If you think your separation, severance, and similar agreements permit employees or contractors to participate in whistleblower activities or receive whistleblower rewards, take another look. No, a closer look. The SEC’s latest enforcement actions are a reminder that employers cannot impede whistleblowers’ rights to communicate potential violations to the SEC.
Background
The Dodd-Frank Act, which became law in 2010, amended the Exchange Act to add Section 21F, “Securities Whistleblower Incentives and Protection.” This new provision was designed to encourage whistleblowers to report possible securities law violations by providing, among other things, financial incentives and confidentiality protections. The SEC implemented Section 21F in 2011 by adopting Exchange Act Rule 21F-17. The Rule is short and straightforward, providing in part that:
“[n]o 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 . . . with respect to such communications.”
Enforcement Actions
Since that time, beginning in 2015, the SEC has brought several enforcement actions against companies that have used various practices, allegedly to do precisely what the rule prohibits – i.e., to impede whistleblowers’ efforts to communicate possible violations to the SEC.
The latest round of such enforcement actions was announced on September 9, 2024, when the SEC reported that it had settled charges against seven public companies “for using employment, separation, and other agreements…to impede whistleblowers from reporting potential misconduct to the SEC”. The companies in question agreed to pay civil penalties ranging from $19,500 to $1,386,000; agreed not to violate the Rule in the future; and agreed to take steps to remediate the violations.
Although some of the violations cited by the SEC seem relatively obvious, others seem less so. For example:
- None of the companies appear to have taken action to enforce the offending provisions of the agreements in question.
- Despite the offending provisions, none of the employee-whistleblowers had declined to speak to the SEC.
- The SEC objected to provisions that permitted employees to disclose confidential information to government agencies, provided that the disclosure could not exceed what was required by law, regulation or order.
Also offensive to the SEC were provisions in which employees waived rights to possible whistleblower awards, even though the provisions were by their terms enforceable only “to the maximum extent permitted by law.”
It is also noteworthy that some of the agreements were with contractors or consultants rather than employees.
What Does This Mean?
If it wasn’t already clear, this round of enforcement actions brings home the point that the SEC does not want companies to include any provision that might have a chilling effect on employees’ or others’ ability to inform the SEC of possible violations, even if the detailed wording of the provision effectively permits the employee to so inform the SEC. For example, although the last provision cited above can be enforced only “to the maximum extent permitted by law,” an employee might well have no clue the law does not permit the company to require her to waive the right to receive a whistleblower award.
So the bottom line is that employers should avoid using any provision that might reasonably be interpreted by an employee to prohibit him from notifying the SEC of possible violations.
And Another Thing
Lest anyone think that the SEC is a lone ranger when it comes to supporting whistleblowing activity, on September 13, the U.S. Attorney for the Southern District of Florida announced the launch of a Whistleblower Non-Prosecution Pilot Program “designed to encourage voluntary self-disclosure…of certain types of non-violent criminal conduct involving corporations, [including] financial crimes, corporate crimes, health care fraud, and public corruption.” It will be interesting to see if the Southern District follows the lead of the SEC in prohibiting companies and others from seeking to limit whistleblowing activity by their employees and others.
Please direct any questions or observations to Gunster shareholder Jounice Nealy-Brown or securities law and corporate governance practice leader, Bob Lamm.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
About Gunster
Gunster, Florida’s law firm for business, provides full-service legal counsel to leading organizations and individuals from its 12 offices statewide. Established in 1925, the firm has expanded, diversified and evolved, but always with a singular focus: Florida and its clients’ stake in it. A magnet for business-savvy attorneys who embrace collaboration for the greatest advantage of clients, Gunster’s growth has not been at the expense of personalized service but because of it. The firm serves clients from its offices in Boca Raton, Fort Lauderdale, Jacksonville, Miami, Naples, Orlando, Palm Beach, Stuart, Tallahassee, Tampa Bayshore, Tampa Downtown, Vero Beach, and its headquarters in West Palm Beach. With more than 290 attorneys and consultants, and over 290 committed support staff, Gunster is ranked among the National Law Journal’s list of the 500 largest law firms and has been recognized as one of the Top 100 Diverse Law Firms by Law360. More information about its practice areas, offices and insider’s view newsletters is available at www.gunster.com
