistleblower” applicable solely to the anti-retaliation provision:
(A) IN GENERAL.—The term“whistleblower” means any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission; and
(B) SPECIAL RULE.—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 2 or more individuals acting jointly who take an action described in subsection (h)(1)(A).
And the anti-retaliation provision in Section 922 would add the bolded text below:
(h) Protection of whistleblowers
(1)Prohibition against retaliation
(A)In general No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower-
(i) in providing information to the Commission in accordance with this section;
(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information;
(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), this chapter, including section 78j-1(m) of this title, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission; or
(iv) in providing information regarding any conduct 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 sub-clause (I) who has the authority to investigate, discover, or terminate misconduct.