On September 9, 2024, the Securities and Exchange Commission (“SEC”) announced it settled enforcement actions against seven public companies for alleged violations of its whistleblower protection rule in their employment-related agreements. Rule 21F-17 of the Securities Exchange Act of 1934 (“Rule 21F-17”), adopted under Dodd-Frank, prohibits any person from “taking any action to impede an individual from communicating directly with [SEC staff] about a possible securities law violation.” These recent enforcement actions reflect the SEC’s continuing scrutiny of employment-related agreements that it views as discouraging employees from exercising their whistleblower rights.
In all the enforcement actions, the SEC determined that the companies’ agreements violated Rule 21F-17 by requiring employees to waive their rights to monetary awards for reporting possible securities violations to the SEC. This was so even though the agreements expressly permitted participation in government whistleblower programs.
The SEC also found that two of the companies’ confidentiality provisions—which permitted disclosure of confidential information only where required by law or court order and required the individual to provide notice to the company in advance of any such disclosure—violated Rule 21F-17 by prohibiting individuals from voluntarily providing information to the SEC.
Notably, in each case, the SEC was “unaware of any instances in which [the companies] took action to enforce these provisions” or in which the affected individuals “declined to speak with [SEC] staff about potential violations of the securities laws.” The SEC nonetheless found the offending provisions “created impediments to participation in the SEC’s whistleblower program” by requiring employees to “forego the critically important financial incentives that are intended to encourage persons to communicate directly with [SEC] staff about possible securities law violations” or to forego the right to provide information to or file a complaint with the SEC.
In total, the companies agreed to pay over $3 million in penalties across the seven actions. Each company also agreed to revise its agreements to add language affirmatively advising employees that they are not prohibited from disclosing information to governmental agencies or regulators or collecting incentive awards. Each company also agreed to use reasonable efforts to notify affected employees that their agreements do not limit their ability to contact the SEC or to obtain any related monetary award.
These recent enforcement actions provide an important reminder for employers to ensure their employment-related agreements, employee handbooks and compliance manuals—particularly those that contain whistleblower policies or confidentiality, non-disparagement, covenants not to sue, and other similar provisions—contain adequate carveouts consistent with Rule 21F-17.
