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The U.S. Supreme Court’s Digital Realty decision presents good and bad news to public companies and other entities regulated by the U.S. Securities and Exchange Commission (SEC). The so-called “good” news is that the decision limits their liability for alleged retaliatory acts by ruling that Dodd-Frank does not provide a private right of action to employees who only report potential misconduct internally to the company. Yet, by taking away this protection, the court effectively directs employees to bypass their company’s compliance programs and instead report the alleged misconduct directly to the SEC (or at the very least, simultaneously report the potential misconduct to the SEC and the company). Therein lies the apparent “bad” news.

Companies now must face the very real prospect that the SEC, and other regulators and prosecutors vis-à-vis the SEC, will learn of alleged misconduct, institute an investigation and contact witnesses without the company’s knowledge. This dynamic can deny the board and senior management the opportunity to investigate internally, get ahead of the potential misconduct and receive potentially valuable cooperation credit from the government. Given the competing incentives offered by the SEC’s Cooperation and Whistleblower programs, the Digital Realty decision has significant implications for how boards and senior management should structure their compliance programs, investigate reports of potential misconduct, and ultimately determine whether and when to report their misconduct to the government.

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