In-House Counsel as Whistleblowers Under the Dodd-Frank Act

I recently posted a blog regarding my article on in-house counsel as whistleblowers, which is available here. This post is a deeper dive into the Dodd-Frank Act’s protections for attorney whistleblowers and eligibility for bounties under the Act.

The Dodd-Frank Act contains anti-retaliation provisions that may relate to in-house counsel as whistleblowers. In particular, the Dodd-Frank Act prohibits employers generally from retaliating against whistleblowers who, inter alia, “mak[e] disclosures that are required or protected under the Sarbanes–Oxley Act of 2002 (15 U.S.C. 7201 et seq.) … and any other law, rule, or regulation subject to the jurisdiction of the” SEC. See 15 U.S.C. 78u–6(h)(1)(A)(iii). This language incorporates Section 307 of SOX and Part 205 of the rules implementing this provision, by specifically referring to SOX and any rules administered by the SEC. Thus, any in-house attorney who made a disclosure of a “material violation” under Part 205 would be protected from retaliation under the Dodd-Frank Act.

The Dodd-Frank Act’s anti-retaliation provision would also likely protect in-house attorneys who blow-the-whistle on violations of the Foreign Corrupt Practice Act by a publicly traded company, as the FCPA is a “law…subject to the jurisdiction of the” SEC.

However, there is still a debate amongst jurists regarding whether the Dodd-Frank Act’s anti-retaliation protections cover internal whistleblowing. The debate stems from two arguably inconsistent definitions of the word “whistleblower.” Section 21F(h) of Dodd-Frank prohibits retaliation “because of any lawful act done by the whistleblower” to make a covered disclosure of information. See 15 U.S.C. 78u–6(h)(1)(A). Subsection 21F(a)(6) of the Act defines “whistleblower” to mean an individual who reports violations to the SEC and subdivision (iii) of subsection 21F(h)(1)(A), which, unlike subdivisions (i) and (ii), does not within its own terms limit its protection to those who report wrongdoing to the SEC. Subdivision (iii) expands the protections of Dodd–Frank to include the whistleblower protection provisions of Sarbanes–Oxley, which expressly protects an employee reporting violations internally. The question presented by these two provisions is whether an employee who suffers retaliation because he reports wrongdoing internally, but not to the SEC, can obtain the retaliation remedies provided by Dodd–Frank.

According to the SEC, whistleblowers who only internally disclose covered information are protected from retaliation under Dodd-Frank. In 2011, the SEC promulgated Exchange Act Rule 21F–2, 17 C.F.R. § 240.21F–2, which expressly distinguished between “whistleblower” in the context of the Act’s bounty provision, and “whistleblower” in the context of the Act’s anti-retaliation provision. Stating that the latter need only comply with the disclosure requirements of Subdivision (iii) of subsection 21F(h)(1)(A), rather than the definition of “whistleblower” under Subsection 21F(a)(6). The SEC went on to explain in another release that “the statutory anti-retaliation protections [of Dodd–Frank] apply to three different categories of whistleblowers, and the third category [described in subdivision (iii) of subsection 21F(h)(1)(A) ] includes individuals who report to persons or governmental authorities other than the Commission.” Securities Whistleblower Incentives and Protections, Release No. 34–64545, 76 Fed.Reg. 34300–01, at *34304, 2011 WL 2293084 (F.R.) (June 13, 2011) (emphasis added).

Given this internal tension between the Act’s provisions, as well as the SEC’s rules and releases, courts are split regarding whether an employee who only discloses information internally qualifies as a “whistleblower” for purposes of the Dodd-Frank Act’s anti-retaliation provision. Compare Berman v. Neo@Ogilvy LLC, 801 F.3d 145, 146, 155 (2d Cir. 2015) (holding that reporting violations internally is sufficient to qualify an individual as a whistleblower for purposes of Dodd-Frank’s anti-retaliation provision) with Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 629 (5th Cir. 2013) (holding that only individuals who report violations to the SEC qualify as whistleblowers for purposes of Dodd-Frank’s anti-retaliation provision).

In addition to Dodd-Frank’s anti-retaliation provision, the Act also created a bounty system that provides awards to whistleblowers when they disclose information directly to the SEC and that information results in a successful prosecution of a securities law violator. Under the Act, a whistleblower providing “original information” relating to a violation of securities laws which leads to the recovery of monetary sanctions of more than $1 million is entitled to a bounty of between 10 and 30% of the recovery. See 15 U.S.C. 78u–6.

However, attorneys generally cannot recover a whistleblower bounty under Dodd-Frank because of the SEC’s implementing rules. In particular, the SEC rules preclude a whistleblower from receiving a bounty if the information disclosed to the SEC was (a) obtained through a communication subject to the attorney-client privilege, (b) obtain in connection with legal representation, or (c) made by an employee in or based on information derived from an entity’s legal, compliance or auditing departments. See 17 C.F.R. § 240.21F-4(b)(4)(i)-(iii).

These exclusions have exceptions though. A whistleblower can be eligible for a bounty award even when the information disclosed was obtained through a privileged communication or as the result of legal representation, if the disclosure is permitted by SEC rule 17 C.F.R. §205.3(d)(2), which permits attorneys to reveal confidential information related to the representation of a public company to the SEC in order to (i) prevent the company from committing a material violation that is likely to cause substantial injury to the financial interest or property of the company or its investors; (ii) prevent the company from committing or suborning perjury or fraud ion an SEC investigation ; or (iii) rectify the consequences of a material violation by the company that caused, or may cause, substantial injury to the financial interest or property of the company or investors in the furtherance of which the attorney’s services were used. Further, a disclosure may be made by an employee of, or through information derived from, the legal, audit or compliance departments of a company if the whistleblower reasonably believes the disclosure is necessary to prevent substantial injury to the company or its investors or if 120 days have passed since the company’s audit committee, chief legal officer, chief compliance officer, or the whistleblower’s supervisor became aware of the information. See 17 C.F.R. § 240.21F-4(b)(4)(v).