SEC Files Amicus Curiae Brief in Dodd-Frank Whistleblower Retaliation Case
The Securities and Exchange Commission (“SEC”) continues to advocate a broad construction of the anti-retaliation provision of the Dodd-Frank Act. In its amicus curiae brief in Danon v. Vanguard Group, Inc., the SEC argues that:
- Section 21F of the Exchange Act is ambiguous regarding who qualifies as a “whistleblower” for purposes of the Dodd-Frank Act’s anti-retaliation provisions.
- The court should defer to the SEC’s reasonable interpretation of Section 21F, which resolves the ambiguity by applying the definition of “whistleblower” to individuals who, pursuant to Section 21F(h)(1)(A) clause (iii), report information to agencies besides the SEC.
- Failure to defer to the SEC’s interpretation would result in “arbitrarily and irrationally” denying employment protection to individuals who, pursuant to Section 21F(h)(1)(A) clause (iii), report information internally or to agencies besides the SEC prior to reporting that information to the SEC.
Ambiguity: A Need to Reconcile Section 21F(a)(6) with Section 21F(h)(1)(A)
Ambiguity regarding who qualifies as a “whistleblower,” the SEC argues, results from tension between Section 21F(a)(6) and Section 21F(h)(1)(A) clause (iii) (“clause (iii)”) of the Exchange Act. Section 21F(a)(6) defines “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission.” Clause (iii)’s anti-retaliation protection, however, is not limited to disclosures of securities-law violations that are made to the SEC; rather, clause (iii) protects individuals who make “‘disclosures that are required or protected under’ Sarbanes-Oxley, the Exchange Act, 18 U.S.C. §1513(e), ‘and any other law, rule, or regulation subject to the jurisdiction of the Commission.’”
If these two provisions are applied rigidly, then an individual who makes a disclosure protected under clause (iii) will be protected only where “(1) the individual has separately submitted that same information to Commission, and (2) that information involves a securities law violation.” This result, the SEC argues, would be antithetical to Congress’s suggestion in clause (iii) that a wider range of disclosures are protected than merely those that concern securities-law violations and are made to the SEC:
If an employer knows that an individual has made a disclosure listed in clause (iii), such as an internal report about a potential securities fraud violation, and the employer is also aware that the individual has provided the same information to the Commission, then as a practical matter the individual will be protected from retaliation under clauses (i) and (ii). . . . Thus, where an employer knows that an individual has reported to the Commission, clauses (i) and (ii) would already sufficiently protect the individual from retaliation should the individual also wish to make the disclosures specified in clause (iii).
Therefore, the only scenario in which clause (iii) would function is where “the employer, unaware that the individual had already reported to the Commission, takes an adverse employment action against the employee for a disclosure listed in clause (iii).” While some, including the Fifth Circuit, believe that this is a permissible reading of the statute, the SEC contends that it runs counter to Congress’s intent in passing Section 21F(h)(1)(A), for two reasons.
First, this section is meant to affect the behavior of employers—to prevent them from retaliating against whistleblowers—by letting them know that they are prohibited from taking adverse action against employees who make any of the specified disclosures. However, clause (iii) would fail to prevent an employer from retaliating based on an employee’s disclosures enumerated in clause (iii), such as internal reports, because the employer would be unaware that the employee had reported to the SEC.
Second, even where an employer retaliated against an employee, the employee would probably be unable to achieve redress under clause (iii) because “if an employer is genuinely unaware that the employee has separately disclosed to the Commission, any adverse employment action that the employer takes would appear to lack the requisite retaliatory intent—i.e., the intent to punish the employee for engaging in a protected activity.”
As the foregoing demonstrates, the SEC concludes, “Congress did not unambiguously express an intent to limit the employment anti-retaliation protections under Section 21F(h)(1) to only those individuals who report securities law violations to the Commission.”
Because of this ambiguity, it was incumbent upon the SEC to adopt a reasonable interpretation of Section 21F.
The SEC’s Reasonable Interpretation: Rule 21F-2(b)(1)
The SEC adopted Exchange Act Rule 21F-2(b)(1) to resolve Section 21F’s ambiguity regarding who qualifies as a whistleblower for the purposes of the Exchange Act’s anti-retaliation provisions. Per this rule, the SEC argues that “Section 21F(h)(1)(A) is best read as an implied exception to the definition of whistleblower in Section 21F(a)(6),” meaning that anyone who provides information pursuant to Section 21F(h)(1)(A) is a whistleblower and so receives protection from retaliation under Section 21F(h)(1). In other words, individuals who make disclosures specified in clause (iii) belong to a class of whistleblowers “who report to persons or governmental authorities other than the Commission.”
Rule 21F-2(b)(1) is reasonable, the SEC argues, for three reasons:
- “it resolves the statutory ambiguity in a manner that effectuates the broad employment anti-retaliation protections that clause (iii) contemplates”;
- “by ensuring that individuals who report internally first will not be potentially disadvantaged by losing employment anti-retaliation protection under Section 21F, it better supports a core overall objective of the whistleblower rulemaking—avoiding disincentivizing individuals from reporting internally first in appropriate circumstances”; and
- “it enhances the Commission’s ability to bring enforcement actions when employers take adverse employment actions against employees for reporting securities law violations internally.”
The Arbitrary and Irrational Results of Rejecting the SEC’s Interpretation
A congressional purpose underlying Section 21F is to encourage people to report misconduct to regulatory and law-enforcement authorities besides the SEC. This intent is apparent in Section 21F(b)–(c), under which an individual who provides information that leads to a successful SEC action and also to a successful “related action” may receive between 10% and 30% of monetary sanctions collected in that “related action.” Related actions encompass judicial or administrative actions brought by entities including the U.S. Department of Justice, federal banking regulators, or self-regulatory organizations subject to the SEC’s jurisdiction.
Individuals are not statutorily required to report this information to the SEC before or at the same time as they report it to those other regulators—Exchange Act Rule 21F-4(b)(7) established a 120-day look-back, meaning that anyone who reports information to an authority that can prosecute a “related action” and then provides the SEC with the same information within 120 days may receive an award as if he or she had provided the information to the SEC on the date that he or she first reported it to the other authority.
By providing anti-retaliation protection to individuals who make disclosures to authorities that can bring “related actions,” clause (iii) “complement[s] the related action component of the award program.” In fact, the SEC points out, the anti-retaliation protections under Section 21F(h)(1)(A) clauses (i)–(iii) correspond to the award program:
[C]lauses (i) and (ii) provide employment retaliation protection for providing information to the Commission, which may lead to a successful Commission action for which an award may be paid, while clause (iii) affords employment retaliation protection for providing information to a law enforcement or regulatory authority other than the Commission, which may lead to a successful related action for which an award may be paid.
The SEC argues that rejecting its interpretation in favor of the Fifth Circuit’s in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013)—which narrowly interpreted “whistleblower” to include only individuals who report information to the SEC—would allow employers to retaliate against employees who first report information internally or to regulatory authorities besides the SEC, unless those employees qualify for protection under Section 806 of the Sarbanes-Oxley Act. Particularly in light of the purpose underlying Section 21F, the SEC concludes, an interpretation that hinges employment protection on the sequence of an employee’s disclosures would lead to “arbitrary and irrational results.”
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