Health Net, Inc., a formerly publicly traded company whose securities were registered with the Securities and Exchange Commission until earlier this year, agreed to pay a fine of US $340,000 to the SEC to resolve charges that its standard severance agreement violated the whistleblower protections of ex-employees under applicable law. According to the SEC, from August 12, 2011, when the relevant SEC rules governing whistleblowing became effective, through June 2013, Health Net required employees receiving voluntary severance payments to enter into a contract under which they were expressly prohibited from filing an application for, or accepting, a whistleblowing award from the SEC. This restriction, said the SEC, violated its rule that prohibits companies from taking “any action” to impede an employee “from communicating directly with the Commission staff about a securities law violation, including enforcing, or threatening to enforce a confidentiality agreement … with respect to such communications” (click here to access SEC Rule 21F-17). Health Net amended its standard severance agreement in June 2013 to better comport with applicable law. However, it still retained a requirement that employees receiving voluntary severance payments waive any right to receive “any individual monetary payment” as a result of any proceeding brought by a government agency or department as a result of any employee communication. In addition to agreeing to pay a fine, Health Net agreed to revise its standard severance agreement to better comply with the SEC’s reading of applicable law. In its order of settlement with Health Net, the SEC acknowledged that it was not aware of any circumstance where a former company employee avoided talking to the Commission about any potential securities law violation, or where Health Net sought to enforce the allegedly problematic provisions of its standard severance agreements.
Compliance Weeds: This is the second action the SEC has brought and settled within two weeks where firms included in their standard severance agreements language that the Commission determined potentially impeded an employee from disclosing to the SEC a possible securities law violation. (Click here for background on the prior SEC enforcement action in the article, “SEC Sanctions Publicly Traded Company for Restricting Whistleblowing Claims in Employee Severance Agreements” in the August 14, 2016 edition of Bridging the Week.) It is clear that the SEC reads its anti-retaliation clause broadly. SEC and Commodity Futures Trading Commission registrants and SEC-regulated publicly traded companies should review their form employment and severance agreements to ensure they are consistent with regulatory requirements regarding employee whistleblower rights. (Click here for a more comprehensive discussion of this development in the August 17, 2016 advisory “Public Company Sanctioned by SEC for Including Illegal Anti-Whistleblower Provisions in Severance Agreements” by Katten Muchin Rosenman LLP.)