Takeaways:

  • SEC is targeting contract terms that appear to restrict contact with the SEC or require employee whistleblowers to waive monetary recoveries.
  • Express disclosure of these rights in severance agreements is now required by the SEC.
  • The fact that the contract did not thwart any whistleblowers is not an adequate defense.

The U.S. Securities & Exchange Commission (SEC) continues to attack any employer practices which may have the effect of suppressing whistleblowers’ access to the SEC. The recent spate of settled enforcement actions against companies with agreements or policies that could potentially impede employee communication with the SEC demonstrates the SEC’s intention to scrutinize all levels of business practices—and eradicate anything that could even potentially stifle whistleblowers’ rights.

Thus, employers should carefully review their current agreements and, in certain circumstances described below, notify signatories to prior, more restrictive agreements, that those restrictions are now lifted.

Overview

The SEC has grounded each such enforcement action in a violation of Rule 21F-17, a rule developed by the SEC to implement the “Securities Whistleblower Incentives and Protection” section of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 15 U.S.C. § 78u-6 (Dodd-Frank). Under Rule 21F-17, no person may take any action to impede a whistleblower from communicating with the SEC about a possible violation of securities law, including enforcing or threatening to enforce a confidentiality agreement. 17 C.F.R. § 240.21F-17.

In April 2015, the SEC announced its first settled enforcement action against a public company which had required witnesses in internal investigations to sign confidentiality statements agreeing that they would not discuss the subject matter of the interview. In the Matter of KBR, Inc., SEC File No. 3-16466 (April 1, 2015). Despite the fact that there was no explicit prohibition regarding communicating with the SEC or any government entity, in response to the enforcement action, the company voluntarily amended its confidentiality statement to affirmatively state that employees were free to report possible violations of federal law to any government agency including the Department of Justice, the SEC and Congress.

Subsequently, the SEC has announced a number of settled enforcement actions against employers for agreements and policies that the SEC asserts restrain whistleblower rights. In each of these actions, the SEC has focused on two issues: (1) contract provisions that limit communication with the SEC; and (2) contract provisions that require employees to waive monetary recovery in connection with reporting information to the government.

Documents Limiting Communications with the SEC

The SEC has made clear that any contract provisions which explicitly prohibit voluntary communication with the SEC violate Rule 21F-17. Recently, the SEC took issue with a company that had a non-disparagement clause in its severance agreement that expressly prohibited former employees from communicating with the SEC and other government agencies. In the Matter of NeuStar, Inc., SEC File No. 3-17736 (Dec. 19, 2016). One day after the NeuStar settlement, the SEC more broadly invalidated another company’s severance provisions that prohibited former employees from voluntarily contacting government agencies with any complaint, participating in a government investigation, being paid as a result of a government investigation, providing confidential information to the government, or disparaging the company to any government agency. In the Matter of SandRidge Energy, Inc., SEC File No. 3-17739 (Dec. 20, 2016).

While the NeuStar and SandRidge settlements dealt with contract provisions that expressly prohibited government communication, the SEC has also taken issue with more nuanced provisions. In the first enforcement action following KBR, the SEC extended its reach to severance agreements which prohibited employees from sharing confidential information with anyone unless compelled to do so by law and unless the company was given notice of the disclosure. In the Matter of BlueLinx Holdings Inc., SEC File No. 3-17371 (Aug. 10, 2016). BlueLinx is striking in that the company was held accountable, not for language that was improper on its face, but because it did not also contain language that expressly excluded voluntary communications with government agencies from the prohibited conduct.

Documents Waiving Awards from the SEC

The SEC has also taken issue with provisions that purport to waive recovery of monetary awards for SEC whistleblowers because it removes the financial incentives that are intended to encourage communication with the SEC. In BlueLinx, the SEC focused on a provision which stated broadly that an employee could file charges with certain named government agencies including the SEC but that, in doing so, the employee waived the right to any monetary recovery for such complaint. In requiring that the company revise its agreement to state that former employees were not limited in their right to receive an award from any government agency, the SEC appears to read its authority to extend beyond protecting potential whistleblower communications with its own staff.