During a recent panel discussion at the Georgetown University Law Center’s 18th Annual Corporate Counsel Institute, the head of the U.S. Securities and Exchange Commission’s Office of the Whistleblower, Sean McKessy, warned companies and their in-house counsel against drafting employment contracts that discourage employees from reporting potential violations of the securities laws to agency regulators. Mr. McKessy explained that efforts to tempt employees with rewards for keeping certain kinds of information confidential may run afoul of federal law, and both the company and the drafting attorney could face serious consequences.

The SEC Whistleblower Program is a product of the Dodd-Frank Wall Street Reform and Consumer Protection Actand a response to public criticism of the SEC after the discovery of Bernard Madoff’s multi-billion-dollar Ponzi scheme. Under Dodd-Frank, this program allows eligible whistleblowers who report potential securities violations to the SEC to collect a bounty of up to 30% of any monetary sanctions collected as a result of the whistleblower’s tip.2 To protect these whistleblowers from adverse employment actions and further encourage tips, Dodd-Frank also prohibits employers from discharging, demoting, suspending, threatening, harassing, or discriminating against a whistleblower for engaging in protected activity.3

Although Dodd-Frank thus unequivocally prohibits punishing an employee for engaging in protected whistleblowing activity, it is less clear whether the Act also prohibits employers from encouraging confidentiality or internal reporting (as opposed to external whistleblowing) through the use of financial rewards or other positive incentives.

Mr. McKessy’s remarks at the Corporate Counsel Institute, however, could be interpreted to suggest that the Office of the Whistleblower is actively looking to combat any form of incentive that might discourage employees from coming forward and bringing information to the SEC. Specifically, Mr. McKessy mentioned confidentiality agreements, separation agreements, and other employment agreements that condition the employee’s receipt of a financial reward on his or her agreement to refrain from sharing information with the SEC or other regulatory agencies.

Mr. McKessy also warned that the SEC would target not only employers that incorporate these incentive provisions into their employment agreements, but also the lawyers who draft them. In particular, Mr. McKessy noted the power to revoke an attorney’s ability to practice before the SEC and told the audience that his office is “actively looking for examples” of contractual language that runs afoul of the SEC’s broad interpretation of Dodd-Frank’s anti-retaliation provision.

In light of fears that Dodd-Frank’s whistleblower bounties would encourage a proliferation of unfounded tips, many employers have tried to balance their obligations under the new law with legitimate interests in protecting proprietary or confidential information and preserving the integrity of their internal compliance programs. Given Mr. McKessy’s recent comments — and the fact that his office now receives an average of nine or ten whistleblower tips a day — companies and their inside counsel should carefully review their employment agreements to identify any provisions that could be construed as incentives to avoid sharing information with the SEC. Until the courts have definitely answered lingering questions about the scope of Dodd-Frank’s anti-retaliation provision, the risks of including such a provision may very well outweigh its benefits.