The Basic Definition Of A Whistleblower Under Dodd-Frank
The Dodd–Frank Act defines a whistleblower making disclosures under the SEC’s jurisdiction as follows: “The term ‘whistleblower’ means 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.” 15 U.S.C. § 78u–6(a)(6).
To qualify as a whistleblower under Dodd-Frank, an individual must be “an employee of a public company or subsidiary whose financial information is included in the consolidated financial statements of a public company or the employee of a nationally recognized statistical rating organization.” 17 C.F.R. pts. 240 & 249, Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934. (“Final Rules”), at 17. The Final Rules define a whistleblower as one who possesses a “reasonable belief” that the information provided “relates to a possible securities law violation.” The “reasonable belief” standard, also applicable in SOX and other whistleblower contexts, is intended to put “potential whistleblowers on notice that meritless submissions cannot be the basis for anti-retaliation protection.” Final Rules at 218. The SEC notes that it included this phrase to deter frivolous claims so it could focus on more meritorious submissions and because of its concern about the cost of such claims to employers, not only in terms of the costs of litigation, but also because of “inefficiencies stemming from some employers’ decisions not to take legitimate disciplinary action due to the threat of bad faith anti-retaliation litigation.” Id. at 219.
The use of the term “possible violation” in the definition of whistleblower in the Final Rules is also significant. In the proposed rules, the SEC had used the word “potential,” but changed it to “possible violation” that “has occurred, is ongoing, or is about to occur” to be more precise and clarify that whistleblower status applies to those who provide “information about possible violations, including possible future violations, of the securities laws.” Id. at 12. The SEC rejected the use of the terms “probable violation” or “likely violation,” stating that it thought that such a “higher standard” was “unnecessary” and would “make it difficult for the staff to promptly assess whether to accord whistleblower status to a submission.” Id. at 13. In the SEC’s view, the language it adopted was sufficient to ensure that “frivolous submissions would not qualify for whistleblower status.” Id.
The SEC also decided not to limit the scope of the term “possible violations” by including a requirement that the information provided relate to a “material” violation of the securities laws. In keeping with its objective of encouraging informants, the Final Rules express the SEC’s concern that a materiality threshold might limit the number of reports made. The SEC states that “it is preferable for individuals to provide us with any information they possess about possible securities violations (irrespective of whether it appears to relate to a material violation) and for us to evaluate whether the information warrants action.” Id. at 14.
Hat tip: An outstanding article that covers the law and final regulations in comprehensive fashion is Dodd-Frank and the SEC Final Rule: From Protected Employee To Bounty Hunter, ST001 ALI-ABA 1487 (July 28-30, 2011), which was written by Littler Mendelson, P.C. lawyers John S. Adler, Edward T. Ellis, Barbara E. Hoey, Gregory C. Keating, Kevin M. Kraham, Amy E. Mendenhall, Kenneth R. O’Brian, and Carole F. Wilder. This post is partially derived from that article.