Further to this week's Society Alert report on the US Supreme Court's holding in Digital Realty Trust v. Somers that whistleblowers must report information about possible securities law violations to the SEC to be covered by Dodd-Frank's anti-retaliation provisions, DLA Piper offers these suggestions for companies to promote internal reporting:
"Compliance action items
Companies cannot impede employees from reporting to the SEC (see SEC Exchange Act Rule 21F-17), but companies can, and should, encourage employees to report potential misconduct internally. In the wake of Digital Realty, corporate compliance teams should reevaluate their whistleblower programs to ensure that employees perceive those programs as protecting them if they report an issue.
First, ensure that your whistleblower hotline is functioning as it should. If it’s not functioning, employees won’t use it. Test the lines; test the response; review your docket to ensure compliance incidents are being investigated to completion and remediation is implemented in a timely fashion.
Second, ensure that your whistleblower program protects the anonymity of whistleblowers. Often, internal investigators press too hard for identifying details from whistleblowers who wish to remain anonymous and intentionally or unintentionally “out” them in the process. Once anonymity is lost, whistleblowers feel more vulnerable, and practically speaking are more vulnerable, to adverse employment actions elevating the risk that the employee will stop cooperating with the company’s investigation and will start cooperating with the SEC instead.
Third, if not already covered by the company’s code of ethics, tell employees that the company expects them to report misconduct to the compliance department, anonymous hotline, or other resource and reinforce this corporate ethos by promoting trust in the process. Promote a culture that emphasizes correcting issues without
retaliation through senior-level communications to employees as well as compliance training.
If employees view the corporate whistleblowing program, its administrators and corporate management as having integrity, they will feel less incentivized to report to outsiders. Most employees would prefer to report problems internally and will do so if given a fair and meaningful opportunity."
Among the key implications of the decision noted by Sullivan and Cromwell:
- Substantial Narrowing of the Scope of Dodd-Frank Whistleblower Claims. The decision provides needed clarity to courts, employers and individuals. The immediate effect of the decision will be dismissal of pending claims under the Dodd-Frank Act’s whistleblower provisions brought by individuals who did not report alleged violations to the SEC. Individuals who believe they have been retaliated against after reporting internally possible securities law violations still may bring claims under the Sarbanes-Oxley Act. A Sarbanes-Oxley retaliation claim must be filed within 180 days of the violation (or the date that the employee became aware of the violation) and in an administrative proceeding before the Occupational Safety and Health Administration. By contrast, the statute of limitations on a Dodd-Frank retaliation claim is three years, and a Dodd-Frank claimant has immediate access to federal court. A successful Dodd-Frank whistleblower is entitled to double backpay with interest, whereas Sarbanes-Oxley limits recovery to actual backpay with interest.
- Ambiguity Regarding Dual Reporting. The Court did not address whether there must be a “temporal or topical connection” between the violation that is reported to the SEC and any internal disclosure as to which the individual claims retaliation.
- Meaning of “Provides Information to the Commission.” The Court observed that Dodd-Frank permits the SEC to define the “manner” in which information may be reported to the SEC by a whistleblower. In response to this decision, the SEC may adopt a broader definition of the manner in which information can be reported, such as providing testimony to the SEC or turning over information to the SEC in an indirect fashion.
See also DLA Piper's post, “Who you gonna call? Recommended best practices for whistleblower hotlines,” these articles from the National Law Journal: "'The SEC Has a Big Problem Now After Broad Whistleblower Protections Curbed," Reuters: "SCOTUS whistleblower case dodges Chevron deference showdown," and the WSJ: "Whistleblower Ruling Adds a Risk for Companies," and numerous additional memos, benchmarking surveys, and other resources on our Whistleblowers and Compliance & Ethics topical pages.