The Securities and Exchange Commission (“SEC”) recently announced that two companies agreed to pay penalties of more than $500,000, combined, for illegally requiring employees to waive their rights to monetary awards from the SEC’s Whistleblower Program. In each case, the SEC alleged that the companies violated Exchange Act Rule 21F-17 by requiring outgoing employees to trade away their rights to potential monetary recovery from any whistleblower complaints to the SEC in order to obtain severance pay or other post-employment benefits. Both companies consented to cease-and-desist orders and agreed to take reasonable efforts to contact former employees and notify them that they were not prohibited from providing information to the SEC or from accepting SEC whistleblower awards.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the SEC’s Whistleblower Program, includes financial incentives and guarantees of confidentiality to incentivize whistleblowers to report possible securities law violations. In each of these respective orders, the SEC noted that Congress determined that providing financial incentives to potential whistleblowers was “a critical component of the Whistleblower Program.” To protect this component, the SEC enacted Rule 21F-17, which provides in relevant 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.” The SEC determined that language used in these two severance agreements impedes such communications and undermines “the purpose of Section 21F and Rule 21F-17(a), which is to ‘encourage individuals to report to the Commission.’”
In announcing the second award, Stephanie Avakian, Deputy Director of the SEC’s Division of Enforcement, explained that the SEC is committed to ensuring that whistleblowers may bring forward allegations of potential wrongdoing without fear of repercussions. “We’re continuing to stand up for whistleblowers and clear away impediments that may chill them from coming forward with information about potential securities law violations,” she said. Jane Norberg, Acting Chief of the SEC’s Office of the Whistleblower, added, “Companies simply cannot undercut a key tenet of our whistleblower program by requiring employees to forego potential whistleblower awards in order to receive their severance payments.”
As we have previously reported, whistleblower tips and awards under the SEC Whistleblower Program continue to increase, and this increase in activity is likely to continue. The SEC has previously sent letters to a number of companies requesting production of nondisclosure agreements, employment contracts and other documents. These requests, in conjunction with continued enforcement actions relating to employer attempts to silence potential whistleblowers indicate that the SEC continues to pay close attention to corporate attempts to discourage whistleblower reporting. Therefore, public companies should strongly consider reviewing their existing employee confidentiality policies and agreements to ensure compliance with SEC Rule 21F-17.
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