Publicly traded companies and their subsidiaries are inundated with compliance challenges under the Sarbanes-Oxley Act (SOX) and Dodd-Frank Act (DFA). Both acts were enacted in an effort to protect investors and prevent fraud by preventing retaliation against whistleblowers that report securities violations. Under SOX, a whistleblower is protected whether he reports the wrongdoing internally to company officials or externally to the Securities and Exchange Commission (SEC). But the wording of the DFA’s anti-retaliation provisions makes the act’s definition of a whistleblower less clear.
The DFA applies protection to three categories of whistleblowers: those who provide information to the SEC, those who assist in an SEC investigation, or those who “make disclosures that are required or protected” under SOX, securities laws, and other SEC regulations. The first two categories clearly state that a whistleblower who reports to or assists the SEC is protected. The third category is more ambiguous, and federal courts are split on whether it requires whistleblowers to report information to the SEC, regardless of whether they have reported it internally.
Two recent district court decisions illustrate the division. In May 2014 in Yang v. Navigators Group, Inc., the U.S. District Court of the Southern District of New York denied a motion to dismiss whistleblower claims, finding the plaintiff was entitled to whistleblower protection even though she did not report the alleged securities law violations to the SEC.
In December 2014, however, the same district court took the opposite view in Berman v. Neo@Ogilvy LLC. Calling the DFA’s definition of a whistleblower “unambiguous,” the court concluded that an individual must report information to the SEC in order to qualify for protection against retaliation under the act.
The division of opinion is likely to continue in 2015, to be ultimately decided in the U.S. Supreme Court. In the meantime, employers should be mindful of an employee’s right to complain internally under SOX and, perhaps, DFA. Employers should create a compliance structure to address complaints. The reporting structure and complaint investigation process should include protections against retaliation and should not hinder an employee’s ability to report problems to the SEC.
We are happy to help you develop policies and procedures that protect your company and clients while promoting an atmosphere of openness between employees and management.