Applicable SEC rule
Recent SEC enforcement actions
Employers take note – the Security and Exchange Commission (SEC) has begun to target routine language used in nearly every employment, severance and settlement agreement regarding confidentiality and an employee's waiver of the right to share in any monetary awards obtained by a governmental agency. Examples of these clauses include the following:
"The Employee shall not disclose to any person or entity not expressly authorized by the Company any Confidential Information or Trade Secrets... [Y]ou shall not be restricted from disclosing or using Confidential Information or Trade Secrets that are required to be disclosed by law... however, ... in the event disclosure is required by law, you shall provide the Company's Legal Department with prompt written notice of such requirement..."
"Employee further acknowledges and agrees that nothing in this Agreement prevents Employee from filing a charge with [any federal agency]; however, Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file..."
The SEC's position derives from 17 CFR § 240.21F-17 (Rule 21F-17) regarding communications between the SEC and individuals reporting possible securities law violations. Rule 21F-17 was implemented after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act and states that:
"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 position is similar to positions taken previously by both the National Labour Relations Board (NLRB) and the Equal Employment Opportunity Commission (EEOC) in other contexts. In short, these agencies assert that employers are prohibited from taking any action that impinges upon an employee's ability to bring complaints to federal agencies.
Recent SEC enforcement actions
Two recent SEC enforcement actions illustrate the risk to employers that do not consider Rule 21F-17 when drafting agreements.
First, on August 10 2016 the SEC settled an enforcement action against a publicly traded company based in Atlanta, Georgia. The company required departing employees to waive their rights to monetary recovery if they filed a charge or complaint with the SEC or other federal agency and prohibited disclosure of confidential information or trade secrets unless compelled to do so by law, and only after first notifying the company and obtaining written consent. The SEC asserted that these provisions violated Rule 21F-17 because they raised impediments to participation in the SEC's whistleblower programme and removed financial incentives that encourage employees to communicate with the SEC. To resolve the matter, the company agreed to:
- pay a monetary penalty of $265,000;
- modify the language in its severance agreements; and
- provide certain notices to employees who signed the offending severance agreements.
Second, on August 16 2016 the SEC settled an enforcement action with another publicly traded entity. Similar to the prior settlement, the SEC found that a waiver and release of claim provision in the company's severance agreements violated Rule 21F-17. The provision provided that departing employees were not restricted from filing charges or "participating in any investigation or proceeding before any federal or state agency, or governmental body"; but that the employees "waive[d] any right to any individual monetary recovery... based on any communication by Employee to any federal, state, or local government agency or department". The SEC found that this provision impinged on Rule 21F-17's whistleblower programme by removing "critically important financial incentives that are intended to encourage persons to communication directly with the [SEC] staff about possible securities law violations". As part of the settlement, the company agreed to pay a monetary penalty of $340,000 for the violation.
All publicly traded employers may wish to reconsider whether to keep the confidentiality and monetary waiver language traditionally used in employment and severance agreements. Although some employers will retain this language for deterrent value (notwithstanding the SEC's enforcement actions), appropriate thought should be given to balancing the pros and cons of the language used.
Although the SEC has not targeted closely held businesses so far, such businesses may also want to consider the language used in employment and severance agreements. This is true not only because the SEC's Office of the Whistleblower has noted that Rule 21F-17's language is intentionally broad and arguably applicable to private companies that contract with publicly traded firms, but also because the EEOC, the NLRB and the Department of Labour have raised concerns about similar language in other contexts and will likely make an even harder push given the SEC's early success in securing notable settlements.
For further information please contact Scott Paler or J Wesley Webendorfer at DeWitt Ross & Stevens SC by telephone (+1 608 255 8891) or email ([email protected] or [email protected]). The DeWitt Ross & Stevens SC website can be accessed at www.dewittross.com.