From the Securities and Exchange Commission’s perspective, their whistleblower program has been wildly successful. Indeed, the program has recently surpassed providing $100 million in rewards to whistleblowers.
Given the importance of this program, it’s no surprise that the SEC looks disfavorably on anything that seems like it might get in the way of a person’s desire to communicate to the SEC’s Office of the Whistleblower.
The SEC keeps open the lines of communication to the Office of the Whistleblower in part by aggressively enforcing Rule 21F-17, which states:
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 (other than agreements dealing with information covered by § 240.21F-4(b)(4)(i) and § 240.21F-4(b)(4)(ii) of this chapter related to the legal representation of a client) with respect to such communications.
From time to time, some companies may inadvertently include language in their corporate agreements that violate this rule.
If you remember, back in 2015 the SEC fined and issued a cease and desist order to a Houston-based company that had broad language in its confidentiality agreement that the SEC said violated Rule 21F-17.
The disfavored language was this:
I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.
An area that might be a trap for the unwary today is severance agreements.
Employment lawyers typically work closely with a company’s human resources department to draft these agreements. In the context of a severance agreement, HR professionals and employment lawyers are, of course, focused on protecting the company that is their client/employs them.
Trouble can arise if neither of these parties keeps in mind the SEC’s prohibition on curtailing the normal functioning of the Office of the Whistleblower—which includes providing monetary incentives to whistleblowers.
One company, BlueLinx Holdings Inc., perhaps thought that it would be OK to have its employees waive their right to awards from the Office of the Whistleblower in exchange for a severance payment. Wrong.
The severance agreement in question at BlueLinx included language—adopted two years after Rule 21F-17 was implemented—that had outgoing employees waive their right for monetary recoveries should they file a complaint with a federal agency, including the SEC.
From the case proceedings, the agreement’s disfavored language included the following:
Employee further acknowledges and agrees that nothing in this Agreement prevents Employee from filing a charge with…the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other administrative agency if applicable law requires that Employee be permitted to do so; however, Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency. (Note: Emphasis added.)
For this and other language in BlueLinx’s severance agreement, the SEC found the company to be in violation of Rule 21F-17. The SEC imposed a cease and desist order, and the company agreed to pay $265,000 in penalties.
(As a reminder, the SEC won’t let you settle with insurance money for these types of cases.)
In addition, BlueLinx agreed to amend its severance agreements to “make clear that employees may report possible securities law violations to the SEC and other federal agencies without BlueLinx’s prior approval and without having to forfeit any resulting whistleblower award.”
The company also is required to contact previous employees who signed the severance agreement and let them know the company does not prohibit them from providing information to the SEC or from accepting whistleblower recoveries.
The SEC’s enforcement action against BlueLinx is a cautionary tale. What’s tricky about severance agreements in particular is that the spirit of these agreements is to encourage folks to bring issues up sooner rather than later so that the corporation isn’t surprised many years down the road.
Certainty that there is no claim lurking in the near or distant future is valuable. By providing a payment, severance agreements also discourage folks who may have frivolous claims from bringing them.
To be sure, it’s completely proper for a company to have a severance agreement in which they are asking people to waive future claims. This is a standard corporate risk management procedure.
However, in their enthusiasm to map the risk landscape, HR professionals and employment lawyers can’t go so far that they create a new risk in the form of an SEC enforcement action. HR needs to be trained on this issue.
Now is a good time for companies (both public and private) to take a close look at their internal agreements, including confidentiality and severance agreements. It’s important to confirm that there is nothing in these agreements that the SEC would regard as improper vis–à–vis the SEC’s whistleblower program.
The recent SEC cease and desist order action against Anheuser-Busch InBev NA/NV is instructive. At issue was a separation agreement that caused an employee (of an Anheuser-Busch subsidiary) to stop cooperating with an SEC anti-corruption investigation.
The employee was worried that his continued cooperation would cause him to violate the confidentiality terms of his separation agreement, causing him to owe his former employer $250,000 in liquidated damages. According to the SEC, similar contractual terms had been used with other former employees as well.
In its cease and desist order, the SEC noted that Anheuser-Busch has already taken steps to clarify that speaking with the SEC isn’t a violation of the terms of its separation agreements with its employees. The added language to the separation agreements is as follows:
I understand and acknowledge that notwithstanding any other provision in this Agreement, I am not prohibited or in any way restricted from reporting possible violations of law to a governmental agency or entity, and I am not required to inform the Company if I make such reports.
In its order, the SEC seemed to approve of this language that Anheuser-Busch is committed to using in the future. Nevertheless, Anheuser-Busch still had to pay the SEC more than $6 million in disgorgement and penalties for its past infractions, though much of this was clearly related to the anti-corruption investigation.
One hopes it goes without saying that it is illegal to retaliate against whistleblowers. This is obvious to most HR professionals. With its recent enforcement actions, the SEC is signaling strongly that HR departments need a briefing on confidentiality and severance agreements as well.