The U.S. Securities and Exchange Commission (SEC) may soon be investigating the agreements companies make with their employees. According to a February 25, 2015 Wall Street Journal report, the SEC has sent requests to several companies asking for years of employment contracts, nondisclosure agreements, and other documents imposing confidentiality obligations on employees.
The inquiries are part of the heightened attention that the SEC is paying to the protection of whistleblowing acts and to the SEC’s efforts to encourage the free exchange of information with regulatory agencies. In 2014, the SEC’s Office of the Whistleblower Chief Sean McKessy said that his office would be on the lookout for contracts that attempt to discourage employees from bringing alleged wrongdoing to the SEC’s attention. According to a 2014 article, McKessy warned “if we find that kind of language, not only are we going to go to the companies, we are going to go after the lawyers who drafted it.”
In requesting these documents from companies, the SEC is stepping up its efforts by moving from analyzing these contractual provisions in matters before the agency to seeking out these contractual provisions in situations in which the SEC is not conducting an active investigation. According to the Wall Street Journal report, the SEC is specifically asking companies to submit nondisclosure, confidentiality, severance, and settlement agreements into which they have entered with employees, as well as training materials and other company documents about whistleblowing. These inquiries represent an expansion of the investigations conducted by the Office of the Whistleblower into a new arena of potential enforcement. Companies should take notice.
Based on McKessy’s prior statements, the SEC is likely to focus not only on language that prohibits employees from reporting information to regulatory or enforcement agencies in exchange for benefits, but also on language that could have a chilling effect on employees’ communications to agencies. SEC Rule 21F-17(a) generally states that “[n]o 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.” The SEC has yet to issue any specific guidance regarding the type of language it views as unlawful or impermissible, however, and McKessy has said that there are no plans to provide specific language that will pass muster, as the Financial Industry Regulatory Authority (FINRA) has done.
In light of the SEC’s initiative, companies should review their employment agreements to ensure they do not include language that impedes an employee’s ability to report potential violations to the SEC or other regulatory agencies. Companies should also consider inspecting some of their more general confidentiality, nondisparagement, or nondisclosure provisions and consider if their effect could be to restrict interactions with regulatory agencies.
The SEC’s Office of the Whistleblower has been increasingly active in pursuing whistleblower actions. As we have previously noted, in 2014 the SEC made 9 whistleblower awards, more than in all previous years combined. These actions included the SEC’s largest bounty award to date of $30 million and the SEC’s first enforcement action under the anti-retaliation provisions of the Dodd-Frank Act. The SEC also awarded over $300,000 to a whistleblower with auditing functions in August 2014, which is the first award the agency has made to an employee with compliance functions. The SEC recently issued an award of approximately half a million dollars to a former company officer who reported securities law violations.