SEC’s history in protecting whistleblowers

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, added Section 21F to the Securities Exchange Act of 1934 to protect whistleblowers from retaliation from their employers. Eligible whistleblowers are also entitled to a monetary award in the event the Securities and Exchange Committee (SEC) succeeds in obtaining a monetary order in a judicial or administrative enforcement action.

SEC Rule 21F-17(a) prohibits taking “any 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 . . . with respect to such communications.”

In recent years, the SEC has turned its attention to agreements between employers and employees, such as employment, consulting, restrictive covenant, separation, and settlement agreements, to determine whether they contain overbroad restrictions on employees communicating to third parties that may run afoul of Section 21F. If the SEC determines an employer has violated Rule 21F-17, they may seek civil penalties and require employers to take remedial measures such as changing relevant agreements going forward.

SEC’s recent enforcement

This week, the SEC announced that the seven public companies it determined violated Rule 21F-17 “agreed to pay more than $3 million combined in civil penalties.” According to the SEC, each of the seven companies utilized employment agreements, separation agreements, retention agreements, settlement agreements, or some combination of the four that ran afoul of Section 21F. The SEC’s investigation focused on language in the agreements that required employees to waive their right to any monetary award resulting from the successful prosecution of any investigations or charges the employee files or participates in without carving out the right to receive a whistleblower award. While the agreements had never actually been enforced to prevent employees from reporting or participating in any investigations, the SEC determined the language waiving an employee’s right to any monetary award to be too broad because it could discourage a potential whistleblower from making reports to the SEC, running afoul of the intent of Section 21F. The SEC stated that the inclusion of such terms “severely impedes would-be whistleblowers from reporting potential securities law violations to the SEC.”

In addition to civil penalties, the SEC required remedial measures to ensure the companies refrain from violating the SEC’s rules in the future, including appropriately reviewing and revising any of their employment-related agreements.

What you need to know

As the SEC continues its enforcement against companies and their use of these types of limiting agreements, public (and some private) companies should be aware of the SEC’s interpretation of Section 21F and conduct a review of their employment-related agreements to ensure that they do not contain provisions that could be interpreted as a violation of Section 21F. This includes reviewing employment, confidentiality, restrictive covenant, and non-disclosure agreements, as well as separation and severance agreements, to ensure employees are not prohibited from speaking or reporting to government agencies or waiving whistleblower awards offered by the SEC.

If you’re an employer seeking review and revision of your employment-related agreements to ensure compliance, including SEC compliance, please reach out to one of Hogan Lovells’ employment attorneys.

Authored by Michael E. DeLarco, Kenneth Kirschner, George W. Ingham, Tao Y. Leung, Martha N. Steinman, Steven J. Abrams, Zachary P. Siegel, and Muhammad S. Burney.