On April 1, the SEC announced its first enforcement action against a company for requiring employees to sign confidentiality agreements containing language that allegedly impeded whistleblowing activity in violation of Rule 21F-17, enacted under the Dodd-Frank Act. (Read our full blog post about the enforcement action here.)
While the confidentiality provision in that case was specifically used in the context of witness interviews in internal investigations, the SEC made clear in its press release that the staff intended to send a message about routine practices, saying that “SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision.” The SEC also suggested that employers should review and amend existing agreements that may stop employees from reporting potential securities laws violations to the SEC, and made clear that it is the existence of the agreement itself, not the enforcement of that agreement, which can give rise to a violation.
In light of these developments, we recommend that our clients review their standard forms of confidentiality, release, separation and employment agreements for provisions that may restrict an employee’s right to engage in whistleblowing activity, including provisions that only permit disclosure of confidential information to the extent such disclosure is “required” by applicable law and/or require notification to the employer prior to or in connection with the disclosure of confidential information. Any such form agreements should be amended to include language similar to the following:
Notwithstanding anything herein to the contrary, nothing in this agreement shall (i) prohibit the employee from making reports of possible violations of federal law or regulation to any governmental agency or entity in accordance with the provisions of and rules promulgated under Section 21F of the Securities Exchange Act of 1934 or Section 806 of the Sarbanes-Oxley Act of 2002, or of any other whistleblower protection provisions of state or federal law or regulation, or (ii) require notification or prior approval by the employer of any reporting described in clause (i).
With respect to agreements currently in effect, we recommend sending a formal notice signed by an appropriate corporate officer to all current employees who may be subject to similar provisions, stating that nothing in those agreements shall serve to prohibit or impede the employee’s ability to report violations to the applicable governmental agency, and that the notice shall serve as an amendment to all previously executed agreements relating to that subject.