This summer has been a hot one for the Securities and Exchange Commission (“SEC”). In particular over the past couple of months, the SEC has been busy promoting and defending its rules and practices in front of federal courts across the country, including defending the constitutionality of the Commission’s administrative enforcement proceedings in various circuits, while venturing further into the morass of cases grappling with the definition of who is a “whistleblower” entitled to the anti-retaliation protections of the Dodd-FrankWall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) by issuing an Interpretive Release on the issue “clarifying” its position. Whether the SEC’s positions will ultimately triumph is not clear but the SEC is fighting hard to protect its interpretation of Dodd Frank.
Constitutionality of Administrative Enforcement Proceedings
The Dodd-Frank Act greatly enhanced the SEC’s authority to prosecute enforcement cases in an administrative forum and to collect valuable information from whistleblowers to support administrative and federal court enforcement proceedings. However, as the SEC has proceeded to exercise these expanded powers, it has faced increased challenges to the constitutionality of its administrative proceedings, some of which have been successful and have raised significant questions about the SEC’s internal practices.
Last week, in a short opinion in Duka v. SEC (referring throughout to an April 2015 decision in the case, which is described in detail by my colleague Richard A. Albert in a blog entitled “Duka v. SEC Redux – SEC Holds Home Court Advantage for Another Round“), Judge Richard M. Berman enjoined the SEC from pursing administrative proceedings against a former Standard & Poor’s executive, reasoning that because the ALJs presiding over those proceedings are not appointed by the SEC Commissioners and are not appointed pursuant to Article II, their appointment “is likely unconstitutional in violation of the Appointments Clause.” The decision also refers to a decision in June 2015 by Judge Leigh Martin May of the Northern District of Georgia in Hill v. S.E.C., reaching the same conclusion. Significantly, before issuing the injunction, Judge Berman gave the SEC the opportunity to correct what he deemed to be the agency’s failure in appointing the ALJs, but the SEC declined to amend its practices. On August 27, the SEC filed a notice of interlocutory appeal to the Second Circuit Court of Appeals seeking to overturn Judge Berman’s decision.
Then, in Bebo v. SEC, a former CEO accused by the SEC in administrative cease-and-desist proceedings of violating the federal securities law, filed a suit in federal district court in Illinois – while the administrative proceeding was pending – alleging that the SEC “lacks the constitutional authority to continue the administrative proceeding because certain provisions of the [Dodd-Frank Act] are unconstitutional.” As in Duka, Bebo challenged the constitutionality of the SEC’s ALJ appointment process and also challenged the provision of the Dodd-Frank Act that permits the SEC to bring administrative proceedings seeking monetary penalties against non-regulated individuals.
In an opinion released on August 24, the Seventh Circuit Court of Appeals rejected Bebo’s attempt to halt the pending SEC proceeding and affirmed the district court’s ruling that “the administrative review scheme established by Congress stripped it of jurisdiction to hear this type of challenge.” The Seventh Circuit noted, however, that if she is “aggrieved by the SEC’s final decision, Bebo will be able to raise her constitutional claims in this circuit or in the D.C. Circuit. Both courts are fully capable of addressing her claims.” It therefore remains to be seen whether the Seventh Circuit ultimately will side with Judge Berman on the merits.
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According to its website, the SEC “occasionally provides guidance on topics of general interest to the business and investment communities by issuing ‘interpretive’ releases, in which [it] publish[es its] views and interpret the federal securities laws and SEC regulations.” The substance of the SEC’s Interpretive Release is not news; it previously took the very same position in the adopting release accompanying the rules implementing the whistleblower bounty program and anti-retaliation provisions pursuant to the Dodd-Frank Act; in public pronouncements by its high level officials; and in court. What is more interesting is the timing of the Interpretive Release, why the SEC issued it, and whether it will impact the decisions of the federal courts of appeals before which cases implicating this issue are pending.
Despite the SEC’s clear position, some courts — most prominently the Fifth Circuit Court of Appeals in Asadi v. G.E. Energy (U.S.A.), L.L.C. (which I discussed in a previous blog entitled “When is a Whistleblower Not Really a ‘Whistleblower’“) – have determined that the anti-retaliation provisions protect only individuals who have reported possible misconduct to the SEC. That is because the Dodd-Frank Act (and the SEC rules, which mirror the Act) defines a “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the [SEC], in a manner established, by rule or regulation, by the [SEC].” (emphasis added.) The Fifth Circuit found the statute to be “unambiguous” and rejected an SEC regulation that interprets the statute more broadly.
In the Interpretive Release, the SEC specifically referencesAsadi and explains that recognizing the ambiguity of the scope of Dodd-Frank’s anti-retaliation provisions, it promulgated a “broad Catchall provision” (which, incidentally, is the provision the Fifth Circuit rejected) to include protection against retaliation for individuals reporting certain categories of information, such as disclosures required or protected under the Sarbanes-Oxley Act of 2002, “to persons or governmental authorities other than the [SEC].” The Interpretive Release notes that the SEC’s position is further supported by the fact that its rules implementing Dodd-Frank state that “[t]he anti-retaliation protections apply whether or not [an individual] satisf[ies] the requirements, procedures and conditions to qualify for an award.” The Interpretive Release also explains that the SEC’s interpretation “best comports with [its] overall goals in implementing the whistleblower program . . . [because it] avoids a two-tiered structure of employment retaliation protection that might discourage some individuals from first reporting internally in appropriate circumstances and, thus, jeopardize the investor-protection and law-enforcement benefits that can result from internal reporting.”
Earlier this summer, the Second and Third Circuit Courts of Appeals heard oral arguments in cases involving whistleblowers terminated as a result of internally reporting suspected misconduct, and in both cases, the SEC advocated on behalf of the whistleblowers in the form of amicus briefs (the briefs amicus curiae are available here and here). In a case pending before the federal district court in the Northern District of California, Wadler v. Bio-Rad Laboratories, Inc., the SEC recently moved for permission to file the sameamicus brief. Although the SEC’s argument is set forth in more detail in the amicus briefs, they mirror the Interpretive Release.
The Interpretive Release lacks the force of law or a rule, making it even less persuasive than the regulation that the Fifth Circuit previously disregarded in Asadi. Nonetheless, the fact that the SEC found the issue significant enough to issue the Release after Asadi and while the Second and Third Circuits’ considerations of the issue are pending, highlights the importance placed on the issue by the SEC. Whether the Second and Third Circuits will defer to the SEC’s interpretation of the Dodd-Frank Act still is unclear.
From The Insider Blog: White Collar Defense & Securities Enforcement.