Managing Director, Washington, D.C.
The United States Supreme Court ruled in favor of narrowing the term "whistleblower" recently, a decision that could have serious implications for employees, companies and the Securities and Exchange Commission (SEC).
The ruling is poised to limit the anti-retaliation protections for whistleblowers and would require employees who bring complaints against their companies to go to the SEC in order to be protected. In narrowing the definition, those employees who only report internally will be excluded from safeguards under the Dodd-Frank Act, which had expanded protections and incentives for whistleblowers under Sarbanes-Oxley.
The Court’s decision likely will have a negative effect on whistleblowers, since it places an additional burden on what is required of them to obtain protection. But it also could have an impact on companies. Following the collapse of Enron and WorldCom in the early 2000’s, many companies focused on developing and enhancing robust internal compliance systems and whistleblower reporting mechanisms, which allowed them to catch improper activity early and take measures to correct it.
From the SEC’s 2017 Annual report to Congress: "if individuals are not assured they will be protected from retaliation if they report internally, they will be less likely to report internally, which could undermine the important role that internal compliance programs play in helping the Commission prevent, detect, and stop securities law violations."
The ruling also will have implications for the SEC, and could lead to an increase in the number of complaints filed. As a result, it may put additional pressure on the SEC, particularly the enforcement division, to deal with an increased number of whistleblower tips at a time when the SEC is in a hiring freeze.
To give you a sense of scale, during its 2017 fiscal year, the SEC received 4,484 tips, the most since the establishment of the Office of the Whistleblower in 2010 (more than 20,000 tips overall). Also, during 2017, the SEC ordered whistleblower awards of nearly $50 million to 12 individuals,1 with three of the 10 largest whistleblower awards made by the Commission during this time.
The SEC is required to issue an annual report to Congress which describes the activities of the Office of the Whistleblower. If more tips are received and the SEC does not have the staff to pursue them, the SEC could be criticized for not following through on the intent of the Dodd-Frank Whistleblower Rules. While all tips received by the SEC are reviewed, not all of them are recommended for investigation, and are subject to a triage process.
One of the main benefits of a strong internal whistleblower mechanism is that improper activity can be identified at an early stage, the improper conduct stopped, and corrective actions taken. Additionally, this allows for investigations to be handled without the additional scrutiny that comes with an SEC inquiry.
Given the Court’s ruling, public companies should be prepared for a knock on the door, or a voluntary inquiry by the SEC, for any significant allegations employees reported internally. They will want to ensure that investigations are thorough and non-biased, and actions are not taken that could be seen as retaliatory.
12017 Annual Report to Congress: Whistleblower Program, sec.gov/files/sec-2017-annual-report-whistleblower-program.pdf