DFA

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On June 28, 2018, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) voted in an open meeting on several final rules and rule proposals that will have a material impact on the Commission’s whistleblower program. Most notably, the SEC approved a rule proposal that would modify its Rule 21F, which defines who is a whistleblower and establishes anti-retaliation protection, to comport with the U.S. Supreme Court’s holding in Digital Realty Tr., Inc. v. Somers, 138 S. Ct. 767 (2018).

As detailed on our blog, in February, the U.S. Supreme Court unanimously held that the anti-retaliation provision of the Dodd-Frank Act only applies to individuals who have provided information regarding a violation of the securities laws to the SEC. In so holding, the Court ruled that the SEC’s Rule 21F-2, which enabled an individual to gain anti-retaliation protection from complaints not made directly to the SEC (such as internal company complaints), was in clear contravention of Congress’s instruction that a “whistleblower” is a person who provides “information relating to a violation of the securities laws to the Commission.”

The SEC’s proposed rule will comport with the Court’s holding by requiring, inter alia, that an individual seeking anti-retaliation protection report, in writing, information about possible securities laws violations to the SEC itself. The proposed rule would apply uniformly: to the SEC’s whistleblower award program, the heightened confidentiality program, as well as for employment anti-retaliation protection.

SEC LogoThe “Securities Whistleblower Incentives and Protection” section of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“DFA”) is an integrated scheme designed to encourage individuals to complain to the SEC of securities law violations by offering bounties and protection against retaliation.  The two components of this section are:  (i) a whistleblower bounty program; and (ii) a prohibition on retaliation against individuals who blow the whistle on violations of securities laws.

There’s much controversy over who is protected under the DFA anti-retaliation provision.  On the one hand, the DFA unequivocally defines “whistleblower” as a person or persons who report a violation of securities laws to the SEC.  15 U.S.C. § 78u-6(a)(6) (emphasis added).  But the following protective text in the same section, which prohibits retaliation for “any lawful act done by the whistleblower” has created confusion, as it encompasses: “disclosures … required or protected under [The Sarbanes Oxley Act] …, the Securities Exchange Act of 1934 …, including section 10A(m) of such Act …, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.” 15 U.S.C. § 78u-6(h)(1)(A)(iii).