How the Federal Arbitration Act (FAA) Protects Securities Fraud Whistleblowers

Learn What You Need to Know About Blowing the Whistle with the SEC if You Signed an Arbitration Agreement

Many individuals who work for large companies or work for foreign or interstate commerce in the securities industry are required to sign contracts as a condition of their employment. Frequently, these contracts include mandatory arbitration provisions. These provisions prevent employees from suing their employers in court—and companies and firms generally favor them because arbitration is both less costly and less public than litigation in most cases.

 But what if you need to blow the whistle? If you signed an arbitration agreement, does this prevent you from serving as a securities whistleblower?

The short answer is “No.” Under the Federal Arbitration Act (FAA) and other federal laws and regulations, employers cannot use such arbitration clauses to prevent their employees from coming forward. Employees have the right to serve as a whistleblower, and companies and firms of state or foreign nation cannot compel arbitration clauses to abridge this right.

Companies Cannot Use Mandatory Arbitration Clauses to Prevent Whistleblowers from Coming Forward

While companies and firms can use such an agreement to avoid facing lawsuits (and the publicity that comes with them) in many cases, there are exceptions. The Federal Arbitration Act (FAA) governs the enforceability of mandatory arbitration clauses (and arbitration decisions) at the federal level. While the FAA provides that mandatory arbitration clauses are generally enforceable, it provides an exception for when “grounds . . . exist at law or in equity for the revocation of any contract.”

Various federal laws and regulations prohibit the enforcement of mandatory arbitration clauses to prevent whistleblowing. For example, SEC Rule 21F-17(a) states:

“No person may take 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.”

Although Rule 21F-17(a) mentions confidentiality agreements specifically, it does so by way of example only. As a result, this rule prohibits other efforts to discourage whistleblowing as well. The U.S. Securities and Exchange Commission (SEC) makes this clear—stating that Rule 21F-17(a), “prohibits any person from taking any action to prevent you from contacting the SEC directly to report a possible securities law violation.”

To avoid enforcement of mandatory arbitration clauses, however, employees must ensure that they take the steps necessary to formally qualify as a federal securities whistleblower. This means timely submitting sufficient information in accordance with the terms of the SEC’s whistleblower program. Employees who come forward publicly or who fail to establish their status as a protected whistleblower are not entitled to the same protections as those who comply with the SEC’s whistleblower requirements. 

Other Efforts to Discourage Whistleblowing Are Also Prohibited

Along with using arbitration clauses to prevent whistleblowing, other efforts to discourage whistleblowing are also prohibited. In late 2024, the SEC issued two press releases announcing settlements that resulted from companies’ and firms’ alleged whistleblower protection violations. As these press releases make clear, not only are efforts to discourage whistleblowing broadly prohibited under the SEC’s Rules, but the SEC is committed to enforcing whistleblowers’ rights under these Rules as well:

Confidentiality Agreements that Impede the Reporting of Potential Securities Law Violations

In a September 4, 2024 press release, the SEC announced that it had entered into settlement agreements with several broker-dealer and investment advisory firms related to their use of confidentiality agreements. According to the SEC’s press release, these firms asked their clients to sign agreements that prevented them from discussing “losses caused by the firms’ alleged breaches of federal or state securities laws,” and that also required them to, “represent that they had not reported the underlying dispute to the SEC or to another securities regulator and would forever refrain from such reporting.”

The SEC found that both of these issues rendered the confidentiality agreements violative of Rule 21F-17(a). While this specific case involved clients rather than employees, the same principles would apply in cases involving employees as well.

Agreements Requiring Employees to Waive Their Right to Whistleblower Compensation

In a September 9, 2024 press release, the SEC announced that it agreed to settle charges against multiple entities that had attempted to impede their employees from filing whistleblower complaints with the Commission. The SEC found that these entities violated Rule 21F-17(a) by “requir[ing] employees to waive their right to possible whistleblower monetary awards.”

Thus, not only are mandatory arbitration clauses ineffective for preventing employees from serving as federal whistleblowers, but other types of contractual provisions intended to discourage whistleblowing are ineffective as well. With this in mind, if you are thinking about blowing the whistle and have concerns about any agreement you have signed with your employer, we strongly encourage you to speak with one of our attorneys to ensure that you are making informed decisions.

Put our highly experienced team on your side

Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd

Former DOJ Trial Attorney

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Brian J. Kuester

Former U.S. Attorney

Hon. Kevin McCarthy

55th Speaker, U.S. House of Representatives (ret.)

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Mike Pompeo

Of Counsel

Former U.S. Secretary of State

John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara

Federal Appeals Attorney

Nicholas B. Johnson

Former Prosecutor

Roger Bach

Former Special Agent (DOJ)

Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen

Former Supervisory Special Agent (FBI)

When Arbitration Clauses May Be Enforceable: Whistleblower Retaliation Under the Dodd-Frank Act

In addition to prohibiting employers from using arbitration clauses to prevent or discourage whistleblowing, the SEC’s Rules also prohibit employers from requiring employees to pursue arbitration in cases involving whistleblower retaliation under the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. As a result, even if you have a contract with a mandatory arbitration clause, you are still entitled to sue your employer for retaliation in court—if you have properly reported a violation of either of these statutes to the SEC.

However, this isn’t necessarily the case under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). While the SEC states, “if you are a whistleblower who has reported a possible [Dodd-Frank Act] violation to the Commission in writing and believe you have been retaliated against because of your report, you may be able to sue your employer in federal court,” some federal courts have held that mandatory arbitration clauses are enforceable in these cases. If you encounter this issue after blowing the whistle with the SEC, our attorneys can assist with assessing your options and asserting your legal rights by all means available.

FAQs: Protecting Your Legal Rights as a Securities Fraud Whistleblower

Further Information About Our Securities Whistleblower Attorney

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• Securities Whistleblower Complaints Involving Criminal Violations