SEC Whistleblower Update


The Supreme Court recently clarified the scope of SEC whistleblower retaliation provisions. Though the decision limits retaliation actions, employers should continue to avoid conduct that can be interpreted as retaliation under other statutes, and should find ways to encourage internal reporting.

In Depth

The US Supreme Court recently clarified the scope of whistleblower retaliation provisions designed to protect reporting to the Securities and Exchange Commission. Although the decision restricts whistleblower retaliation actions, two takeaways are important:

  • First, the decision does not affect existing Sarbanes-Oxley prohibitions on whistleblower retaliation. Employers should continue to avoid conduct that may be interpreted as retaliation against individuals alleging securities violations.
  • Second, the decision may encourage whistleblowers to report concerns directly to the Commission earlier, before reporting concerns internally. Because internal reports allow companies to address any concerns, and prepare for any SEC investigation proactively, clients should consider ways to encourage internal reporting.

Digital Realty

In Digital Realty Trust, Inc. v. Somers, decided on February 21, 2018, the Supreme Court addressed the scope of prohibitions on whistleblower retaliation imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act provides that no employer may retaliate against a whistleblower for (1) submitting information to the Commission about potential securities violations; (2) initiating, testifying or assisting in an SEC investigation or action related to the submission; or (3) making certain disclosures required or protected under the Sarbanes-Oxley Act.

The question was whether this protection extended to individuals who reported concerns internally, but did not report to the SEC. The Court concluded that it did not. First, the Court pointed to the statutory text, which defined “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission.” According to the Court, this clear language resolved the question. A whistleblower must report to the Commission to be protected under the Dodd-Frank Act.

Second, the majority opinion found additional support for its position in the legislative purpose of the Dodd-Frank Act. In contrast to the Sarbanes-Oxley Act of 2002, which endeavored to “disturb the ‘corporate code of silence’ ” inhibiting both internal and external reporting more broadly, the retaliation provisions of the Dodd-Frank Act were designed specifically to protect and reinforce the Commission’s new whistleblower award program. This narrower objective informed the focus on SEC reporting in the Dodd-Frank definition.

Sarbanes-Oxley Act

As the Court explained, the Sarbanes-Oxley Act prohibits retaliation against both internal and external whistleblowers. Those restrictions remain in effect.

Proceeding under the Sarbanes-Oxley Act carries two principal, practical differences for whistleblowers. First, the Sarbanes-Oxley Act requires an aggrieved employee to exhaust an administrative process before accessing a federal court and to file within 180 days of the retaliation. The Dodd-Frank Act permits whistleblowers to file in federal district court within six years. Second, relief under the Sarbanes-Oxley is more limited. Under the Sarbanes-Oxley Act, a whistleblower may be reinstated and recover back pay with interest, with “special damages” and litigation costs. In contrast, the Dodd-Frank Act permits recovery of double back pay.

Restricting whistleblowers to the Sarbanes-Oxley Act process will reduce litigation risk for employers, but significant concerns remain.


Responding to Incentives

Employers may face an unintended consequence of the Court’s decision. Given the difference in forum and remedies, whistleblowers could elect to report to the SEC before reporting concerns internally. If so, the employer could lose a valuable opportunity to investigate and remedy any misconduct. This internal review often allows a company to prepare for any resulting inquiry and manage the response to the allegations.

For this reason, employers may want to consider steps that encourage internal reporting. For example, the company could reemphasize a commitment under an existing policy not to retaliate against whistleblowers and to investigate claims thoroughly. Such actions can raise concerns under employment law, and we advise any company to consult with counsel before making more significant policy changes.

For more information about managing SEC whistleblower actions and related employment law concerns, please contact the author or your regular McDermott Will & Emery lawyer.