TheCorporateCounsel.net

Last week was fiscal year end for the federal government, including the SEC and other agencies. In the face of the shutdown threat, the Commission plowed forward with its customary year-end enforcement spree, making every effort to add to the government’s bottom line. The WSJ reported that they brought in $218 million in fines last Friday alone – 10% of the Commission’s annual budget!

Included in the pile of settlements announced during the last 10 days of the month were two (!) instances of the SEC taking issue with non-disclosure provisions in separation or employment agreements that, in the SEC’s view, discouraged potential whistleblowers from voluntary contacting the SEC about potential securities law violations, and thereby violated Rule 21F-17.

For those who may not remember, Rule 21F-17 became effective as part of the Dodd-Frank Act in August 2011. In the big picture, that’s not that long ago. So, maybe it’s not too surprising that these provisions continue to linger on in forms – especially because stray language can appear in various overlapping policies, agreements, and acknowledgement pages that are handled by different departments. In the SEC’s view, that’s not a good excuse.

Anyway, these two actions followed a similar announcement earlier in the month (so that’s 3 total just this past month, for anyone counting at home). That brings the running total of Rule 21F-17 enforcement actions to “nearly 20” since 2015, according to one of the recent orders. In these instances, both companies added language and/or sent communications to employees following the first wave of enforcement actions in 2015 to clarify that the provisions shouldn’t be construed to prevent whistleblower claims. But in the SEC’s view, that didn’t fully address the problem. Here’s why:

1. In this case, the SEC viewed the new language as prospective in nature, and not a cure for restrictions on disclosure from 2011 to 2015. The Commission noted that it wasn’t aware of any specific instances in which a former employee was prevented from communicating with the Commission Staff about potential securities law violations, or in which the company took action against a former employee based on the non-disclosure representation. The company cooperated with the SEC’s investigation, initiated a remediation program, and agreed to a $375k fine as part of the settlement.

2. In this case, the company continued to use an employment agreement without a whistleblower carveout for years after revising other policies, and after that, continued to use a release at the time of separation that reminded employees of confidentiality requirements (without a carveout). The Commission didn’t like that severance and deferred comp were conditioned on signing the release, and also said it was aware of one former employee who was initially discouraged from submitting a whistleblower complaint. The company cooperated with the SEC on remedial steps. They were fined $10 million!

Enforcement Director Gurbir Grewal shared this warning in the SEC’s announcement about the second case:

“Entities employing confidentiality, separation, employment and other related agreements should take careful notice of today’s enforcement action,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “The Commission takes seriously the enforcement of whistleblower protections and those drafting or using these types of agreements should take equally serious their obligations to ensure that they don’t impede whistleblowers from contacting the Commission.”

– Liz Dunshee