The Securities and Exchange Commission recently announced the settlement of two proceedings regarding the SEC’s whistleblower protection framework, resulting in over $500,000 in penalties. Both of the companies were charged with including language in employee severance agreements that discouraged the employees from reporting possible securities law violations to the SEC. Every company, whether public or private, that has agreements with its current or former employees in the U.S. prohibiting or restricting the employee’s disclosure of confidential information or limiting the employee’s right to receive an award under the SEC’s whistleblower program should be aware that such arrangements may violate the law.

On August 10, 2016, the SEC announced that BlueLinx Holdings Inc., a publicly traded building products distributor, has agreed to pay a $265,000 penalty to settle a cease-and-desist proceeding concerning language the company included in severance agreements with certain former employees. The severance agreements limited the ability of the former employees to disclose confidential information about the company and to receive a monetary recovery in connection with a whistleblower complaint.

On August 16, 2016, the SEC announced that Health Net, Inc., a California-based health insurance provider that was acquired by Centene Corporation in March 2016, has agreed to pay a $340,000 penalty to settle a cease-and-desist proceeding concerning severance agreements that limited the ability of former employees to receive a monetary recovery in connection with a whistleblower complaint.

SEC regulations prohibit any action that impedes an individual from communicating with the SEC about possible securities law violations. The SEC’s whistleblower protections are a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which directed the SEC to establish a program offering financial incentives to encourage whistleblowers to report possible violations of the federal securities laws. The program, which the SEC has called a success, has resulted in substantial awards to whistleblowers in recent years.

In the orders approving the settlements, the SEC identified provisions from the BlueLinx and Health Net severance agreements that it believed impeded the employees’ participation in the SEC’s whistleblower program. Some of the BlueLinx agreements prohibited the disclosure of confidential information about the company unless required by law and/or required notice to be given to the company prior to disclosure. The BlueLinx agreements also included a waiver of the employee’s right to receive a monetary recovery for a complaint made to an administrative agency, such as the SEC. The Health Net agreements recognized the ability of former employees to participate in a governmental investigation, but prohibited the employees from receiving a monetary recovery in such proceedings.

In addition to the fines, the SEC’s order regarding BlueLinx requires that BlueLinx insert a provision into all of its agreements that limit the disclosure of confidential information in order to clarify that employees and former employees can file a complaint with the SEC or other governmental agencies and receive a related award in connection with the complaint.

Because the SEC’s rules protecting the rights of whistleblowers apply to both public and private companies, all companies need to review existing employment, confidentiality and settlement arrangements and policies to determine whether the agreements or policies violate the SEC’s regulations. It is important to note that the SEC brought its actions against BlueLinx and Health Net for including offending language in its agreements even though neither company had sought to enforce the provisions. This result is similar to an enforcement action the SEC brought in 2015 against Houston-based KBR, Inc. over confidentiality agreements it required witnesses in certain internal investigations to sign. Because of the SEC’s willingness to pursue action in these circumstances, companies cannot wait for a potential whistleblower claim to arise before addressing this issue. Attention to these developments now could prevent a costly enforcement action in the future.