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From Securities Regulation Daily, July 22, 2014

Two SEC rulemaking petitions seek greater protections for whistleblowers

By Jacquelyn Lumb

Two rulemaking petitions have been submitted to the SEC in connection with its Dodd-Frank whistleblower program. The petitions seek the issuance of a policy statement with respect to certain aspects of the program, additional protections for whistleblowers, public hearings, and the creation of an advisory committee on whistleblower reporting and protection.

The petitions were submitted by Labaton Sucharow LLP, the Government Accountability Project, and a coalition of over 250 organizations. Jordan A. Thomas, a partner at Labaton, wrote that he had a leadership role in the development of the whistleblower program while serving as an assistant director in the SEC’s Division of Enforcement. The program has been a success by nearly all accounts, he said, but two areas require immediate attention by the SEC.

First, Thomas advised that there is significant uncertainty about certain program rules, including whether the reporting of possible securities violations in the workplace is included within the scope of the anti-retaliation protections for whistleblowers. He said there is no room for grey areas given the troubling statistics on workplace retaliation. The petitioners’ second concern is the increasing number of private agreements that are designed to limit employees’ rights as whistleblowers.

Epidemic of retaliation. The petitioners cited a growing epidemic of retaliation against whistleblowers. The Ethics Resource Center reported that nearly 22 percent of employees who reported misconduct faced retaliation, up from 12 percent in 2007. Over a third of those who chose not to report misconduct cited a fear of retaliation as the reason. The incidences of retaliation are outpacing the rate of increases in whistleblower disclosures, according to the petition.

Petitioners asked the SEC to clarify and strengthen the protections for those who report misconduct internally or externally. The rules should make clear that whistleblowers are eligible for protection when they disclose misconduct and that any action to block the provision of evidence is illegal. The rules also should state that it is legal to report evidence of a crime or violations of the SEC’s rules, despite any assertions by the wrongdoers that it would constitute theft of their property.

Field hearings. Petitioners suggest that the SEC hold a series of field hearings to discuss workplace retaliation and to explore ways to increase reporting. The information from the field hearings and the creation of an advisory committee will assist the SEC in collecting best practices and recommendations for whistleblower reporting and protection, according to petitioners. Petitioners believe that by clarifying the whistleblower protection laws, those with knowledge of potential misconduct will be more likely to come forward, which in turn will help the SEC fulfill its investor protection mission.

Attempts to inhibit reporting. Petitioners noted that the SEC recognized when it drafted the whistleblower rules that there was a risk of private agreements and confidentiality agreements that may seek to inhibit communications with the SEC and that may seek to undermine the incentives that were established to encourage reporting of possible violations. In spite of the SEC’s rule to prevent these efforts, petitioners report that they have seen repeated examples of employment, severance and confidentiality agreements that seek to limit the extent to which employees or former employees can participate in the whistleblower program.

Even though the provisions would likely be found invalid by a court, petitioners say these agreements present a grave danger to the whistleblower program. Individuals typically enter into the agreements without the benefit of legal counsel and may accept them as a normal part of their employment. Individuals also often consider that those engaged in the wrongdoing have greater financial resources, top legal counsel and possibly connections with politicians and regulators, which would make it nearly impossible to prevail in any litigation.

Most troubling, according to petitioners, is the tactic where employers brand the whistleblowers as the wrongdoers on the grounds of breach of confidentiality clauses or theft of company property based on broad confidentiality polices or agreements, without any exceptions for whistleblowers. The SEC’s Rule 21F is helpful, petitioners noted, but a clearer mandate is needed to prevent the chilling effect of retaliatory litigation, balancing tests, and after-the-fact judgments.

Split in the courts. Petitioners also noted that a split among courts with respect to whether certain kinds of internal reports constitute protected conduct under Dodd-Frank, coupled with the SEC’s encouragement of internal reporting, has confused many prospective whistleblowers. The SEC should issue a policy state to clarify the current state of the law, petitioners said, so that whistleblowers do not choose to report securities violations internally based on incomplete or inaccurate information about the legal consequences.

After lobbying the SEC to require internal reporting during the comment period for the whistleblower rules, some of those same parties have now taken the position in litigation that internal reporting is not protected under Section 21F, according to petitioners. Many courts have rejected this argument, but some have not. The current uncertainty of the law creates a significant risk that whistleblowers will be misled about the potential costs and benefits of internal reporting.

The petitioners urged the SEC to issue a policy statement or similar guidance to inform prospective whistleblowers of the key facts surrounding internal reporting. The petition includes the draft of a proposed policy statement for the SEC’s consideration.

Rulemaking Petition 4-677.

Rulemaking Petition 4-676.

MainStory: TopStory DoddFrankAct WhistleblowerNews

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