Recent SEC enforcement actions imposing significant penalties and other corrective actions highlight the importance of ensuring that employment-related agreements, particularly separation agreements, comply with how the SEC now interprets Rule 21F-17. This SEC rule prohibits taking any action that impedes communication with the SEC about possible securities law violations, including through confidentiality agreements. Significantly, for the first time, the SEC recently settled an enforcement action involving Rule 21F-17 with a privately held company.
The SEC has recently taken the position that separation agreement provisions representing that the employee has not filed any complaint or charges against the employer (or related persons or entities) violates Rule 21F-17 because, in order to receive severance pay, the employee must not have filed a claim with the SEC. See In the Matter of CBRE, Inc. No. 3-21675. The SEC has reasoned that these provisions are unlawful, even if the agreement expressly provides that it does not preclude the employee from filing a charge with or participating in an investigation by the SEC. Recent SEC cease-and-desist orders have also attacked broad definitions of confidential information in employment agreements. It is noteworthy that remedial measures resulting from recent enforcement activities have included informing employees that they may communicate with the SEC without notice to or approval from the employer. See In the Matter of D.E. Shaw & Co, L.P., No. 3-21775.
Finally, recent SEC enforcement actions also highlight the importance of making clear in separation agreements that monetary awards from the SEC are not precluded. In one case, which involved a privately held company, the company was fined for including a provision in its separation agreement that purported to preclude employees from obtaining monetary relief from governmental agencies. See In the Matter of Monolith Resources, LLC, No. 3-21629. The SEC’s order found that Monolith’s separation agreements raised impediments to participation in the SEC whistleblower program by having employees forgo important financial incentives that are intended to encourage people to communicate directly with SEC staff about possible securities law violations. An SEC regional director commented, “Both private and public companies must understand that they cannot take actions or use separation agreements that in any way disincentivize employees from communicating with SEC staff about potential violations of the federal securities laws.” An explanation of the SEC staff’s view of its regulatory authority over privately held companies can be found on the commission’s website.
Employers, including privately held companies, should review and make any needed revisions to the provisions in separation agreements, confidentiality agreements and employment agreements as well as codes of conduct relating to confidentiality and reports to governmental authorities in light of the recent enforcement actions described above. It is a particularly opportune time to update your template agreements following the National Labor Relation Board’s McLaren decision, described in our earlier Alert, as well as recent state laws limiting nondisclosure agreements. Of course, it is a best practice to treat most general templates as only a starting point.