The U.S. Securities and Exchange Commission (“SEC” or the “Commission”) recently announced the settlement of two cease-and-desist proceedings against employers alleged to have unlawfully restricted employees’ rights to engage in protected whistleblowing activity. According to the SEC, the two companies, BlueLinx Holdings, Inc. (“BlueLinx”) and Health Net, Inc. (“Health Net”), violated SEC Rule 21F-17 by utilizing severance agreements that required employees to waive their rights to receive incentive awards for providing information to the SEC.1 BlueLinx also violated Rule 21F-17, the Commission asserted, by requiring that employees provide notice to the company’s legal department before providing confidential information to the government.
Section 21F of the Securities Exchange Act of 1934, which was enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), empowers the SEC to pay financial awards to whistleblowers who provide “original information” concerning violations of the securities laws.2In connection with this “bounty” program, the Commission adopted Rule 21F-17, which prohibits employers from “tak[ing] any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation.”3 In April 2015, the Commission announced the settlement of its first enforcement action under Rule 21F-17 in In the Matter of KBR, Inc.4 In that case, the Commission found that KBR’s practice of requiring witnesses in internal investigations to sign confidentiality agreements prohibiting discussion of the investigations without company approval violated the Rule.
The BlueLinx and Health Net cases are the first in which the SEC has found violations of Rule 21F-17 based on waiver of the right to recover incentives under the bounty program. BlueLinx’s agreements stated that “Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with any administrative agency.” Health Net originally used agreements that expressly waived “the right to file an application for award for original information submitted pursuant to Section 21F of the Securities Exchange Act of 1934.” The company later removed the specific reference to Section 21F, but continued to state that “Employee, to the maximum extent permitted by law…waives any right to any individual monetary recovery…in any proceeding based on any communication by Employee to any federal, state or local government agency or department.” According to the Commission, agreements like those at issue “undermine the purpose of Section 21F, which is to ‘encourage individuals to report to the Commission’ and violate Rule 21F-17(a) by impeding individuals from communicating directly with the Commission about possible securities laws violations.” Significantly, the SEC found violations despite the fact that it was not aware of any specific instances in which an employee of either BlueLinx or Health Net was dissuaded from reporting to the SEC based on his or her severance agreement.
The Commission’s orders required that BlueLinx and Health Net revise their separation agreements. In BlueLinx’s case, it agreed to include in its separation agreements the affirmative statement that “this Agreement does not limit Employee’s right to receive an award for information provided to any Government Agencies.” The cease-and-desist orders further required that the companies notify employees who signed improper agreements that they are not prohibited from communicating with the SEC and obtaining whistleblower awards. Finally, BlueLinx was required to pay a fine of $265,000, and Health Net was assessed a fine of $340,000.
These recent cases demonstrate that the SEC’s focus on employers’ confidentiality and severance agreements is not going to dissipate any time soon. Accordingly, all employers subject to the SEC’s jurisdiction must carefully review their confidentiality and separation agreements to ensure that they do not impermissibly interfere with employees’ rights under Dodd-Frank, including the right to seek and obtain a whistleblower award under the SEC’s bounty program.