On August 4, the U.S. Securities and Exchange Commission (SEC or “the Commission”) issued guidance that further clarifies the Dodd-Frank Act’s anti-retaliation provision.1 According to the Commission, Section 21F of the Securities Exchange Act of 1934 (the Exchange Act) protects an individual, who reports potential illegal activity, from employment-related retaliation even if the individual does not report the alleged violation to the SEC as specified by Rule 21F-9(a) of the Exchange Act. The SEC’s guidance states that if an individual internally reports an alleged violation, Rule 21F-2(b) (1) provides anti-retaliation protection for the individual.
The clarification comes after some confusion over the language of different provisions and reporting procedures in Section 21F, and which provision controls whistleblower status for individuals who internally report possible violations. Section 21F was added to the Exchange Act through the 2010 Dodd-Frank reform and established a set of incentives for individuals to report potential securities violations. Dodd-Frank added three general types of incentives: monetary awards, confidentiality assurances and employment-related anti-retaliation protections. Section 21F provides different requirements for defining who is a whistleblower, and who is eligible for the monetary awards and employment-related anti-retaliation protection. On one hand, Rule 21F-9(a) sets out the procedure for an individual who seeks to qualify as a whistleblower to receive a monetary award, and requires that an individual submit a report directly to the SEC to be considered a whistleblower and receive a monetary award. On the other hand, Rule 21F-2(b) (1), which governs the anti-retaliation provision, does not require reporting to the SEC to be considered a whistleblower.
While the SEC maintains that it has always interpreted Rule 21F-2(b)(1) to protect potential whistleblowers regardless of whether they report internally or directly to the SEC, the Commission acknowledges confusion in some court interpretations of Section 21F. In particular, the U.S. Court of Appeals for the Fifth Circuit’s opinion in Asadi v. G.E. Energy (U.S.A.), L.L.C. highlights the inconsistency in the reporting procedure and definition of whistleblower contained in Rule 21F-2(b)(1) and Rule 21F-9.2
The SEC states in its guidance that the plain language of Section 21F clearly supports its interpretation. First, Rule 21F-2(b)(1) states that to be eligible for anti-retaliation protections, an individual must make disclosures as required under Section 21F(h)(1)(A), which includes internal reporting.3 Second, Rule 21F-2(b) (1) (iii) expressly states that “[t]he anti-retaliation protections apply whether or not [an individual] satisf[ies] the requirements, procedures and conditions to qualify for an award.” Third, the SEC states that this interpretation best exemplifies the goals of the whistleblower program by providing some incentives for potential whistleblowers to internally report possible securities violations.
While the SEC’s guidance on this issue is not binding, courts may find it persuasive and often defer to the Commission’s interpretation when deciding whistleblower cases.
1 17 C.F.R § 241(2015).
2 Asadi v. G.E. Energy (U.S.A.), L.L.C., 720 F.3d 620, 630 (5th Cir. 2013).
3 Section 21F(h)(1)(A)(iii), which governs whistleblower protection from employment retaliation, states: “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…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.” Section 78j1 (m) (4) requires audit committees of regulated public entities to establish procedures for internal reporting. See 15 U.S.C. § 78 (2010).
