Ninth Circuit Weighs In on Dodd-Frank Whistle-Blower Protections, Deepening Circuit Split


GavelThe Dodd-Frank Act’s whistle-blower provisions continue to divide the federal courts on a key issue: should informants have to contact the SEC before they can claim anti-retaliation protections?

The U.S. Court of Appeals for the Fifth Circuit says “yes,” the Second Circuit says “no.”

On March 8, the Ninth Circuit entered the fray. The court ruled that a whistle-blower—in this case a former Digital Realty Trust Inc. executive—didn’t have to report his concerns to the Securities and Exchange Commission to be able to sue his employer for retaliation under Dodd-Frank.

The court joined the Second Circuit in concluding that the term “whistle-blower” isn’t confined to those who disclose information to the SEC.

The question of whom the whistle-blower approaches is an important one. As observed by the Ninth Circuit, informants who know of possible securities violations may approach either their compliance/legal departments or the SEC, but are unlikely to contact both.

According to Navex Global’s 2016 Ethics & Compliance Hotline Benchmark Report, there has been a 44 percent increase over the last five years in the rate at which employees internally report violations. The report concludes that significantly more companies are seeing more employee reports of malfeasance.

If Dodd-Frank protections were to cover only SEC-reported incidents, that would exclude a high—and growing—number of whistle-blowers.

The Ninth Circuit decision increases the chance that the U.S. Supreme Court will hear, and clarify, the issue. 

Transition Period

On another front, the SEC is now entering a period of transition. Acting SEC Chairman Michael Piwowar recently said the commission should review its spending in the face of possible budget cuts under the new Congress.

Budget cuts won’t affect SEC bounties, which are drawn from the Investor Protection Fund—which draws from sanctions collected by the commission. Nonetheless, budget cuts and other changes to the SEC’s enforcement program may impact staff who operate the SEC’s whistle-blower program.

The SEC program, since its inception in August 2011, has grown over the years. It rewarded whistle-blowers a record $57 million in fiscal 2016.

However, a memo circulated in February by Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, suggests that the SEC bounty program may not be immune from changes under the Financial Choice Act, the forthcoming Republican plan to overhaul Dodd-Frank.

Time will tell how Congress handles the program and whether the Supreme Court weighs in on whistle-blower protections.