In 2010, as part of the sweeping regulatory reforms of the Dodd-Frank Act, which was passed in the wake of the 2008 financial meltdown, Congress expanded whistleblower protections provided to employees who report SEC violations under the 2002 Sarbanes-Oxley Act (SOX) and offered financial rewards to whistleblowers. Since Dodd-Frank’s passage, there has been extensive litigation and debate as to whether whistleblower provisions of Dodd Frank protect and award only whistleblowers who report violations to the SEC, or if they also cover individuals who only report violations internally?

In 2011, the SEC issued a regulation stating that it would interpret the Act’s protections as covering all types of disclosures, not just SEC reports. In contrast, some lower appellate courts held that Dodd Frank, by its terms, only protected and rewarded whistleblowers who report violations to the SEC. On Wednesday, February 21, 2018, the Supreme Court resolved this conflict, holding unanimously that Dodd Frank only covers whistleblowers that report suspected securities law violations directly to the SEC.

The case, Digital Realty Trust, Inc. v. Somers, involved an employee, Paul Somers, who was terminated in 2014 after reporting possible securities law violations to his superiors at Digital Realty Trust. Somers had not reported the alleged violations to the SEC. Nonetheless, relying on the 2011 SEC regulations, Somers claimed whistleblower protections based on his internal report. The unanimous decision, authored by Justice Ginsburg, found that the text of the Dodd-Frank act was clear and that the whistleblower protections the Act provides apply only to employees who report securities law violations to the SEC.

This decision may have multiple implications for employers. In a recent report to Congress, the SEC stated that 83% of whistleblowers who have received SEC awards under Dodd-Frank since 2012 first reported the alleged violation internally. Thus, on the surface, this appears to be a huge win for publicly traded employers who are subject to SEC regulation because these internal complaints are no longer subject to Dodd Frank protection. Nevertheless, some commentators have already noted that the ruling may create some problematic incentives for employees to bypass internal reporting procedures and go directly to the SEC with future complaints. This practice of reporting internally has provided employers with an invaluable opportunity to be aware of possible violations prior to the SEC becoming involved and to take proactive measures before a federal investigation begins.

To minimize this risk and potential disincentive to report internally, SEC regulated entities should take a careful look at their existing reporting policies to ensure that they are well publicized and provide adequate incentives and protections for individuals who report violations internally. Principally, ensuring employees are aware of reporting policies that protect them from retaliation when making an internal report should likely curtail any increase in direct SEC reports.