SEC Says Employees Protected For Internal Whistleblowing

U.S. Securities and Exchange Commission building in Washington, D.C. September 4, 2014. Photo by Diego M. Radzinschi/THE NATIONAL LAW JOURNAL.

On August 4, 2015, the Securities and Exchange Commission (“SEC”) issued an interpretive rule to dispel confusion over whether employees who only report violations to their employer are protected by the Dodd-Frank whistleblower protection provision. The SEC will formally publish this interpretative rule in the Federal Register and it will operate as an amendment to the Dodd-Frank whistleblower rules. A copy of the SEC’s interpretative ruling can be found here.

The SEC’s action became necessary because employers have been wrongly persuading courts that an employee is not protected from retaliation by the Dodd Frank whistleblower provisions unless the employee reports violations to the SEC. After the U.S. Court of Appeals for the Fifth Circuit ruled in 2013, in Asadi v. GE Energy USA, LLC, 720 F.3d 620 (5th Cir. 2013), that employees are not protected under the whistleblower retaliation protection provisions of the Dodd-Frank Act unless they report their concerns to the SEC, many courts have become confused about the reach of these important whistleblower protections. Employers have been regularly moving to dismiss complaints nationwide arguing that the whistleblower law does not protect employees because they did not first report their concerns to the SEC and that they only blew the whistle internally, within the company. Most employees report violations internally to company management long before reporting violations to the SEC, and many employees only report violations internally. By stripping employees of protection for making internal complaints the employers would be able to legally fire most whistleblowers.

Such disingenuous employer arguments to defeat whistleblowers are not new. More than 30 years ago, the Fifth Circuit also ruled in Brown & Root v. Donovan, 724 F.2d 1029 (5th Cir. 1984), that whistleblowers in the nuclear industry were not protected unless they first reported their nuclear safety concerns to the Nuclear Regulatory Commission. The Fifth Circuit’s absurd ruling in that case was resoundingly criticized and that ruling eventually was discredited. But the damage caused by Brown & Root v. Donovan lasted more than a decade and many meritorious whistleblowers in the nuclear industry whose cases were heard in the Fifth Circuit lost their cases because of it.

The SEC’s action is another example of how the SEC has begun to change its culture and treatment towards whistleblowers since the passage of Dodd-Frank. The SEC is strongly arguing to courts, through amicus briefs and now through the interpretative ruling, that they should reject severely flawed legal arguments that employers are making to limit the reach of the Dodd-Frank whistleblower law.

Related Links:

SEC’s Interpretative Ruling

Dodd-Frank Whistleblower Rules

Dodd-Frank/FCPA FAQ

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