SEC Defends Whistleblower Protection Rules

The Securities and Exchange Commission (SEC) recently filed an amicus brief with the Sixth Circuit, defending whistleblowers and advocating that the court apply the Commission’s rulemaking while rendering its decision in an employer retaliation lawsuit.  The Commission’s rule resolved an ambiguity in the Dodd-Frank Act’s anti-retaliation provisions and expanded its whistleblower protections to employees who engage in any whistleblowing activities described in Section 21F(h)(1)(A) of the Securities Exchange Act, thereby recognizing congressional intent to protect broader forms of whistleblowing activity.

The lawsuit in question, Verble v. Morgan Stanley Smith Barney LLC, was filed by a former employee of Morgan Stanley who claimed he was harassed and then fired by his employer after his co-workers began to suspect he was working with the FBI. Though Mr. Verble did not provide information to the SEC, he reported his concerns internally and collaborated with the FBI to gather evidence that Morgan Stanley was involved in insider trading.

The SEC argues in its amicus brief that while the Dodd-Frank Act defines a “whistleblower” as one who reports securities and exchange violations to the SEC, internal reporting is included by Section 21F(h)(1)(A) as protected whistleblowing activity. Thus, there is an ambiguity between the statue’s narrow definition of “whistleblower” and the broader range of whistleblowing activity it also protects. The SEC further argues that if Congress had truly intended to protect only whistleblowers who reported to the Commission, then it would have been more explicit.

Therefore, the SEC continues, it is in the interest of the court to apply the broader definition included in the agency’s rule because to do so otherwise “could arbitrarily and irrationally deny the employment retaliation protections afforded by Dodd-Frank to individuals who… first report potential securities law violations to the U.S. Department of Justice or Self-Regulatory Organizations such as FINRA.”  Dodd-Frank instructs the SEC to pay informant awards based on monetary sanctions in “related actions” initially brought  by whistleblowers to the DOJ and SROs. Thus, since the anti-retaliation and award provisions are coextensive, there is no indication that Congress intended to treat claims disparately that were brought to different agencies.

The amicus brief further highlights the importance of internal reporting to preventing securities and exchange violations and protecting investors.  The SEC demonstrates how its award provisions were calibrated not to disincentivize internal reporting and argues that adopting the narrow whistleblower definition would inhibit the Commission’s ability to protect whistleblowers who report internally first, thereby discouraging the practice.

Ultimately, the Sixth Circuit decided in favor of Morgan Stanley, stating that the Dodd-Frank anti-retaliation provisions were unambiguous and that Mr. Verble did not qualify as a whistleblower. The court cited Asadi v. G.E. Energy (USA), L.L.C., a Fifth Circuit decision from 2013, which held that the anti-retaliation provision applied only to those who provided information to the SEC.

Though the case was not decided in favor of the SEC rule, the Commission’s persistence in fighting for the implementation of its rule may inevitably lead to a Supreme Court decision on broader SEC whistleblower protections.

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