The Bipartisan SEC Whistleblower Reform Bill: Building on Success

The SEC’s whistleblower program has been a resounding success – a point that has been echoed by SEC Chairs and Commissioners from both sides of the aisle. Indeed, whistleblowers have helped to take over $1.5 billion out of the pockets of fraudsters and put it back into the hands of their victims.  The program has garnered over $6.3 billion in sanctions and, importantly, awarded over $1.5 billion to the courageous women and men who helped bring misconduct to light.

It is this very success that highlights the wisdom, and anti-corruption benefits, of continually working to improve and build upon the promise of this impressive record. Fortunately, a bipartisan group of Senators agree and have put forth the SEC Whistleblower Reform Act of 2023.  Introduced by Senators Grassley (R-IA) and Warren (D-MA) on March 15, and cosponsored by Senators Collins (R-ME), Warnock (D-GA) and Cortez Masto (D-NV), this legislation is designed to make some important improvements to the SEC’s existing program.

Most notably, the legislation would address the U.S. Supreme Court’s 2018 ruling in Digital Realty Trust, Inc. v. Somers which stripped workers of protection from retaliation when they have reported corporate 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 Whistleblower Program remains an indispensable tool in the Commission’s efforts to police wrongdoing and protect investors.

Supporting Internal Whistleblowers and Corporate Efforts at Compliance

In Digital Realty, the Supreme Court ruled that to be considered a “whistleblower,” and thus protected from retaliation, an individual must report violations directly to the SEC and not just through internal channels where they work.  But a vast majority of whistleblowers first go directly to their managers or corporate compliance programs when they discover misconduct.  That is an entirely sensible approach and one that companies should generally support because it allows them the opportunity to fix their own problems and self-report where appropriate.

The ruling in Digital Realty, however, created a perverse incentive for whistleblowers to sidestep a company’s efforts to address its own issues and promote an internal culture of compliance. That’s because unless whistleblowers take their concerns quickly and directly to the SEC, they will not be protected from retaliation – and retaliation is a well-grounded concern for whistleblowers.  In fact, data suggests that a large and growing percentage of whistleblowers experience some form of retaliation in the workplace, ranging from harassment to termination.

The SEC Whistleblower Reform Act provides a common-sense fix.  The provision makes clear that the definition of a “whistleblower” includes those who voluntarily report potential violations of securities law to “a person with supervisory authority over the whistleblower at the employer of the whistleblower.”  This affords whistleblowers the protection from retaliation they deserve and reverses the harmful incentives created by Digital Realty.

Codifying the SEC’s “No Muzzle” Rule

We’re all familiar with the maxim “the cover-up is worse than the crime.”  Some companies put a novel twist on this dynamic by trying to provide for a cover-up even before misconduct occurs. They do this through the use of restrictive non-disclosure agreements (or NDAs) written to prevent whistleblowers from reporting what they know to the SEC (even after they’ve tried unsuccessfully to get their employers to address their concerns). These NDAs may allow firms to use the threat of expensive litigation to keep the truth from coming to light. The SEC has 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 blowing the whistle are illegal and non-enforceable.

*    *    *

The SEC Whistleblower Reform Act reflects a bipartisan consensus that a strong whistleblower program benefits investors, companies and the public.  The program has helped uncover — and remediate –serious and costly frauds that might never have otherwise come to light. Having worked in law enforcement for over a decade, and then as an SEC Commissioner helping to oversee the SEC’s Office of the Whistleblower, I know firsthand the value of continued investment in this highly successful program.  I hope Congress will act quickly to pass this important legislation.