by Eric Young and Brandon Lauria
Confidentiality and employment agreements have not historically been a matter of concern for the nation’s leading securities regulator. However, since August, the SEC has settled eight enforcement actions involving allegations of improper conduct with respect to employment agreements as part of its efforts to encourage, protect and reward whistleblowers. If this enforcement blitz surrounding Rule 21F-17 continues, it could ultimately change the terms of confidentiality provisions at a far ranging list of employers from publicly traded companies to financial institutions to government contractors.
What is SEC Rule 21F-17? It is the 2011 regulation adopted by the SEC as part of the rules governing its Dodd-Frank Act authorized whistleblower program. It prohibits, with a few small exceptions, “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 ….” 17 C.F.R. 240.21F-17(a). In short, it bars efforts to impede whistleblowers from reporting misconduct to the SEC.
For most of the last five years, SEC enforcement actions have been quiet with respect to this provision. Prior to August, the only action involved a $130,000 settlement with KBR, Inc., in April 2015 (PDF: 155 KB) over a confidentiality agreement signed by witnesses in internal investigations that required approval from the legal department before discussing the matter with others.
In the eight enforcement actions, starting in August 2016 with a $265,000 penalty to building products distributor BlueLinx Holdings Inc. and ending in January 2017 with a settlement by HomeStreet Inc., the SEC took a broad view of Rule 21F-17 and alleged violations based on employment agreement terms ranging from limits on information that can be provided in Government communications to waivers of any right to monetary reward from the SEC whistleblower program.
The SEC brought an action against Health Net (PDF: 160 KB), which settled for $340,000, based on a severance agreement that specifically prohibited filing a claim for an SEC whistleblower reward. A later version of the agreement required waiver of the right to a monetary award. The government filed the action despite language expressly permitting communications with government regulators and limiting any reward waiver to the maximum extent permitted by law. In other words, the SEC is not going to allow obfuscating legalese to thwart its attempts to encourage whistleblowing on corporate misconduct.
The December 2016 action against Neustar (PDF: 175 KB), settled for $180,000, is another example of the potential agreement terms which could be implicated by the SEC Rule. Neustar’s severance agreements from 2011 to 2015 contained a broad non-disparagement clause which specifically included communications to the SEC. Even though the company took no action against any of the nearly 250 former employees that signed the agreement with this term, it impeded one individual from communicating with the SEC and the SEC brought the action.
The SEC has also shown a willingness to bring actions based on Rule 21F-17 even when there have been no actual allegations of impeded whistleblowers. If a corporation that is within the purview of the SEC is requiring employees or ex-employees to sign problematic agreements, they are at risk of scrutiny by the SEC.
The total monetary penalties so far in these types of cases would hardly scare a large corporation. The defendants are probably paying their lawyers more to resolve the violation than they ultimately pay the government. However, now that the SEC has laid down the broad scope of the rule, they may decide to extract larger settlements against corporations that persist in their efforts to impede whistleblowers.
Although enforcement of Rule 21F-17 is limited to the SEC, similar measures are spreading to other whistleblower programs. Congress included a similar provision in Section 743 of the fiscal year 2015 appropriations bill generally referred to as the CRomnibus bill. In August 2016, the CFTC also sought public comments about including a similar provision in 17 C.F.R. § 165.19 as part of proposed changes to its Dodd-Frank whistleblower program.
If other branches of the government begin protecting whistleblower communications through enforcement actions, the Government will have successfully sent the message to employers around the country that they can not impeding whistleblowing. Companies that continue to offer departing employees agreements which impede whistleblowing do so at their own peril.
Eric Young and Brandon Lauria are whistleblower attorneys and partners at Young Law Group in Philadelphia.
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