[co-author: Ana María Blanco]
The SEC has begun to bring enforcement actions against companies whose employment and client agreements could appear to infringe on the right to report cases in violation of Section 21f-17(a) of the Exchange Act. On September 9, 2024, the Securities and Exchange Commission (SEC) announced that it settled charges against seven public companies for more than $3 million in combined civil penalties for including language in its employment, consulting and other agreements that potentially discourages whistleblowers from reporting issues to outside authorities.
The SEC charged the companies with violating the whistleblower protections in the Exchange Act by requiring employees, contractors, and/or former employees to forego their right to file a complaint with a government agency, to notify them of any disclosure required by a court or government agency, or to waive their right to receive a financial reward for making any such report. The seven companies agreed to pay civil penalties ranging from $19,500 to $1,386,000, totaling more than $3 million. Notably, in each case, the SEC made no finding that any company had actually attempted to enforce the challenged restrictions. The SEC determined that the provisions alone created impediments to participation in the whistleblower program because they required individuals to forego the financial incentives that are intended to encourage persons to report possible securities law violations. For more information about these SEC charges, see Ballard’s legal alert, Are Whistleblower Protection Violations the New SEC Sweep?
Public and private companies should review their employment agreements, consulting contracts, and customer agreements to ensure that there is no language that could be considered discouraging to potential whistleblowers, regardless of whether the company has an explicit whistleblower policy that encourages whistleblowers to report violations to government agencies.
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