The SEC recently slapped two companies with sizeable fines for allegedly impeding potential whistleblowers from communicating with the agency in violation of Rule 21F-17. These fines, coupled with the SEC’s recent enforcement actions that we discussed here and here, signal that enforcement of Rule 21F-17 is a growing focus for the SEC.
Rule 21F-17 provides that “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 . . . with respect to such communications.”
Two months after Rule 21F-17 went into effect in 2011, asset manager Blackrock, Inc. changed its severance agreement form to allow departing employees to communicate with the SEC but prohibited such employees from receiving separation benefits unless they waived their rights to recover any incentives for reporting misconduct. More than one thousand departing Blackrock employees signed separation agreements containing this provision. In March 2016, and before the SEC contacted Blackrock, the company removed the provision from its severance agreement form. But the company’s remedial action was too late to save it from SEC penalty, and the SEC fined Blackrock $340,000 for violating Rule 21F-17.
In the SEC’s press release, the Chief of the Office of the Whistleblower was quoted as saying that “[t]his enforcement action against Blackrock underscores our ongoing commitment to ensure the lines of communication between whistleblowers and the SEC remain unimpeded,” and she advised companies to review and revise their agreements accordingly.
Two days after announcing the Blackrock fine, the SEC released an order against financial company Homestreet, Inc. for improper accounting and for violation of Rule 21F-17. Like Blackrock, Homestreet used a severance agreement that contained a waiver of the right to receive incentives for whistleblowing. More significant, however, was Homestreet’s attempts to identify a supposed whistleblower. When the SEC served a voluntary document request on the company in connection with the accounting issues, Homestreet assumed the SEC’s investigation was prompted by a whistleblower and took steps to identify the whistleblower. Homestreet directly confronted two employees, both of whom denied being the whistleblower or knowing any information relating to what provoked the SEC’s investigation. One of these employees later resigned but continued to comply with the SEC investigation and sought reimbursement of his costs from Homestreet pursuant to an indemnification agreement. Homestreet made multiple requests that the former employee first confirm in writing that he was not the whistleblower before it advanced any reimbursements.
In a press release, an SEC director stated that “[c]ompanies that focus on finding a whistleblower rather than determining whether illegal conduct occurred are severely missing the point.” The SEC did not find any evidence that Homestreet’s tactics actually resulted in preventing communications with the SEC, but found that Homestreet’s actions to determine the identity of the suspected whistleblower and the waiver in the severance agreement impeded employees from communicating with the SEC. The SEC fined Homestreet $500,000 for various violations of the Exchange Act, including violation of Rule 21F-17.
Homestreet’s alleged actions provide an example of how companies should not react when the SEC comes calling. Companies are also advised, as stated by the Chief of the Office of the Whistleblower, to review their severance agreements, both current and expired.
The SEC settlement orders are available here and here.
