On September 9, 2024, the SEC announced settled enforcement actions against seven companies for violating the SEC’s whistleblower rules.[1] Specifically, the SEC alleged that the companies had provisions in various kinds of agreements with employees, including employment, separation, and settlement agreements, that purport to restrict, and thereby could potentially discourage, employees and other signatories from reporting information to government investigators or participating in a whistleblower award.
The Dodd-Frank Act of 2010 gave the SEC authority to administer and enforce a whistleblower program. Among the rules the SEC has adopted to implement that authority is Exchange Act Rule 21F-17(a)[2]:
No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement (other than [certain specified] agreements … related to the legal representation of a client) with respect to such communications.
The recent actions are not the first the SEC has brought under this provision.[3]
The SEC often collects related cases into a “sweep” to heighten attention and amplify its message. In the recent seven actions, the agreements include employment, severance, retention, separation, consulting, and settlement agreements that stretch over the last five years. The contracts included clauses that waived the right to a monetary award in any government investigation, waived the right to file a complaint or claim with a government authority, and required prior notification before sharing confidential information with a governmental authority. The SEC was not, apparently, moved by clauses that limited these restrictions “to the fullest extent permitted by law.”
In its sweep, the SEC included companies from various industries, including fashion, healthcare, software, manufacturing, and consumer credit reporting. (It is not clear how the companies were identified.) Penalties ranged from $19,500 (against a company with a going concern opinion and $8,890 in cash) to $1,386,000. The amounts are not explained, but seem to bear some relation to the number of contracts with which the SEC took issue. The SEC assessed penalties notwithstanding the companies’ remedial efforts once approached by the SEC and the fact that the provisions had never been invoked to prevent a party from making a claim or seeking compensation as a whistleblower.
The SEC’s message could not be clearer – if public companies have any contractual provisions that restrict the ability to report potentially wrongful conduct to the SEC and participate in a whistleblower award, the SEC is likely to object and may take action against such companies. The financial and reputational consequences to the company can be significant. Public companies should review their standard agreements with employees to determine whether they contain similar, potentially problematic, provisions, and make any necessary updates. The SEC stresses that its investigation in this area is ongoing.
If you have questions about the material discussed in this client alert, please contact the members of our Employment, Employee Benefits and Executive Compensation, Securities and Capital Markets, or Securities Litigation and Enforcement practices.
[2] 17 C.F.R 240.21F-17(a).
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