On March 19, 2018, the SEC issued an Order jointly awarding two whistleblowers more than $49 million, and awarding a third whistleblower more than $33 million, for reporting information to the SEC that led to its successful prosecution of an enforcement action against the perpetrators of securities violations.

In 2010, the Dodd-Frank Act amended the Securities Exchange Act of 1934 to include Section 21F, entitled “Securities Whistleblower Incentives and Protection.” Among other things, Section 21F established a whistleblower “bounty” program that entitles individuals who voluntarily provide the SEC with original information that leads to a successful SEC enforcement action resulting in monetary sanctions greater than $1 million to receive an award of between 10 and 30 percent of the total sanctions collected.

The awards announced earlier this week are the largest awards issued to whistleblowers since the inception of the whistleblower “bounty” program. The previous record was set by a $30 million award in 2014. To date, the SEC has awarded more than $262 million to whistleblowers.

These recent awards are a good reminder that employers must be more diligent and cautious than ever when it comes to securities compliance and investigating internal complaints by would-be whistleblowers, as the awards available to tipsters under the “bounty” program are a tremendous incentive to report to the SEC. This is likely the reason why the program has been steadily gaining traction, with the number of whistleblower tips submitted to the SEC increasing every year since its inception. Indeed, in its last Annual Report to Congress on the Whistleblower Program, the SEC’s Office of the Whistleblower reported that from FY 2012 to FY 2017, the number of whistleblower tips received by the SEC had grown by almost 50 percent.

Featured on Employment Law This Week: Supreme Court: Dodd-Frank Protections Are Limited

Dodd-Frank whistleblower protections are limited – The Supreme Court has ruled that whistleblower protections under the Dodd-Frank Act apply only to those who report violations to the SEC. The Act protects whistleblowers from termination, demotion, and harassment. People who report to the SEC, other regulatory or law enforcement agencies, or to company management are still protected under the 2002 Sarbanes-Oxley Act. Dodd-Frank’s anti-retaliation provision permits whistleblowers to recover double back pay damages – Sarbanes Oxley does not.

Watch the segment below and read our recent post.

On the campaign trail, President Trump vowed to “dismantle” Dodd-Frank. Dodd-Frank was enacted in the wake of the 2008 financial crisis to curtail risky investment activities and stop financial fraud through increased oversight and regulation of the banking and securities industries. Among other things, it amended the Sarbanes-Oxley Act, Securities Exchange Act, and Commodity Exchange Act to include monetary incentives for individuals to blow the whistle on suspected financial fraud and stronger protections for whistleblowers against retaliation by their employers. President Trump has criticized Dodd-Frank, arguing that it is overbroad and inhibits economic growth. Now that he is in office, President Trump has the statute squarely in his crosshairs, and he is poised to impact its whistleblower protections on the legislative, administrative, and judicial fronts.

From a legislative standpoint, President Trump has wasted no time in seeking to roll back Dodd-Frank’s statutory framework. Only two weeks after his inauguration, he issued an EO titled “Core Principles for Regulating the United States Financial System,” which directs the Treasury Secretary to consult with the heads of financial agencies, including the Commodity Futures Trading Commission and the Securities and Exchange Commission (“SEC”), to find ways to conform U.S. financial regulations, including Dodd-Frank, to the Trump administration’s “Core Principles.” These “Core Principles” (detailed in the second article of this Take 5) are broad-sweeping and include, among other things, requiring “more rigorous regulatory impact analysis” for new laws and “mak[ing] regulation efficient, effective, and appropriately tailored.” While the precise scope of these principles is undefined (perhaps intentionally so), they appear to demonstrate a clear first step toward deregulation in the financial sector and may be a shot across the bow signaling the President’s intent to scale back—or at least halt any expansion of—Dodd-Frank, including its whistleblower protections.

Additionally, President Trump is well positioned to substantially affect the SEC’s administrative enforcement of Dodd-Frank’s whistleblower laws. Dodd-Frank created the SEC Office of the Whistleblower (“OWB”) to enforce its comprehensive whistleblower program. As reported in the 2016 Annual Report to Congress on the Dodd-Frank Whistleblower Program, since the OWB was established, the SEC has (i) awarded more than $100 million in bounty awards to whistleblowers who provided information leading to successful enforcement actions, (ii) independently sued employers for retaliating against employees for reporting alleged securities violations, and (iii) made it a top priority to find and prosecute employers that use confidentiality, severance, and other agreements that impede their employees from communicating with the SEC.

The SEC’s enforcement agenda could change significantly, however, under the Trump administration. Specifically, in 2017, President Trump will have the opportunity to appoint four out of the five SEC Commissioners (three seats are now vacant, and another will become vacant in June). He has nominated Jay Clayton—a corporate attorney who has spent his career representing financial services firms in business transactions and regulatory disputes—to fill one of those vacancies and serve as SEC Chair. New SEC leadership may result in the potential replacement of the sitting OWB Chief and alter the OWB’s current enforcement strategies. Thus, through his administrative appointments, President Trump may attempt to temper the SEC’s aggressiveness and focus when it comes to enforcement of Dodd-Frank’s whistleblower protections to more closely reflect his vision for less onerous regulation of the financial sector.

The President is also uniquely situated to influence the application of Dodd-Frank in the courtroom. Indeed, President Trump has inherited more than 100 federal court vacancies that he must fill, including one on the U.S. Supreme Court, giving him the opportunity to shape how Dodd-Frank’s whistleblower laws will be interpreted and applied by federal judges across the country. One of the most critical issues that hangs in the balance is whether an employee who reports an alleged securities violation only to his or her employer, and not to the SEC, is protected by Dodd-Frank’s anti-whistleblower retaliation provision. At present, there is a circuit court split on this issue. In 2013, the U.S. Court of Appeals for the Fifth Circuit held in Asadi v. G.E. Energy United States, LLC, that an employee who only reports a suspected violation internally is not a protected whistleblower for the purposes of Dodd-Frank’s anti-relation provision. In 2015, however, the Second Circuit Court of Appeals reached the opposite conclusion in Berman v. Neo@Ogilvy LLC. The question has since come before the Sixth Circuit Court of Appeals (which declined to rule on it) and is currently pending before the Courts of Appeals for the Ninth and Third Circuits, and it will almost certainly end up before the U.S. Supreme Court for resolution. Accordingly, President Trump’s federal judicial appointments—particularly his nomination of Judge Neil Gorsuch to the U.S. Supreme Court—may play a pivotal role in establishing exactly who is protected under Dodd-Frank’s proscription against whistleblower retaliation.

Ultimately, it is unlikely that President Trump will actually be in a position to completely “dismantle” Dodd-Frank. Yet, there is no question that he has at his disposal the power to greatly impact the statute at the legislative, administrative, and judicial levels, and there is little doubt that change is on the horizon.

A version of this article originally appeared in the Take 5 newsletter Five Employment Issues Under the New Administration That Financial Services Employers Should Monitor.”

Twice in the past two weeks, the Securities and Exchange Commission (“SEC” or “Commission”) issued a cease-and-desist order settling proceedings against companies for using confidentiality and waiver of claims provisions in employee separation or severance agreements that violate an SEC rule promulgated after passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The rule in question is designed to encourage and allow whistleblowers to freely disclose information to the SEC without impediments and ensure that they are (and remain) entitled to collect monetary incentive awards if the Commission determines that they are eligible for such awards. In both cases, the companies were required, as part of the settlement of claims without admission of liability, to take affirmative remedial actions and pay fines of hundreds of thousands of dollars as the result of fairly typical language in their separation agreements. In addition, the SEC has signaled that not only will it take action in response to separation agreements that may limit an employee’s ability to communicate with the SEC, but also it will oppose attempts by employers to limit an employee’s right to receive whistleblower incentive awards.

To read more, click here for our Act Now Advisory

A featured story on Employment Law This Week is the new legislation proposed in Congress that aims to clarify whistleblower policies.

The Whistleblower Augmented Reward and Non-Retaliation Act would expand protections for those who blow the whistle on financial crimes. The bill would also resolve a circuit court split on the definition of “whistleblower,” expanding the scope of the term to specifically include employees who only report violations internally, without filing with the SEC or CFTC. The WARN Act aims to broaden monetary incentives for whistleblowers, and increase the scope of protected activities and prohibited retaliation. Whether or not this bill moves forward, we’re likely to see some movement soon on the circuit conflict it addresses, either by legislation or by the courts.

View the episode below or read more about this legislation in an earlier post on this blog.

One of the featured stories on Employment Law This Week – Epstein Becker Green’s new video program – is the SEC reminder that their bounty program applies to external whistleblowers.

The U.S. Securities and Exchange Commission has awarded $700,000 to a whistleblower who was not employed by the company he exposed. The external whistleblower discovered the issue when he ran a detailed analysis on the company. The agency explained that analysis from “industry experts” is as valuable as insider information. The whistleblower program began after the Dodd-Frank Act was passed and has now yielded $55 million in awards. This latest award raises new questions, including how the SEC will define “industry experts.”

See below to view the episode or read more about this important decision in an earlier post on this blog.

As we mentioned before the holiday, I was recently interviewed on our firm’s new video program, Employment Law This Week.  The show has now released “bonus footage” from that episode – see below.

I elaborate on my recent post with Jason Kaufman, “2nd Circuit Expands Dodd-Frank Anti-Retaliation Protection to Cover Internal Whistleblowing.”

Employment Law This Week – Epstein Becker Green’s new video program – features an interview with attorney John Fullerton, a founding contributor to this blog.

Mr. Fullerton discusses the lack of clarity on what constitutes a whistleblower. Marketing firm Neo@Ogilvy has decided not to appeal to the U.S. Supreme Court in a case that would have tested the definition of a whistleblower under the Dodd-Frank Act. At issue is whether an employee can be eligible for anti-retaliation protection under the Dodd-Frank Act even if he or she does not provide information of corporate wrongdoing directly to the SEC. The U.S. Court of Appeals for the Fifth Circuit says “no,” but the Second Circuit disagrees.

Click below to view the episode and also see our earlier post “2nd Circuit Expands Dodd-Frank Anti-Retaliation Protection to Cover Internal Whistleblowing.”

On September 10, 2015, the Second Circuit Court of Appeals ruled in Berman v. Neo@Ogilvy LLC that an employee who reports an alleged securities violation only to his or her employer, and not to the SEC, is nevertheless covered by the anti-retaliation protections afforded by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).

Berman, a former finance director of Neo@Ogilvy, claimed that his employer and its corporate parent, WPP Group USA, Inc., violated the whistleblower protections of Dodd-Frank by wrongfully terminating him for raising concerns internally about business practices that allegedly constituted accounting fraud.  The companies moved to dismiss the claim, arguing that Berman was not a whistleblower subject to protection under Dodd-Frank because he did not report the alleged violations to the SEC.  The District Court agreed.

In a 2-1 decision, the Second Circuit reversed the District Court’s decision on appeal.  The Court found that the provisions of Dodd-Frank are ambiguous as to whether an employee who reports an alleged violation internally, but not to the SEC, qualifies as a whistleblower.  On the one hand, Section 21F(a)(6) of Dodd-Frank limits the definition of “whistleblower” to include only those individuals who provide information relating to an alleged securities violation to the SEC.  Yet, on the other hand, Section 21F(h)(1)(A) of Dodd-Frank’s retaliation protection provision prohibits retaliation against individuals who make disclosures that are, inter alia, required or protected under the Sarbanes-Oxley Act of 2002 (“SOX”), and SOX protects employees who make internal complaints of suspected securities laws violations without reporting them to outside agencies.

Finding that these were conflicting statutory provisions, the Court deferred to the SEC’s interpretation of the statute, under which an individual is a “whistleblower” if he or she provides information pursuant to Section 21F(h)(1)(A) of Dodd-Frank, which, as explained above, prohibits retaliation against employees for making internal complaints that would be protected by SOX.  Accordingly, the Court held that under SEC Rule 21F-2, “Berman is entitled to pursue Dodd-Frank remedies for alleged retaliation after his report of wrongdoing to his employer, despite not having reported to the Commission before his termination.”

Judge Dennis Jacobs, dissenting, opined that Dodd-Frank is “unambiguous”:  Section 21F(a)(6) is controlling because it defines who is a “whistleblower” under the relevant section of the statute and expressly provides that only those who report to the SEC can qualify.   Judge Jacobs pointed out that Dodd-Frank Section 21F(h)(1)(A), which the majority found creates ambiguity by incorporating protections provided by SOX, does not expand the statutory definition of whistleblower under Dodd-Frank, but instead identifies which acts done by whistleblowers are protected by Dodd-Frank.  In other words, according to Judge Jacobs, Section 21F(h)(1)(A) does not apply to protect a person unless he or she qualifies as a “whistleblower,” as the term is defined by Section 21F(a)(6).  Judge Jacobs criticized the majority for disregarding the plain text of Dodd-Frank’s definition of whistleblower and creating an ambiguity in the statute that does not exist solely to expand the reach of the anti-retaliation provisions of Dodd-Frank.

Notably, the Second Circuit’s decision creates a split in authority with the Fifth Circuit Court of Appeals, which came down the opposite way when faced with the same issue in 2013.  As a result, this issue is almost surely headed to the Supreme Court for resolution. Further, in holding that Dodd-Frank provides a private right of action for those who report violations only internally, the Second Circuit’s decision may lead to significantly more whistleblower retaliation claims in the future because, in comparison to the SOX whistleblower protections, Dodd-Frank offers a much longer statute of limitations, double back pay damages, and no administrative exhaustion requirement.

On June 10, 2015, the much-anticipated joint final standards (“Final Standards”) issued by six federal agencies (“Agencies”) in accordance with Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Act”) for assessing the diversity policies and practices of the entities that they regulate (“Covered Entities”) were published and became effective.   Covered Entities include financial institutions, investment banking firms, mortgage banking firms, asset management firms, brokers, dealers, financial services entities, underwriters, accountants, investment consultants, and providers of legal services.  In issuing the Final Standards, the Agencies stated that their goal is to provide a framework for an entity “to create and strengthen its diversity policies and practices . . . and to promote transparency of organizational diversity and inclusion.”

My colleagues Lauri Rasnick and Dean Singewald have written an Act Now Advisory describing the Final Standards and explaining important steps financial services employers should take now.

Read the full Act Now Advisory here.