SEC Increases Scrutiny of Whistleblower Protections
The Securities and Exchange Commission (SEC) has recently announced settlements with a number of companies whose separation agreements or internal policies the SEC viewed as impeding employees’ participation in the SEC’s whistleblower program, including privately-held companies not otherwise regulated by the SEC.
- The SEC’s whistleblower program gives broad protections to individuals seeking to report potential violations of the securities laws, and has been aggressively enforced since its adoption in 2011.
- The recent settlements make clear that the SEC is taking an expansive view on the types of conduct it may punish to ensure that individuals have complete liberty to report violations of the securities laws.
The Bottom Line
Recently, the Securities and Exchange Commission (SEC) has announced settlements with a number of companies whose separation agreements or internal policies the SEC viewed as impeding employees’ participation in the SEC’s whistleblower program, including privately-held companies not otherwise regulated by the SEC. Taken together (see, e.g., here, here, here, and here), the settlements make clear that the SEC is taking an expansive view of the types of conduct it may punish to ensure that individuals have complete liberty to report violations of the securities laws. Additionally, these settlements imply a dramatic expansion of the types of firms that the SEC is targeting, and suggest that all companies, whether traditionally subject to SEC regulation or not, should review their separation agreements and related policies.
The SEC’s whistleblower program, established in 2011 pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, gives broad protections to individuals seeking to report potential violations of the securities laws. Under Rule 21F-17(a) of the Securities Exchange Act of 1934, as amended (hereinafter, the "Rule"), “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.” The SEC has aggressively enforced the Rule since its adoption, with the first enforcement action coming in 2015. Since that time, the SEC has brought approximately 20 such actions, and the SEC’s primary focus has been on the degree to which ex-employees must maintain the confidentiality of company information in the event they wish to report suspected wrongdoing to the SEC.
More recently, however, the SEC has begun to bring a new breed of case. For example, in 2021, and again this year, the SEC penalized two regulated entities under the Rule because their internal policies or separation agreements directed employees to notify the company before contacting authorities about potential misconduct. In both of those cases, the SEC expressly acknowledged that these policies had not discouraged anyone from actually reporting a violation of the securities laws, and noted that the companies changed their policies immediately after being contacted by the SEC, but the SEC still fined these companies.
In addition, the SEC brought an action last year against the CIO of a small private company for allegedly limiting a whistleblower’s access to company systems after encouraging the whistleblower to report his concerns of fraud and securities law violations up the ladder within the company. Notably, SEC Commissioner Peirce dissented from that decision, arguing the Order did not show precisely what the employee “did to hinder or obstruct direct communication between the [whistleblower] and the Commission” while noting companies may have legitimate reasons to protect their data from “sweeping disclosure threats” that should not put them at odds with the Rule. However, the majority view of the SEC was that limiting a whistleblower’s access to files—even after the whistleblower tipped the SEC—was an impediment under the Rule.
Finally, the SEC settled an enforcement action last month against Monolith Resources—a privately-held, Nebraska-based clean tech company with fewer than 250 employees—because the company’s agreements contained a provision purporting to bar ex-employees from obtaining monetary awards in connection with filing (or otherwise participating in) a charge or claim with a governmental agency. There again, the SEC found no evidence that any employee was discouraged from reporting violations of the securities or that Monolith sought to prevent any employee from obtaining monetary relief. Nonetheless, the SEC viewed the language in the agreements as an impediment to participation in the whistleblower program and fined Monolith $225,000. It should be noted that the clause in the separation agreements was likely the company’s attempt to acknowledge the former employee’s continued right to file claims of discrimination with federal or state agencies, but bar the former employee from receiving monetary awards based on those claims. That practice is consistent with guidance from the Equal Employment Opportunity Commission (EEOC), but the Monolith Resources matter makes clear that the SEC does not permit such a carveout, and companies need to be careful with the wording of such provisions.
These settlements further confirm that the SEC will enforce the Rule aggressively, and, relatedly, that this enforcement will extend to privately-held companies. For these reasons, all companies—regardless of size or ownership—should review their separation agreements and internal policies to ensure that former employees have no impediments to availing themselves of the SEC’s whistleblower program. Specifically, companies should:
- carve out, without exception, disclosure of confidential information to the SEC, even where such disclosure may otherwise violate a separation or confidentiality agreement;
- remove any obligation to inform the company of contacts with the SEC or to seek pre-clearance of reports to the SEC;
- eliminate any limitations on monetary awards obtained pursuant to the SEC’s whistleblower program, even if such limitations remain on employment discrimination and other claims; and
- eliminate any condition to the receipt of severance or other post-employment compensation that relates to refraining from making a report to the SEC.
Subscribe to Ballard Spahr Mailing Lists
Copyright © 2023 by Ballard Spahr LLP.
(No claim to original U.S. government material.)
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.
This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.