The SEC recently issued guidance specifying that whistleblowers do not first have to take their concerns to the SEC in order to be covered by the SEC’s anti-retaliation rule. The guidance clarifies that those whistleblowers who first report issues internally are likewise eligible for whistleblower protections. Though the guidance provides additional protections for whistleblowers, it also clarifies that whistleblowers will not receive greater protections by bypassing internal reporting and taking their concerns directly to the SEC.
Interpretation of this rule has also been at issue in private litigation. Last week, a Second Circuit panel reversed the dismissal of a whistleblower’s anti-retaliation claim against his former employer, the marketing firm Neo@Oglivy LLC. The whistleblower was terminated after reporting suspected securities law violations internally, but before bringing his concerns to the government. The court held the rule was sufficiently ambiguous to oblige the court to defer to the SEC’s interpretation that whistleblowers who only report internally are protected by the rule. The decision conflicts with the Fifth Circuit’s 2013 ruling that the rule only applies to whistleblowers who report to the SEC.
The SEC’s new guidance follows a number of recent whistleblower anti-retaliation cases brought by the Commission. The SEC announced the first anti-retaliation whistleblower award in April, when it awarded over $600,000 to a former Paradigm Capital Management Inc. employee. The award represented 30% of the company’s penalty for retaliating against the whistleblower for reporting to the Commission. This trend also encompasses so-called “pretaliation” cases. Earlier this year, the SEC brought a whistleblower enforcement action against KBR, Inc., alleging that a confidentiality agreement barring employees from disclosing the contents of an internal investigation interview violated whistleblower anti-retaliation laws because it could have given employees the impression that they were prohibited from reporting illegal activity to the government. More recently, Barnes & Noble Inc. disclosed in its September 15 10-Q filing that the company is in the process of negotiating a settlement with the SEC regarding its historical use of certain provisions in employee confidentiality agreements.
The Bottom Line: To minimize risk, it is important that everyone in an organization who may encounter potential whistleblowers understands the anti-retaliation rules, observes the company’s relevant policies and procedures, and has appropriate legal guidance. This is particularly true of managers and human resources professionals. Companies should also proactively review their standard non‑disclosure and separation agreements to ensure they do not run afoul of the guidance in the KBR action.