Protecting whistleblower protections in the Dodd-Frank Act.

• Author: Leifer, Samuel C.
• Position: NOTE

In 2008, the United States fell into its worst economic recession in over seventy years. In response, Congress enacted the near-comprehensive Dodd--Frank Wall Street Reform and Consumer Protection Act. Section 922 of Dodd-Frank, in particular, includes specific provisions designed to incentivize and protect corporate whistleblowers. These provisions demonstrated Congress's belief that a comprehensive and robust whistleblower protection scheme was essential to preventing many of the abuses that caused the financial crisis. Unfortunately, this section's inconsistent language has produced conflicting decisions within the federal judiciary. In accordance with the Securities and Exchange Commission ("SEC")'s own reading of Section 922, several district courts have held that individuals engaging in "whistleblower activities" are entitled to Dodd-Frank's antiretaliation protections, irrespective of whether these individuals report directly to the SEC or report through internal channels in their own companies. In contrast, the U.S. Court of Appeals for the Fifth Circuit has limited Dodd-Frank's whistleblowing protections to individuals who report directly to the SEC. This Note contends that remedial legislation like Dodd-Frank should be broadly interpreted to further its purpose, that a broad interpretation of Section 922 is consistent with the text, structure, and legislative history of Dodd-Frank, and that courts unable to resolve the apparent conflict in this section should defer to the SEC's administrative expertise and interpretation.

TABLE OF CONTENTS INTRODUCTION I. A CYCLE OF FINANCIAL COLLAPSES AND SUBSEQUENT REMEDIAL FINANCIAL REGULATION A. Sarbanes-Oxley: A New Commitment to Whistleblower Protections 1. Sarbanes--Oxley Introduces Internal Whistleblower Protections 2. Sarbanes-Oxley's Whistleblowing Protections Have Been Ineffective B. Dodd--Frank: A Response to the Subprime Mortgage Crisis and to Sarbanes--Oxley's Ineffective Protections II. INDIVIDUALS DO NOT NEED TO REPORT DIRECTLY TO THE SEC IN ORDER TO MERIT DODD-FRANK'S ANTIRETALIATION PROTECTIONS A. The Ambiguous Definition of "Whistleblower" B. The District Courts' Broad Interpretation of Dodd--Frank's Whistleblower Protection Provision C. The Fifth Circuit Narrowly Interpreted Section 922 Based Purely on the Text III. COURTS CAN FOLLOW THE SUPREME COURT'S GUIDANCE IN HERMAN WITHOUT VIOLATING THE CANONS OF STATUTORY CONSTRUCTION A. Remedial Securities Regulations Should Be Broadly and Flexibly Interpreted B. The Text and Structure of Section 922 Are Consistent with c Broad Interpretation and Do Not Limit the Application of the Herman Rule 1. The Text and Structure of Section 922 Reasonably Support a Broad Interpretation 2. Courts That Find the Text and Structure of Section 922 Ambiguous Can Defer to the SEC's Interpretation C. The Legislative History of Dodd--Frank Provides Little Guidance on How Courts Should Interpret Section 922 D. Courts That Find Conflict and Ambiguity in Section 922 Should Defer to the SEC's Interpretation CONCLUSION INTRODUCTION

When the United States' housing market collapsed in 2008, it sent the country into its worst financial state since the Great Depression. Academics, politicians, and the media have suggested various causes of and potential remedies for the collapse. But while many of the causes and remedies for this particular recession may be novel, the general pattern of a financial collapse followed by increased financial regulations is quite familiar. The United States has suffered many severe financial setbacks in the last century, and each time the federal government's response has included some form of proposed regulatory solution: the introduction of the Securities Exchange Act of 1934 following the Great Depression; (1) the enactment of the Sarbanes-Oxley Act of 2002 ("SOX") following the collapses of Enron, WorldCom, and several other prominent corporations; (2) and the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") following the most recent financial crisis. (3)

In recent years, Congress has endorsed the role of whistleblowers in preventing or mitigating the kinds of financial improprieties that can lead to economic chaos. Accordingly, Congress has incorporated whistleblower protection provisions into its remedial legislation. SOX was the first of these regulatory responses to include comprehensive protections and incentives for corporate whistleblowers. Although there is considerable empirical evidence to suggest that SOX's whistleblowing program was unsuccessful, (4) the subsequent introduction of stronger and more expansive whistleblower measures in Dodd-Frank reiterated Congress's belief that whistleblowers play an important role in financial regulation.

Despite this unambiguous congressional goal, however, the statutory language of both SOX and Dodd-Frank remains ambiguous as to precisely who can receive these whistleblower protections. Whereas SOX was unclear about which individuals within an organization are entitled to whistleblower protections (for example, direct employees of a company versus employees of a company's contractors), (5) Dodd-Frank's ambiguity concerns what actions an individual must take in order to receive whistleblower protections.

The heart of the Dodd-Frank debate stems from an internal inconsistency in the way that the statute defines "whistleblower." Section 922 of Dodd-Frank amended the Securities Exchange Act of 1934 by adding Section 21F (codified at 15 U.S.C. [section] 78u-6), a new section that includes enhanced protections and incentives for securities whistleblowers. (6) Within Section 922, [section] 78u-6(a)(6) (the Definitions Section) explicitly defines a whistleblower as an individual who reports a potential violation to the Securities and Exchange Commission ("SEC"), (7) but [section] 78u-6(h)(l) (the Antiretaliation Section) (8) includes protections for individuals who report directly to the SEC as well as for individuals who report internally, through their own company's compliance systems. (9) This has created disagreement among the courts regarding whether Dodd--Frank antiretaliation protections should be limited to individuals who report directly to the SEC (external whistleblowers) or should include individuals who report through their companies (internal whistleblowers). Antiretaliation protections can give whistleblowers the security and confidence they need to report potential violations, and such protections can also deter companies from committing these violations in the first place. Studies have demonstrated that a majority of corporate whistleblowing is done internally (10) and that internal whisdeblowing provides numerous advantages over external whistleblowing. (11) Accordingly, resolving this dispute is crucial to the long-term effectiveness of Dodd--Frank.

District courts in New York, Connecticut, Colorado, and Tennessee have interpreted the statute broadly to protect both internal and external whistleblowers. (12) The SEC has adopted a similar reading. (13) In contrast, the U.S. Court of Appeals for the Fifth Circuit has interpreted Dodd-Frank's whistleblowing protections more narrowly, limiting protection only to those individuals who report potential violations directly to the SEC. (14)

Although the Supreme Court has yet to address Section 922 directly, it has provided some guidance on interpreting ambiguities in remedial legislation. In Herman & Maclean v. Huddleston, the Court held that remedial legislation--specifically, securities regulations--should be broadly and flexibly interpreted. (15) Consistent with Herman, then, this Note contends that Dodd-Frank's whistleblowing protections should be interpreted broadly to include individuals reporting externally to the SEC as well as those individuals reporting internally "under ... any other law, rule, or regulation subject to the jurisdiction of the [SEC]." (16)

Part I details the history of SOX and Dodd--Frank, highlighting the remedial nature of both of these statutes and underscoring that Dodd--Frank's whistleblower measures were meant to be an expansion and enhancement of SOX's program. Part II introduces the split between the Fifth Circuit and the district courts of other circuits and discusses the differing rationales behind both the broad and narrow interpretations of "whistleblower" in Dodd-Frank. Part II also argues that the district courts' rationales for interpreting Section 922 broadly comport with the remedial purposes animating Dodd-Frank and should prevail over the Fifth Circuit's narrow interpretation, which is unpersuasive and incorrect. Part III asserts that Dodd--Frank's text, structure, and legislative history counsel in favor of interpreting the Act in accordance with Herman's principles on remedial legislation. Ultimately, this Note concludes that because Dodd-Frank and its whistleblower protection provisions are remedial in nature, courts should interpret ambiguous sections as broadly and flexibly as the text permits.

1. A CYCLE OF FINANCIAL COLLAPSES AND SUBSEQUENT REMEDIAL FINANCIAL REGULATION

   Many of the most sweeping pieces of financial regulation in the United States over the past century can be viewed as remedial legislative responses to a series of severe market collapses (17): the Securities Exchange Act in 1934 in response to the market instability of the 1920s and 1930s; (18) SOX in 2002 after the collapses of Enron, WorldCom, Tyco, and several other prominent corporations; (19) and Dodd-Frank in (20) 10 in response to the financial collapse of 2008.20 These statutes all share a common purpose: to remedy a perceived problem in the financial sector. (21) The remedial nature of Dodd--Frank is paramount in resolving questions of statutory interpretation because the Supreme Court has specifically held that remedial statutes should be given broad and expansive interpretations. (22) Section I.A details the...