District Court finds that investors qualify for SEC whistleblower protections

Courts SEC Whistleblower Securities Exchange Act

On July 21, the U.S. District Court for the Southern District of New York ruled that the SEC’s whistleblower protection rule extends to investors. In June 2020, a Nevada-based company and its owner (collectively, “defendants”) filed a motion to dismiss, strike portions of, and enter judgment on the pleadings of an amended complaint filed by the SEC which alleged, among other things, that the defendants violated Rule 21F-17 of the Securities Exchange Act. Rule 21F-17 “prohibits any ‘person’ from taking ‘any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.’” The defendants argued that the SEC’s rulemaking authority extends only to “whistleblower-employees,” claiming they “were not in an employer-employee relationship with those individuals whom the SEC claims were impeded (that is, investor-victims),” and objected to a magistrate judge’s report and recommendation (R&R) “as it relates to the SEC’s claim for impermissible impeding of Rule 21F-17 in violation of the Exchange Act.” The SEC countered that “Section 21F is not limited to protecting whistleblowers in the employee-employer relationship, and as such, Rule 21F-17’s application to any ‘person’ is a proper exercise of its rulemaking authority.”

On review, the court sided with the SEC in finding that Section 21F broadly defines “[w]histleblower” as “any individual who provides . . . information relating to a violation of the securities laws” to the SEC, ruling that Rule 21F-17 “falls squarely within the SEC’s statutory authority to issue ‘necessary and appropriate’ regulations to implement Section 21F of the Exchange Act.” The court further held that “[w]hile certain portions of Section 21F provide anti-retaliation protections specific to those whistleblowers who are employees, nothing in the statute’s text nor the supporting documents indicates that Congress intended to protect only those whistleblowers who are employees.”