On December 31, 2015, U.S. District Judge T.S. Ellis III denied an employee whistleblower protection under the Dodd-Frank Act. Rather than reporting possible wrongdoing directly to the U.S. Securities and Exchange Commission (“SEC”), the employee raised her concerns through internal channels within her organization. The employee alleged that the company retaliated against her for reporting what she believed to be misconduct to a superior with oversight authority. In dismissing the employee’s claim, the District Judge adopted a strict interpretation of the Dodd-Frank Act’s requirements for whistleblower protection. He stated that the definition of a whistleblower is “unambiguous” and restricted the eligibility of a “whistleblower” to someone who brings information to the SEC. The District Judge stated that “the SEC has adopted a definition of ‘whistleblower’ for purposes of a Dodd-Frank retaliation claim that is contrary to the plain language of [the applicable section] insofar as the SEC’s definition [in the interpretive rule] does not require a whistleblower to provide the information regarding violations of securities laws to the Commission.”
The Court was referring to the SEC’s own interpretive rule. In August 2015, the SEC issued its interpretive rule which includes a more expansive definition of a whistleblower in order to clarify the applicable sections of the Dodd-Frank Act dealing with retaliation against whistleblowers, which the SEC acknowledged are ambiguous. Under the interpretive rule, the SEC said that Dodd-Frank does not require an employee to report directly to the SEC in order to qualify as a whistleblower eligible for employment retaliation protections, and that internal reporting through an organization’s compliance protocol is sufficient to trigger the protections.
The issue addressed by Judge Ellis is an important one; it goes to the heart of the critical question of the impact of government-administered whistleblower programs and companies’ internal compliance protocols.
In contrast to this decision, in September of last year, the U.S. Court of Appeals for the Second Circuit held that the meaning of a whistleblower is “ambiguous”, stating that “[…] the pertinent provisions of Dodd-Frank create a sufficient ambiguity to warrant our deference to the SEC’s interpretive rule”. In fact, the Court noted that a larger number of district courts have deemed the statute ambiguous and have deferred to the SEC’s interpretation of a whistleblower, in contrast to the courts that have ruled against the SEC’s interpretation.
In Ontario, as we have written previously, the OSC introduced a revised version of its current proposal for the Whistleblower Program (“Proposed Program”) in October 2015, which aims to encourage reporting of securities law violations and enhance securities enforcement efforts primarily by offering bounty-based “awards” to whistleblowers who come forward to the OSC. Eligible whistleblowers are entitled to a payment of up to $5 million. The OSC aims to have the program, which would be the first of its kind in Canada, in place for this Spring 2016.
The ongoing questions in the U.S. about whistleblower protections and the role of internal compliance protocols bear directly on the OSC’s proposal. As discussed in Osler’s most recent comment letter to the OSC on the Proposed Program, the protection of whistleblowers should be of paramount importance in any whistleblower policy the OSC adopts. Similarly, in Osler’s view, an OSC whistleblower policy should not undermine internal compliance programs, and should instead require employees to report misconduct internally at their organization before reporting to the OSC, unless the employees demonstrate that it was not reasonable or possible to do so in the circumstances.
The Proposed Program states that the OSC “expects” that employers will not retaliate against employees who report misconduct, whether that misconduct is reported directly to the OSC or through the organization’s internal compliance protocol. Similarly, Staff have indicated that they intend to recommend amendments to the Ontario Securities Act that will provide protections to whistleblowers against retaliation by their employers. In light of the U.S. experience, it will be important that the OSC make clear that these protections explicitly cover whistleblowers who report to internal compliance as well as directly to the OSC.
