Consistent with its prior announcements that it will protect and encourage whistleblowers, the SEC recently announced its “first enforcement action” against a company for using allegedly restrictive language in an agreement used by the company during internal investigations that the SEC viewed as chilling whistleblower activity.
Public companies and regulated entities should review and revise relevant agreements now to reduce the risk of becoming the next SEC enforcement action on this issue. Businesses and counsel also should evaluate what statements they make to employees regarding confidentiality during interviews related to internal or independent investigations of potential corporate issues.
The SEC’s action
The SEC issued a cease and desist order and fined the respondent company $130,000 based on provisions in an agreement used with employees interviewed during investigations that the SEC considered to inhibit whistleblower activity, even though the agency acknowledged in its order that there was no evidence that (i) any company employee was actually prevented from providing information to the SEC or (ii) the company had taken action to enforce the confidentiality agreement or otherwise prevent whistleblower communications. .According to the SEC, the agreement contained a form provision that the company had been using since before the promulgation of SEC Rule 21F-17, designed to protect whistleblower communications with SEC staff. See the order here, and the SEC’s press release about this case here.
According to the order, the agreement required witnesses interviewed during internal investigations to acknowledge that they were prohibited from discussing any particulars regarding their interview and the subjects discussed without prior authorization from the company’s legal department. The agreement also required the employee to acknowledge that unauthorized disclosure of such information could result in disciplinary action by the company, including termination.
The SEC viewed these provisions as undermining the purpose of Section 21F and Rule 21F-17(a), which is to encourage individuals to report potential securities law violations to the 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.
The SEC’s order included new language that the company planned to adopt to resolve the matter. The relevant language stated:
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.
Separately, the Financial Industry Regulatory Authority (FINRA) has previously endorsed language in the context of settlement agreements:
Any non-disclosure provision in this agreement does not prohibit or restrict you (or your attorney) from initiating communications directly with, or responding to any inquiry from, or providing testimony before, the SEC, FINRA, any other self-regulatory organization or any other state or federal regulatory authority, regarding this settlement or its underlying facts or circumstances.
These provisions provide guidance to companies and regulated entities as they consider these issues. Companies should also note that the SEC is not the only agency focusing on these issues. Recent National Labor Relations Board decisions have concluded that employers may not prohibit employees from discussing terms and conditions of employment, alleged violations of law or common complaints with others. DLA Piper will publish another alert shortly looking at similar activity in other agencies.
Actions for companies
The SEC continues to look at confidentiality agreements and has stated its intention to bring other enforcement cases in this area in the future. Employers should consider where and how they use such agreements and review them with this issue in mind. In addition, companies should consider whether there are other provisions in other corporate agreements and manuals that put them at risk of a claimed violation of Rule 21F-17(a) or any other whistleblower protection provisions.
Companies should review the following types of agreements and manuals used with employees, contractors or advisors bearing in mind the SEC’s whistleblower rules:
- Non-disclosure agreements
- Separation agreements, including follow-up reminders regarding confidentiality obligations
- Settlement agreements
- Employment agreements
- Employee handbooks and manuals
Finally, those who conduct internal and independent investigations of potential improper activity (including in-house or outside counsel or other investigators) should bear in mind the SEC’s stated concerns with inhibiting whistleblowers in making both written and oral confidentiality requests of individuals who are interviewed during the course of those investigation.