The SEC’s whistleblower program has been a resounding success – a point that has been echoed by SEC chairmen and commissioners on both sides of the aisle. Indeed, whistleblowers have helped take more than $1.5 billion out of the pockets of fraudsters and put it back into the hands of their victims. The program has collected more than $6.3 billion in penalties and, most importantly, awarded more than $1.5 billion to the brave women and men who helped bring wrongdoing to light.
It is this very success that highlights the wisdom and anti-corruption benefits of continuously working to improve and build on the promise of this impressive track record. Fortunately, a bipartisan group of senators agreed and proposed the SEC Whistleblower Reform Act of 2023. Introduced by Senators Grassley (R-IA) and Warren (D-MA) on March 15, and co-sponsored by Senators Collins (R-ME), Warnock (D-GA) and Cortez Masto (D-NV), this legislation is designed to make significant improvements to the SEC’s existing program.
Most notably, the legislation would respond to the 2018 U.S. Supreme Court ruling in Digital Realty Trust, Inc. v. Somers which stripped workers of retaliation protection when they reported company misconduct internally but not externally to the SEC. In addition, it would reinforce important safeguards to prevent companies from using policies or practices designed to muzzle whistleblowers.
If passed, this legislation will help ensure that the SEC’s whistleblower program remains an indispensable tool in the Commission’s efforts to control wrongdoing and protect investors.
Support internal whistleblowers And Company Compliance Efforts
In Digital real estate, the Supreme Court ruled that to be considered a “whistleblower,” and therefore protected from retaliation, an individual must report violations directly to the SEC and not just through internal channels where they work. But a large majority of whistleblowers first go directly to their managers or corporate compliance programs when they discover wrongdoing. This is a perfectly sensible approach and one that companies should generally support as it gives them the ability to solve their own issues and self-report where appropriate.
The judgment in Digital real estate, however, has created a perverse incentive for whistleblowers to dodge a company’s efforts to solve its own problems and promote an internal culture of compliance. Indeed, unless whistleblowers report their concerns promptly and directly to the SEC, they will not be protected from retaliation – and retaliation is a well-founded concern for whistleblowers. Actually, the data suggests that a large and growing percentage of whistleblowers experience some form of workplace retaliation, ranging from harassment to dismissal.
The SEC Whistleblower Reform Act provides a common sense solution. The provision clarifies that the definition of a “whistleblower” includes those who voluntarily report potential violations of securities law to “a person exercising supervisory authority over the whistleblower at the whistleblower’s employer.” This gives whistleblowers the protection against retaliation they deserve and negates the harmful incentives created by Digital real estate.
Codification of the SEC’s “No Muzzle” rule
We all know the maxim “concealment is worse than crime”. Some companies put a new spin on this dynamic by trying to provide a cover-up even before the misconduct occurs. They do this by using restrictive nondisclosure agreements (or NDAs) written to prevent whistleblowers from reporting what they know to the SEC (even after unsuccessful attempts to get their employers to respond to their concerns). These NDAs can allow companies to use the threat of costly litigation to prevent the truth from coming to light. The second filed a number of enforcement actions against companies for imposing these types of restrictive NDAs under its own rule 21F-17(a). The Whistleblower Reform Act would codify this important SEC rule and clarify that NDAs designed to prohibit employees from whistleblowing are illegal and unenforceable.
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The SEC Whistleblower Reform Act reflects a bipartisan consensus that a strong whistleblower program benefits investors, businesses and the public. The program has helped uncover – and fix – serious and costly fraud that might otherwise never have been discovered. Having worked in law enforcement for over a decade and then as an SEC Commissioner helping oversee the SEC’s Office of the Whistleblower, I know firsthand the value of continued investment. in this very successful program. I hope Congress will move quickly to pass this important legislation.