Is it possible that whistleblowers who report suspected securities violations internally might not be protected by the Dodd-Frank Act?  In a recent case, a major U.S. corporation argued that an executive who was fired did not qualify as a whistleblower under Dodd-Frank, because he had made an internal complaint, but had not taken his claim to the Securities and Exchange Commission (SEC) before suing his former employer.

A couple of other large organizations have also argued that employees can claim whistleblower protection under the Dodd-Frank Act only if they have provided information to the SEC. This despite the fact that before the Act became law, many large organizations argued (unsuccessfully) that employees should be required to raise allegations internally first.

While apparently several U.S. district court judges have ruled that employees who report such suspicions internally are protected by Dodd-Frank, the Fifth U.S. Circuit Court of Appeals recently ruled otherwise in a case they could be headed to the Supreme Court.

The argument hinges on possibly contradictory language in the law. One section of Dodd-Frank defines a whistleblower as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission. Another section, however, prohibits retaliation against a whistleblower who provides information to the Commission or who initiates, testifies in, assists “in any investigation or judicial or administrative action of the Commission, or makes disclosures required or protected under Sarbanes-Oxley, the Securities and Exchange Act of 1934, or “other law, rule, or regulation subject to the jurisdiction of the Commission.”

If other courts rule as the Fifth Circuit did, it’s possible that reports that could have remained internal will now also, or instead, be filed with the SEC. Only time will tell how potential whistleblowers will respond.

As highlighted before by Ethical Advocate, organizations with a strong ethics culture encourage internal reporting, often through an ethics hotline, and protect whistleblowers from retaliation. Internal reports are often the first indication of wrongdoing, and enable organizations to respond appropriately. This is still true. Please contact Ethical Advocate if you have questions about how to set-up and manage an ethics and compliance hotline or program.

References:

Ensign, Rachel Louise and Christopher Matthews. “Whistleblower Debate Emerges in Court Cases”, Wall Street Journal, August 11, 2013.