Thursday, August 06, 2015

SEC Clarifies Whistleblower Reporting

By Rodney F. Tonkovic, J.D.

The SEC has issued an interpretive rule to clarify the scope of the employment retaliation protections afforded under Exchange Act Section 21F. The Commission explained that Rule 21F-2(b)(1) alone governs the procedures that an individual must follow to qualify as a whistleblower. This interpretation resolves an ambiguity arising from a requirement to report to the Commission found in Rule 21F-9(a), which, the Commission said, applies only in the context of Rule 21F's award and confidentiality provisions of Section 21F (Interpretation Of The SEC’s Whistleblower Rules Under Section 21F of the Securities Exchange Act of 1934, Release No. 34-75592, August 4, 2014).

Ambiguity. In its release, the Commission stated that when it promulgated rules implementing the whistleblower program, it recognized that Section 21F is ambiguous as to the scope of its employment retaliation protections. Courts have also struggled with this ambiguity (see e.g., Somers v. Digital Realty Trust, Inc., in which the court notes that the majority of courts considering the matter have found ambiguity in the interplay between Sections 21F(h)(1)(A)(iii) and Section 21(F)(a)(6)).

The Commission explained that Section 21F(h)(1)(A) contains a catchall provision that prohibits an employer from retaliating against a whistleblower for "making disclosures that are required or protected under" SOX, the Exchange Act, or other laws or rules "subject to the jurisdiction of the Commission." The adopting release explained that the reporting covered by this provision includes reports "to persons or governmental authorities other than the Commission." Section 21(F)(a)(6), however, defines "whistleblower" to mean someone who reports a violation "to the Commission."

To resolve this ambiguity, the Commission promulgated two definitions of "whistleblower" in Rule 21F-2. The first, found in Rule 21F-2(a), applies only to the award and confidentiality provisions of Section 21F and requires reporting in accordance with procedures set forth in Rule 21F-9(a). The second, set forth in Rule 21F-2(b)(1), relates to Rule 21F(h)(1)'s anti-retaliation protections and requires reporting as described in Section 21F(h)(1)(A). Despite this language, the Fifth Circuit in 2013 did not credit the SEC’s broader definition in Section 21F(h)(1)(A) because, the court said, the plain meaning of Exchange Act Section 21F defines "whistleblower" as a person who provides information about a possible securities violation to the SEC.

Interpretation. The Commission remarked that it appreciates the fact that Rule 21F-9(a) can be construed, if read in isolation, to require reporting to the Commission. This construction, however, is not consistent with Rule 21F-2 and would undermine the aim of the whistleblower program, the Commission said.

First, the Rule 21F-2(b)(1)'s express application to the employment retaliation context demonstrates that it should control over Rule 21F-9(a), the Commission said. Next, Rule 21F-2(a)(2) provides that the reporting procedures set forth in Rule 21F-9(a) are among the procedures that must be followed to recover an award. This contrast supports the Commission's interpretation that "the availability of employment retaliation protection is not conditioned on an individual’s adherence to the Rule 21F-9(a) procedures."

According to the Commission, its interpretation avoids a two-tiered structure and removes a disincentive to internal reporting by employees in appropriate circumstances. A contrary interpretation would undermine other incentives put in place to encourage internal reporting, such as collecting a whistleblower award, the Commission said.

The release is No. 34-75592.

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