On June 25, 2018, President Trump signed into law the Whistleblower Protection Coordination Act (the “Act”), permanently reinstating the Whistleblower Ombudsman Program, which was created in 2012 to encourage employees of federal government administrative agencies to report wrongdoing but expired on November 27, 2017 due to a five-year sunset clause.

The Act, which Congress passed with bipartisan support, reauthorizes a “Whistleblower Protection Coordinator” at each administrative agency’s Office of Inspector General (“OIG”) to educate agency employees about their rights to blow the whistle on suspected wrongdoing and the remedies available to them should their employers retaliate against them for doing so. Additionally, the Coordinator is tasked with ensuring that the OIG handles such whistleblower complaints promptly and thoroughly and coordinates with the U.S. Office of Special Counsel, Congress, and other agencies to address the allegations appropriately.

While the Act is specific to federal government employees and has no impact on the anti-whistleblower retaliation protections of the Sarbanes-Oxley and Dodd-Frank Wall Street Reform and Consumer Protection Acts, it is notable that the Trump administration passed the Act rather than letting the Whistleblower Ombudsman Program remain expired. This executive action suggests that the Trump administration does not currently appear to be intent upon rolling back legislative efforts to encourage employees to report suspected legal violations and to protect those that do from retaliation by their employers.

This post was written with assistance from Cynthia Joo, a 2018 Summer Associate at Epstein Becker Green.

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.

On February 21, 2018, the U.S. Supreme Court resolved a circuit split and ruled in Digital Realty Trust, Inc. v. Somers that Dodd-Frank’s anti-whistleblower retaliation provision (15 U.S.C. § 78u–6(h)) does not protect employees who report alleged securities violations only to their employers, and not to the SEC.

Paul Somers (“Somers”), a former Vice President of Portfolio Management for Digital Realty Trust, claimed that his employer violated the whistleblower protections of Dodd-Frank by terminating him in retaliation for complaining to management about suspected securities violations, including the elimination of required internal controls and financial misconduct by his supervisor. Somers never reported the alleged violations to the SEC. Digital Realty Trust therefore moved to dismiss the claim on the ground that Somers was not a “whistleblower” under Dodd-Frank because the statute’s definition of “whistleblower” only covers individuals “who provide . . . information . . . to the [SEC].”

The District Court denied the motion. It held that whether an employee who reports an alleged violation internally, but not to the SEC, qualifies as a whistleblower is ambiguous under Dodd-Frank. Given the apparent ambiguity, the Court deferred to the SEC’s interpretation of the statute set forth in SEC Rule 21F-2, which provides that an individual is a Dodd-Frank “whistleblower” even if he or she only reports internally. The Ninth Circuit Court of Appeals affirmed, joining the Second Circuit’s position on the issue (previously discussed here) and adding to a split with the Fifth Circuit, which had reached the opposite conclusion and held that Dodd-Frank does not protect employees who only report suspected violations internally.

The Supreme Court reversed the Ninth Circuit, however, and finally resolved the split in authority, holding that “Dodd-Frank’s text and purpose leave no doubt that the term ‘whistleblower’ . . . carries the meaning set forth in the section’s definitional provision.” The Supreme Court ruled that because Somers did not provide information to the SEC before his termination, he did not qualify as a “whis­tleblower” at the time of the alleged retaliation and is ineligible to seek relief under Dodd-Frank’s anti-retaliation provision.

The impact of this ruling on the whistleblower landscape remains to be seen. It may reduce the number of frivolous whistleblowers and whistleblower lawsuits since employees might be reluctant to pursue baseless allegations of securities violations if they have to first report them to the SEC before they can invoke Dodd-Frank’s protections against retaliation. Further, employers should take note that the Supreme Court made clear in its decision that an employee who reports misconduct both to the SEC and internally is a protected whistleblower, and can recover under Dodd-Frank’s anti-retaliation provision by proving that the retaliation was the result of the internal whistleblowing, without demonstrating that the retaliation was motivated by the SEC disclosure.

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.”