Why it matters
In a new rule interpretation, the Securities and Exchange Commission (SEC) declared that whistleblowers that report allegedly unlawful activity internally are entitled to the same protections as those who report to the agency. Likely triggered by a decision from the Fifth Circuit Court of Appeals reaching the opposite conclusion, the agency acknowledged that the rules relating to whistleblower protections can be confusing. "Although we appreciate that if read in isolation Rule 21F-9(a) could be construed to require that an individual must report to the Commission before he or she will qualify … that construction is not consistent with Rule 21F-2 and would undermine our overall goals in implementing the whistleblower program," the agency wrote. In the Fifth Circuit case, Khaled Asadi contended that although he never reported his company to the SEC, he was protected by a Dodd-Frank Wall Street Reform and Consumer Protection Act provision for those who make "required or protected" disclosures under SOX. The panel disagreed in Asadi v. GE Energy. In what appears to be an attempt to limit the Fifth Circuit's decision from spreading to other jurisdictions, the SEC issued the new interpretation to make its position clear: whistleblowers who report alleged wrongdoing internally or to agencies other than the SEC are still entitled to anti-retaliation protections.
The SEC wants to make something very clear: a whistleblower is still protected by the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act no matter where he or she first reports alleged wrongdoing.
"[F]or purposes of the employment retaliation protections provided by Section 21F of the Securities Exchange Act of 1934, an individual's status as a whistleblower does not depend on adherence to the reporting procedures specified in Exchange Act Rule 21F-9(a), but is determined solely by the terms of Exchange Act Rule 21F-2(b)(1)," according to the agency's new rule interpretation. "[A]n individual may qualify as a whistleblower for purposes of Section 21F's employment retaliation protections irrespective of whether he or she has adhered to the reporting procedures specified in Rule 21F-9(a). Rule 21F-2(b)(1) alone governs the procedures that an individual must follow to qualify as a whistleblower eligible for Section 21F's employment retaliation protections."
The problem arose because of the two-pronged definition of "whistleblower" found in the Dodd-Frank Act. The statute amended the Exchange Act with the addition of Section 21F, which established a series of new incentives and protections for individuals to report possible violations of the federal securities laws.
Lawmakers utilized a broad catchall provision at Section 21F(h)(1)(A) prohibiting an employer from (among other things) retaliating against a whistleblower for "making disclosures that are required or protected under" the Sarbanes-Oxley Act, the Exchange Act, or other laws, rules, or regulations of the Commission. But the statute also defined a whistleblower in Section 21F(a)(6) as "any individual who provides … information relating to a violation of the securities law to the Commission," leading some to argue that the anti-retaliation protections were limited to those whistleblowers who reported to the SEC.
The SEC promulgated two separate definitions of whistleblower in its rules to implement the program, each with its own specified reporting procedures. First, Rule 21F-2(a) provides that an individual is a whistleblower "if, alone or jointly with others, [the individual] provide[s] the Commission with information pursuant to the procedures in [Rule] 21F-9(a)." This definition applies only to the award and confidentiality provisions of Section 21F, the SEC said.
Found in Rule 21F-2(b)(1), the second definition specifies that "[f]or purposes of the anti-retaliation protections afforded by Section 21F(h)(1) of the Exchange Act … [an individual is] a whistleblower if … [the individual] provide[d] that information in a manner described in 21F(h)(1)(A) of the Exchange Act." This definition does not require reporting in accordance with Rule 21F-9(a)'s procedures.
Since adoption of these rules, the agency has "consistently" understood Rule 21F-9(a) as "a procedural rule that applies only to help determine an individual's status as a whistleblower for purposes of Section 21F's award and confidentiality provisions," the SEC wrote. "Similarly, it has been our consistent view that Rule 21F-2(b)(1) alone controls the reporting methods that will qualify an individual as a whistleblower for the retaliation protections."
However, the Fifth Circuit Court of Appeals reached a contrary decision, dismissing a suit brought by Khaled Asadi against GE Energy. Asadi believed he had uncovered company conduct that violated the Foreign Corrupt Practices Act and reported the issue to his supervisor and the GE ombudsperson. But according to Asadi, he then received a "surprisingly negative" performance review and received pressure to step down from his position. He was terminated one year later.
Asadi filed suit pursuant to the whistleblower protection provision of Dodd-Frank, and GE moved to dismiss the suit. Because Asadi did not report his concerns to the SEC, he did not meet the statutory definition of a "whistleblower," the company argued. The Fifth Circuit agreed.
"[T]he plain language of the Dodd-Frank whistleblower-protection provision creates a private cause of action only for individuals who provide information relating to a violation of the securities laws to the SEC," the three-judge panel wrote. "Because Asadi failed to do so, his whistleblower-protection claim fails."
In response, the SEC sought to make its position even more clear with the new rule interpretation. "Although we appreciate that if read in isolation Rule 21F-9(a) could be construed to require that an individual must report to the Commission before he or she will qualify as a whistleblower eligible for the employment retaliation protections provided by Section 21F, that construction is not consistent with Rule 21F-2 and would undermine our overall goals in implementing the whistleblower program."
Rule 21F-2(b)(1) makes clear that an individual is entitled to the anti-retaliation protections whenever he or she makes any of the broader array of disclosures specified in Section 21F(h)(1)(A), the agency wrote, and the existence of separate procedures to recover an award demonstrates that the availability of employment retaliation protection is not conditioned on adherence to the Rule 21F-9(a) procedures.
Most importantly, "our interpretation best comports with our overall goals in implementing the whistleblower program," the SEC explained. "Specifically, by providing employment retaliation protections for individuals who report internally first to a supervisor, compliance official, or other person working for the company that has authority to investigate, discover, or terminate misconduct, our interpretive rule 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."
Providing equivalent employment retaliation protection for all types of reporting removes a potentially serious disincentive to internal reporting, the agency said, and an individual who reports internally and suffers employment retaliation should be no less protected than an individual who comes immediately to the Commission.
To read the Fifth Circuit's opinion in Asadi v. GE Energy, click here.
To read the SEC's rule interpretation, click here.