The Whistleblower Program Encourages Quantity Over Quality
The Robins Kaplan Business Law Update
The SEC’s Whistleblower Program has been gaining momentum. Created by the Dodd-Frank Act, the program prompted over 4,400 tips in 2017 alone, up 50 percent from its 2012 numbers.1 The SEC added fuel to this growing fire on March 19 of this year, when it announced that it was awarding $83 million to the tipsters of a recently settled case—the largest whistleblower payout to date.2
Thanks to a recent Supreme Court decision, the SEC should expect an even greater influx of whistleblower tips. Although the fallout might be inconsistent with the underlying purpose of the Whistleblower Program, employers should rethink their internal reporting protections to ensure that employees will continue coming to them with their concerns first, prior to reporting to the SEC.
SCOTUS Narrows “Whistleblower” in Digital Realty
On February 21, the Supreme Court ruled unanimously in Digital Realty that an individual must report alleged corporate wrongdoing to the SEC, not just internally, to qualify for the Whistleblower Program’s protections.3 This decision narrowed the SEC’s interpretation of the program’s reach.
Under the SEC’s previous rule, the program’s anti-retaliation provisions protected all employees, regardless of whether they reported potential violations internally or to the SEC, but the program’s award program reserved its monetary allowances for those who reported to the SEC.4 Now, the anti‑retaliation provision also requires SEC reporting, so an employee must report the violation to the SEC prior to termination in order to qualify for reinstatement and back pay.5 The Court found this plain-text interpretation in line with Dodd-Frank’s primary goal, which was “to motivate people who know of securities laws violations to tell the SEC.”6
Shifting Incentives Following Digital Realty
Going forward, concerned employees will no longer be compelled to report internally and instead will report directly to the SEC. Of the employees who received awards by January 2018, an impressive 83% raised their concerns internally first before reporting to the SEC. If Digital Realty had controlled when those employees brought their claims, the anti-retaliation provisions would not have protected anyone who was fired during the time between reporting internally and reporting to the SEC.7 Therefore, the decision will undoubtedly incentivize employees to report to the SEC first, bypassing internal mechanisms, to avoid losing the program’s anti‑retaliation protections.
Further, Digital Realty’s clarification puts gatekeepers—employees who owe a fiduciary duty to their employer—in a difficult position. To qualify for the award program, gatekeepers must report potential violations internally and then wait 120 days before they can report to the SEC.8 They are left with three options: (1) report potential misconduct internally, foregoing their reinstatement right should they be fired;9 (2) report misconduct to the SEC first, waiving access to the award program;10 or (3) overlook potential violations, keeping their jobs secure.11 Indeed, “this is a mortal blow” to the Whistleblower Program, because “history has shown that without Dodd Frank’s whistleblower protections and incentives, gatekeepers will not break their silence.”12
The ruling also affects employers, because it restricts their ability to self-monitor and correct their own potential misconduct. Since employees are now encouraged to bypass internal reporting mechanisms, even misplaced concerns can be costly, both financially and to reputation.13 And internal offices are best positioned to assess and correct any potential compliance shortcomings.14 Employers should therefore encourage internal reporting, because it allows them to more efficiently address whistleblowers’ concerns, which in turn lessens the burden on the SEC to do the same.
The Incongruity of Dodd-Frank’s Purpose and Its Current Incentives
If Dodd-Frank’s purpose was only to encourage reporting to the SEC, then the above‑explained outcomesmight make sense: report any potential misconduct to the SEC, and let the SEC assess which actions actually violate securities laws. But that can’t be the case. Congress’s end goal wasn’t simply an increase in reporting statistics—it wanted a change in corporate culture that would lead to compliance with securities laws.15
Congress could reform the Dodd-Frank Act and clarify that its anti-retaliation provision protects both internal and SEC reporting. This type of reform would improve the quality of tips the SEC receives, because employees who want a cut of a probable award would go to the SEC with credible tips, and employees who merely want to ensure corporate compliance—without running the risk of losing their jobs—would report their suspicions internally.
In the meantime, however, employers who want to avoid unnecessary SEC scrutiny should implement anti-retaliation guarantees in their employment contracts. Doing this would assure employees that any internal reporting would not be met with retaliation and would provide for a potential breach-of-contract claim if retaliation did occur, with reinstatement as a potential award. Protections like these can combat employees’ fear of retaliation without recourse and assure them that internal reporting is a safe and encouraged practice.
2 SEC Announces Its Largest-Ever Whistleblower Awards, U.S. Sec. and Exch. Comm’n (Mar. 19, 2018) (https://www.sec.gov/news/press-release/2018-44).
3 Dig. Realty Trust, Inc. v. Somers, 138 S. Ct. 767, 778 (Feb. 21, 2018).
4 Id. at 775; 17 CFR § 240.21F-2(a)-(b) (2017).
5 18 U.S.C.S. § 78u-6(h)(1)(C) (2018).
6 Dig. Realty, 138 S. Ct. at 777 (citing S. Rep. No. 111-176, at 38 (2010) (emphasis added)).
7 U.S. Sec. and Exch. Comm’n, Office of the Whistleblower, 2017 Annual Report to Congress on the Dodd-Frank Whistleblower Program 17 (2017) (https://www.sec.gov/files/sec-2017-annual-report-whistleblower-program.pdf).
8 See 240 C.F.R. § 240.21F-4(b)(4)(iii), (v).
9 See Dig. Realty, 138 S. Ct. at 778.
10 See 240 C.F.R. § 240.21F-4(b)(4)(iii), (v).
11 See Jordan A. Thomas, ‘Impossible Position’ for Corporate Fraud Gatekeepers, CFO (Mar. 15, 2018), http://ww2.cfo.com/fraud/2018/03/impossible-position-for-corporate-fraud-gatekeepers/?utm_campaign=CFODailyAlert&utm_nooverride=1&utm_source=CFO-email&u.
13 See Henry Cutter, Whistleblower Ruling Adds a Risk for Companies, WSJ (Feb. 23, 2018 6:00 AM), https://blogs.wsj.com/riskandcompliance/2018/02/23/whistleblower-ruling-adds-a-risk-for-companies/.
14 See Dustan Prial, Incentives Get Weaker for Internal Whistleblower Reporting (Mar. 23, 2018 3:53 PM), https://www.law360.com/articles/1025665 (quoting former SEC regional director Kit Addleman, “It’s time for the SEC to recognize the benefits of internal reporting . . . . This is the best way to keep U.S. corporations clean, and when companies are operating in a clean manner, it’s best for the company, management, their boards, shareholders and the markets.”).
15 See Dig. Realty, supra note 6 and accompanying text.
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