The Securities and Exchange Commission recently announced that it had levied a $265,000 penalty against an Atlanta-based company, claiming the company’s severance agreements undercut its whistleblower program. By signing the severance agreements, outgoing employees agreed to waive recovery of potential whistleblower awards.  According to the SEC, these severance agreements violated Rule 21F-17, which prohibits impeding someone from telling the SEC about possible securities law violations.

On top of the monetary penalty, the SEC tasked the company with amending its severance agreements going forward.  The agreements must make clear that employees may report possible securities law violations to federal agencies without the company’s permission and without losing any future whistleblower award.   The company is also required to tell former employees who had already signed the agreements that they may provide information to the SEC and accept whistleblower awards

This enforcement action highlights the risks to companies that take any action that might be viewed as chilling whistleblowers from reporting potential securities law violations.  Companies should review their own severance agreements to make sure they comply with Rule 21F-17.

The SEC’s announcement can be found here.