Two recent enforcement actions demonstrate that the SEC continues to aggressively enforce its whistleblower protection rules, and is on the lookout for companies using agreements that may discourage employees from reporting possible securities law violations to the SEC. In August 2011, the SEC created the whistleblower program under the Dodd-Frank Act by adding Section 21F to the Exchange Act. Under the program, individuals who provide high-quality original information to the SEC that results in an enforcement action with monetary sanctions exceeding $1 million can receive an award ranging from 10-30% of such sanctions. Exchange Act Rule 21F-17 prohibits a company from “tak[ing] any action to impede an individual from communicating directly with the [SEC] about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.”
It is important to note that the mere existence of improperly restrictive language can lead to a Rule 21F-17 violation. In three of the four enforcement actions, the SEC expressly acknowledged that it was unaware of any instance in which the agreement had prevented any employee from communicating with the SEC or in which the company had taken action to enforce the agreement against any employee.
Enforcement Action Based on Language Requiring Company Pre-Approval
As discussed in a previous Sidley Update, in April 2015 the SEC announced a first-of-its-kind enforcement action against a global technology and engineering firm for using language that had the potential to deter whistleblowing in its form confidentiality agreement used in connection with internal investigations. The language provided that an employee was prohibited from discussing the subject matter of the interview without the prior authorization of the company’s law department and that unauthorized disclosure could result in disciplinary action including termination. The SEC charged the company with violating Rule 21F-17 and the company consented to entry of a cease and desist order without admitting or denying the charges. In connection with the settlement, the company:
- amended its confidentiality agreement to add the following language clarifying that it does not prohibit employees from reporting possible violations of law to any government agency without prior authorization:
Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.
- agreed to notify employees who had signed confidentiality agreements with the improperly restrictive language that they are not required to seek pre-approval from the company and
- agreed to pay a civil money penalty of $130,000 to the SEC.
Enforcement Actions Based on Language Requiring Waiver of Monetary Awards
On August 10, 2016, the SEC announced that it had taken enforcement action against a building products distributor for using severance agreements that required departing employees to waive their rights to potential monetary awards should they file a complaint or charge with the SEC or other administrative agency. The SEC found that, by removing the financial incentives intended to encourage whistleblowing, the company impeded individuals from communicating directly with the SEC about potential securities law violations, thereby violating Exchange Act Rule 21F-17. The company consented to the entry of a cease and desist order without admitting or denying the charges. In connection with the settlement, the company:
- agreed to use the following language in its severance agreements clarifying that employees may communicate with government agencies without prior notice to the company and without limiting their rights to receive awards from government agencies for providing information:
Protected Rights. Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (“Government Agencies”). Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee’s right to receive an award for information provided to any Government Agencies.
- agreed to notify former employees who had signed severance agreements with the improperly restrictive language that they are not prohibited from (x) communicating with the SEC without prior notice to the company or (y) accepting a whistleblower award from the SEC and
- agreed to pay a civil money penalty of $265,000 to the SEC.
Less than one week later, the SEC announced on August 16, 2016 that it had taken enforcement action against a health insurance provider based on a similar contractual provision relating to the waiver of monetary awards. The company used severance agreements which included a waiver and release of claims that expressly required a departing employee to waive the right to any monetary recovery in a proceeding brought based on any communication by the employee to a government agency. The SEC found that the company violated Rule 21F-17 because the provision removed the financial incentives for former employees to communicate with the SEC concerning possible securities law violations. The company consented to the entry of a cease and desist order without admitting or denying the charges and agreed to pay a civil money penalty of $340,000 to the SEC. In connection with the settlement, the company also agreed to notify former employees who had signed severance agreements with the improperly restrictive language that they are not prohibited from seeking and obtaining a whistleblower award from the SEC.
In light of these enforcement actions, companies should promptly review their agreements with, and policies applicable to, current and former employees and delete any language that (x) prohibits employees from communicating with government agencies without the company’s prior consent or requires employees to notify the company regarding any such communications or (y) requires employees to waive their ability to obtain monetary awards should they report violations of law to government agencies. In addition to these provisions, companies should ensure that their agreements and policies do not contain any other language that may deter whistleblowing or other communications or cooperation with government agencies.
If past agreements or policies contain improperly restrictive language, the company should consult with counsel regarding whether remedial action is advisable. With respect to future agreements or policies, companies may consider adding language clarifying that the agreement or policy does not (x) require employees to obtain approval from or notify the company prior to communicating with government agencies nor (y) limit an employee’s right to receive a monetary award for providing information to the SEC or another government agency. In connection with that exercise, companies would be well-advised to review the bolded language in this Update that was endorsed by the SEC in connection with previous settlements.
If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work or,
|John P. Kelsh
+1 312 853 7097
|Claire H. Holland
+1 312 853 7099
Employment and Labor Practice
Corporate Governance and Executive Compensation Practice
Securities & Derivatives Enforcement and Regulatory Practice
White Collar: Government Litigation & Investigations Practices
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