White Collar

SEC Whistleblower Scrutiny Expands to Employment Agreements: Is Your Company at Risk?

By: Lucosky Brookman
SEC Whistleblower Scrutiny Expands to Employment Agreements: Is Your Company at Risk?

The Securities and Exchange Commission (SEC) is taking a renewed interest in employment and separation agreements that could discourage whistleblowing. In September 2023, the SEC announced enforcement actions against three companies for provisions that violate Rule 21F-17(a), which protects whistleblowers who report possible securities law violations.

The SEC imposed penalties and cease-and-desist orders against a registered investment adviser, public company, and private company. Their offenses? Confidentiality clauses, affirmations that employees had not filed complaints, and restrictions on receiving whistleblower awards - all contained in standard employment or separation agreements.

This shows the SEC's expanding view of what types of provisions could impede whistleblowers. The agency is now targeting any language or practice that may tend to discourage whistleblowing, even without proof it actually prevented employees from contacting the SEC.

What does this mean for your company? Carefully review any employment-related agreements and policies to avoid language the SEC may construe as stifling whistleblowers. Specifically:

  • Make sure confidentiality clauses carve out an exception for communicating with the SEC. Do not use broad confidentiality provisions that prohibit disclosing company information to external parties without authorization. Even if meant to protect business secrets, these clauses could prevent employees from reporting violations.
  • Do not require affirmations that employees have not filed complaints with regulators. Provisions stating the employee has not made reports to agencies like the SEC could discourage whistleblowing even if not outright prohibiting it.
  • Do not restrict employees' ability to receive whistleblower awards. Removing financial incentives to report violations clearly impedes SEC communication.

This scrutiny applies even to companies not directly involved in securities trading or markets. The SEC will sanction any company for provisions or practices that could potentially discourage reporting possible securities law violations. That includes standard employment contracts and severance agreements used across many industries. 

The risks are real, as we've seen from the recent SEC enforcement actions:

  • In September 2023, the SEC imposed a $10 million penalty against a registered investment adviser for prohibiting employees from disclosing "Confidential Information" in employment agreements. This covered 2011-2019.
  • Also in September, the SEC fined a public company $375,000 for separation agreements since 2011 requiring employees to affirm not filing complaints with agencies.
  • That same month, the SEC penalized a private company $225,000 for separation agreements restricting employees' right to receive whistleblower awards.

These cases involved provisions the SEC deemed could deter whistleblowing, even absent evidence of actual deterrence. The agency will pursue perceived infringements even if no employees have been actively prevented from contacting regulators.

This expansive interpretation of whistleblower protections follows years of more limited enforcement focused on companies directly involved in securities markets. The recent actions address employment practices the SEC now sees as tending to impede whistleblowing. Any company relying on standard employment contracts or severance agreements could face scrutiny.

Avoid SEC sanctions by auditing your agreements and policies for compliance with whistleblower rules. Employ experienced legal counsel to identify provisions that could raise flags. Revise contracts and handbooks to permit employees to communicate violations to the SEC without restriction. 

Specifically, ensure your agreements:

  • Allow employees to report possible securities law violations to the SEC without restraint. Add carve-outs to confidentiality policies exempting regulators.
  • Do not require employees to affirm they have not contacted agencies regarding complaints. Remove any blanket prohibitions.
  • Enable employees to receive whistleblower awards without limitation. Do not deny financial incentives meant to encourage reporting.

 These steps will help guard against the SEC finding fault with your employee contracts and separation policies. Even small risks of deterring whistleblowers can spur SEC action, so proactive compliance is essential.

Beyond SEC rules, other federal and state laws contain whistleblower protections to be aware of. For example, the National Labor Relations Board has ruled that broad confidentiality and non-disparagement clauses in severance agreements are illegal for chilling employees' rights under labor laws.

Consult an attorney to conduct a full audit of your employment-related documents. Assess compliance risks beyond just SEC regulations. Take prompt corrective action to avoid violations or enforcement actions. Stay up to date on the latest interpretations of whistleblower protections and how they apply to your agreements. 

Following the September 2023 SEC enforcement actions, no company can plead ignorance or take a narrow view of whistleblower rules. The SEC is expanding both the range of companies it will target and the types of provisions it considers infringing. Even common employment contract terms are now suspect. 

Do not wait for an SEC investigation or lawsuit to uncover flaws in your agreements. Take proactive steps to ensure your policies encourage rather than discourage whistleblowing. Protect your company and employees. Avoid penalties, sanctions and reputational damage from running afoul of whistleblower protections.