The U.S. Securities and Exchange Commission (SEC) has announced the settlement of three separate enforcement actions totaling $10 million which had been issued for violations of whistleblower protection laws. The companies were accused of using employment agreements or non-disclosure which may have blocked whistleblower reporting.
The SEC has been concerned since 2015 about companies forcing employees to sign restrictive confidentiality agreements as part of their employment. The agreements may have restricted employees from reporting improper activities or acting as whistleblowers, which is protected by federal and many state laws.
Recent SEC Settlements Over Employment and Separation Agreements
Enforcement actions filed against D.E. Shaw & Company, CRBE, Inc., and Monolith Resources, LLC had required employees to sign agreements which prohibited disclosure of confidential information to third parties but did not include an exemption for whistleblowers. All three companies also required employees to sign severance agreements at the end of employment disclosing any reports to government agencies, potentially holding post-employment benefits hostage if agreements were not signed, and in one case, required that employees waive any right to whistleblower rewards.
In the recent past, multiple enforcement actions have been issued over similar concerns regarding employee agreements. In total, penalties issued by the SEC totaled $10 million and each company has acted to correct their employment agreements.
SEC Whistleblower Protections
SEC whistleblower rules protect whistleblowers from retaliation as part of the Securities and Exchange Act under Rule 21F-17. This rule not only protects whistleblowers after reporting, but it also prohibits action which impedes communications directly with the SEC. The SEC rule specifically addresses confidentiality agreements stating “no person may take action to impede an individual from communicating directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a conﬁdentiality agreement…”
The employment agreements under consideration by the SEC may have had the effect of discouraging or preventing employees from becoming whistleblowers.
As part of the settlements, each company has arranged to modify their employee agreements and processes. Companies are required make it clear in new agreements that reporting to government agencies such as the SEC is not prohibited as part of their employment or separation agreement, nor or employees required to disclose communications or forfeit any whistleblower awards. The SEC has encouraged employers to review their company policies, procedures and agreements to ensure compliance with SEC regulations and whistleblower protections.