The SEC, Second Circuit, and Whistleblowers: Searching For Ambiguity

The SEC’s interpretation of the Dodd-Frank whistleblower provisions prevailed in a recent Second Circuit decision, creating a circuit split that could be heading for the Supreme Court. Specifically, the Circuit Court deferred to the SEC’s interpretation of the provisions under which whistleblowers are protected from retaliation, finding that even if the whistleblower has not reported to the SEC as required by the definition of “whistleblower,” the person is entitled to protection. Berman v. Neo@ogilvy LLC, No. 14-4626 (2nd Cir. Sept. 10, 2015). Previously, the Fifth Circuit rejected the SEC’s interpretation. Asadi v. G.E. Energy (USA), LLC, 720 F. 3d 620 (5th Cir. 2013)(here).

The suit

Daniel Berman was the finance director of Neo@Ogilvy LLC from October 2010 to April 2013. He was responsible for its financial reporting and internal accounting procedures. The firm is a media agency that furnishes a range of digital and direct media services.

In January 2014 Mr. Berman filed suit against his former employer alleging that he was discharged in violation of the whistleblower protection of Dodd-Frank Section 21F and in breach of his employment contract. During the course of his employment the suit claims Mr. Berman discovered accounting fraud. The firm dismissed his allegations and terminated him in April 2013. In August of that year he reported his claims to the firm audit committee. In October he reported his findings to the SEC. Prior to that time the statute of limitations ran on one of his Sarbanes-Oxley claims.

The District Court granted a motion to dismiss. The court concluded that Mr. Berman was not entitled to protection under the statute in view of the definition of whistleblower in Section 21F(a)(6) which specifies that the person must have reported to the SEC.

The Second Circuit

The Circuit Court reversed. The question here revolves around the Dodd-Frank whistleblower provisions, added to the Exchange Act as Section 21F. Section 21F(b) provides incentives to would be whistleblowers by directing the SEC to pay awards to those who report violations of the securities laws to the agency that result in a successful enforcement action.

Section 21F(h)(1)(A) contains the retaliation protection provisions. In pertinent part that provision states that: “No employer may discharge, demote, suspend, threaten, harass . . . or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower – (i) in providing information to the Commission in accordance with this section; (ii) in initiating, testifying in, or assisting in any investigation . . . of the Commission . . . or (iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 . . . this chapter . . . and any other law, rule, or regulation subject to the jurisdiction of the Commission.” Section 21F(a)(6) defines “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission . . .”

The Sarbanes-Oxley Act, which is cross–referenced in the Dodd-Frank provisions, contains a number of provisions regarding whistleblowers. For example, Section 307 requires the SEC to issue rules regarding attorney reporting of violations within a company. Section 301 requires the SEC to issue rules to direct national securities exchanges that would require issuer audit committees to establish internal procedures allowing employees to submit complaints regarding auditing matters. Section 806 precludes issuer retaliation against an employee who provides information concerning securities law violations to a federal regulatory agency or law enforcement agency, a member of Congress or “a person with supervisory authority over the employee.”

In 2011 the SEC issued rules implementing Section 21F. In 240.21F-2(a)(1) the Rule states that “You are a whistleblower if . . . you provide the Commission with information . . .” Subsection (b), titled “Prohibition against retaliation” provides that a person is a whistleblower if the person has a reasonable belief that the information being furnished relates to a violation of the securities laws and it is provided “in a manner described in Section 21F(h)(1)(A) of the Exchange Act . . . The anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award.”

While this case was under submission the SEC, in August 2015, issued a release states that “an individuals’s [sic] status as a whistleblower does not depend on adherence to the reporting provisions specified in Exchange Act Rule 21F-9(a) but is determined solely by the terms of Exchange Act Rule 21F2(b)(1).” In effect the interpretation states that a person is entitled to protection under the anti-retaliation provisions even if that person did not first report the information to the SEC.

The issue here, according to the Court, is “whether the arguable tension between the definitional section of subsection 21F(a)(6) (whistleblower definition) and subdivision (iii) of subsection 21(F)(h)(1)(A) (anti-retaliation provisions) creates sufficient ambiguity as to the coverage of subsection (iii) to oblige us to give Chevron deference to the SEC’s rule.” The SEC argued that the determination in its rule is entitled to deference without citing the need for an ambiguity.

Here there is no absolute conflict between the SEC notification requirement in the definition of “whistleblower” and the absence of such a requirement in both subdivision (iii) of subsection 21F(h)(1)(A) of Dodd-Frank and the SOX provision incorporated in subdivision (iii) the Court found: “An employee who suffers retaliation after reporting wrongdoing simultaneously to his employer and to the SEC is eligible for Dodd-Frank remedies and those provided by Sarbanes-Oxley.” It is this point that persuaded the Asadi Court to hold that the SEC notification requirement must be observed. At the same time, “Applying the Commission reporting requirement to employees seeking Sarbanes-Oxley remedies pursuant to subdivision (iii) would leave that subdivision with an extremely limited scope . . .” the Court concluded. For example, there are categories of whistleblowers such as attorneys and auditors who cannot report to the SEC until after making internal reports.

Unfortunately reviewing the legislative history does not resolve the question, the Court found. What became subdivision (iii) of subsection 20F(h)(1)(A) was added to the statute during the conference. There is no real discussion of the provision in the conference report.

Other courts have split on the issue. The Fifth Circuit and some district courts have rejected the SEC’s interpretation based largely on the plain language of the provisions. On the other had, a significant number of district courts have adopted the SEC’s interpretation of the provisions.

Ultimately, the Court turned to what it called “the realities of the legislative process:” “When conferees are hastily trying to reconcile House and Senate bills, each of which number hundreds of pages, and someone succeeds in inserting a new provision like subdivision (iii) into subsection 21F(h)(1)(A), it is not at all surprising that no one noticed that the new subdivision and the definition of ‘whistleblower; do not fit together neatly.” This led the Court to conclude that “it is doubtful that the conferees who accepted the last-minute insertion of subdivision (iii) would have expected it to have the extremely limited scope it would have if it were restricted by the Commission reporting requirement . . .” To resolve this “ambiguity” the court deferred to the SEC.

Judge Dennis Jacobs dissented noting: “The majority and the Securities and Exchange Commission have altered a federal statute by deleting three words (“to the Commission”) from the definition of ‘whistleblower’ in the Dodd-Frank Act. No doubt, my colleagues in the majority, assisted by the SEC or not, could improve many federal statutes by tightening them or loosening them, or recasting or rewriting them. I could try my hand at it. But our obligation is to apply congressional statutes as written. In this instance, the alteration creates a circuit split, and places us firmly on the wrong side of it . . .” Ultimately the interpretation advocated by the SEC and adopted by the majority reflects the “SEC’s territorial interest . . .”


The here, according to the Court, is one of Chevron deference. The resolution of that question begins, the Court said, by determining if there is a statutory ambiguity. If there is then if a regulatory agency such as the SEC adopts a reasonable interpretation of the statute it is entitled to deference. Stated differently, the Court cannot second guess the agency by adopting an alternate reasonable interpretation of the statute.

The majority decision here, however, is anything but Chevron. Page after page of the majority opinion wonders about stating and restating the issue to be decided while searching for an ambiguity. Ultimately none is found. Rather, the majority adds together what it claims would be an overly narrow reading of the statute if its text were applied as written by Congress with speculation about what happened in the conference committee that ultimately produced Dodd-Frank. This leads the majority to conclude it should defer to the SEC.

Speculation about the scope of a federal regulatory statute is not ambiguity. More speculation about what may or may not have happened in a conference committee is not ambiguity. Adding speculation to speculation equals more speculation. While the SEC’s views of what the scope of the Dodd-Frank whistleblower provisions may well have merit, that does not give the agency license to rewrite the plain language of the statute – even with the help of a compliance Circuit Court which seems to have forgotten that the interpretation of any statute begins with the statutory text. Ultimately this issue will now require resolution by the Supreme Court.

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