On August 4, 2015 the Securities and Exchange Commission issued interpretive guidance elaborating its view that the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply equally to tipsters who claim retaliation after reporting internally, as well as those who are retaliated against after reporting information to the SEC. The guidance reflects that there is a split among federal courts over whether Dodd-Frank’s whistleblower retaliation provisions apply to internal as well as external reporting, and recognizes that the only circuit court to decide the issue to date, the Fifth Circuit, has taken a contrary position to that of the Commission in Rule 21F, the regulation the SEC adopted to implement the whistleblower legislation, holding that internal reports are not protected by Dodd-Frank. Whether internal reports qualify for Dodd-Frank coverage has important implications because, among other things, Dodd Frank provides enhanced recoveries (including two times back pay) and longer time frames (six years) for bringing a retaliation claim than would be available under the anti-retaliation provisions in the Sarbanes-Oxley Act of 2002.
Responding to criticisms that the bounties available under Dodd-Frank for those who report to the SEC would discourage internal reporting, the SEC in its Dodd-Frank regulations adopted several provisions it believed would still encourage internal reporting. For example, the SEC has provided for a 120-day “look-back period” for whistleblowers who first report internally. Under this rule, if a whistleblower reports to the SEC within 120 days of reporting internally to the company, the whistleblower will receive ‘credit’ for reporting the information as of the date of the internal report. This allows the whistleblower to maintain priority status over any subsequent whistleblowers. On top of the 120-day “look-back” rule, the SEC has also said that it will consider whether a whistleblower first reported the information internally before reporting to the SEC when it is considering whether the whistleblower should receive an award and, if so, where the award should fall in the 10 – 30% discretionary range. According to the SEC, “a whistleblower’s voluntary participation in an entity’s internal compliance and reporting systems is a factor that can increase the amount of an award, and … a whistleblower’s interference with internal compliance and reporting is a factor that can decrease the amount of an award.” However, many of the bounty awards it has issued to date have not provided information as to whether there was internal reporting or whether the percentage of the award was in fact enhanced for internal reporting.
The dispute over whether internal reporting is covered by Dodd-Frank’s anti-retaliation provisions is rooted in what the Commission has argued is conflicting statutory language. A “whistleblower” under the Act is defined as “any individual who provides, or two or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission in a manner established, by rule or regulation, by the Commission.” 17 C.F.R. § 240.21F-2(a)(6). Whistleblowers, in turn, are protected for three different categories of reporting activity: (1) providing information to the SEC; (2) assisting in an SEC investigation; or (3) making...
