Loyola University Chicago School of Law J.D. 2018
In a 9-0 decision, the Supreme Court on February 22, 2018 decided Digital Realty Trust, Inc. v. Paul Somers, a case challenging the definition of a whistleblower under the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd-Frank. The court held that “Dodd-Frank’s anti-retaliation provision does not extend to an individual, like Somers, who has not reported a violation of the securities laws to the SEC [Securities and Exchange Commission].” This is a narrowing of the definition of whistleblower and as such has a number of implications for companies and their compliance departments.
Under the Supreme Court decision, a potential whistleblower must report a suspected violation of securities law to the SEC first if they wish to avail themselves of the anti-retaliation protections of Dodd-Frank. A whistleblower can still avail themselves of the protections granted by the Sarbanes-Oxley Act of 2002, commonly referred to as “SOX,” but there are important distinctions between the protections offered by the two laws.
First, SOX has a 180-day filing deadline for the potential whistleblower. Dodd Frank, on the other hand, grants a six-year window in which the whistleblower can make their claim. Second, SOX has an exhaustion requirement, where the would-be whistleblower must first file and administrative complaint with the Secretary of Labor through the Occupational Safety and Health Administration (“OSHA”). Dodd-Frank grants that same would-be whistleblower the ability to file directly in a U.S. District Court.
Finally, and possibly most importantly for the whistleblower who faces retaliation or hardship from the start of their case to the end, the SOX grants an award of back pay while Dodd Frank grants an award of double back pay. These are only some of the distinctions between the two bills, but they paint a picture of possibilities to come.
In Fiscal Year 2017, the SEC had over 4,400 tips, representing a 50% increase over Fiscal Year 2012, the first full year of reporting. Since 2011, the SEC has received over 23,000 tips. The Court’s decision now makes it more appealing for a potential whistleblower to report to the SEC before reporting internally, thus leading to an increase in the number of tips to the SEC. This is going to slow down the overall effectiveness of the SEC to pursue an individual tip from origination to conclusion, as the same amount of time and resources will have to be spread among a larger number of tips to verify and investigate them.
But what does that mean for a company’s compliance program, particularly one the company has invested heavily in? It reduces use of the program. Companies have spent time and resources on their programs in order to encourage a safe space for reporting and engender a culture of reporting for a reason: a corporation prefers internal reporting as opposed to external. If the company knows about problems or activities that could rise to the level of violations before the SEC does, they have the ability to remediate the situation as well as self-disclose to the SEC. Without this opportunity, the effect of a problem would last longer and get worse. Even more concerning, penalties and fines would be higher than they would be otherwise.
Now, if employees feel they want to use the protections of Dodd-Frank, they’re forced to go directly to the SEC as opposed to reporting internally, and this makes a compliance officer’s job that much more difficult.
As noted by Jordan Thomas, head of Labaton Sucharow LLP’s SEC whistleblower practice, “For some in corporate America, this may be viewed as a victory. But I believe they will come to regret this decision, because sophisticated whistleblowers will now report externally first because they don’t have the employment protections afforded when they report internally.”
Compliance officers and professionals have to decide how to move forward. Under this more detailed definition, it is in the potential whistleblower’s interest to go directly to the SEC. This poses serious problems for an entity’s compliance department. A lot of the money spent on building up a robust program replete with a good reporting system may now seem wasted.
This perspective may be the first choice of many, but that would be selling the investment into compliance short. The reporting system can still be beneficial and provide value. This depends entirely on the culture of the company, yet another one of the ways a company’s culture is crucial to its success. It may be easier to ensure this sort of response from employees in a smaller entity with fewer people. As the number of personnel increase, the percentage may decrease, increase or remain the same, but unfortunately, all it takes is one person to go to the SEC instead of reporting to the company. The Company then loses that ability to remediate and self-disclose.
In the future, companies will need to carefully consider and analyze how they treat whistleblowers. The significance of engendering a culture where employees know their opinions and feelings are valued will grow as companies work to reduce the possibility of someone opting for Dodd-Frank protection. If a company can reduce the fear of retaliation, it will increase the likelihood that an employee will come forward internally.
In that regard, the Compliance department’s role just became that much more complicated.