Risk Alert (literally)! Standard provisions in employment agreements, severance agreements and policies may run afoul of the SEC’s whistleblower regulations. In the wake of several highly publicized enforcement actions by the SEC, on October 24, 2016 the Office of Compliance Inspections and Examinations issued a “Risk Alert” highlighting various contract and policy provisions the SEC has found to run afoul of Rule 21F-17 of the SEC’s whistleblower regulations, and encouraging companies with registered securities to take steps to address potential violations now.
Rule 21F-17, which took effect on August 12, 2011, provides that “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 …with respect to such communications.” In cases involving KBR, Inc., Merrill Lynch, BlueLinks Holdings, Inc., Health Net, Inc. and, most recently, Anheuser-Busch, the SEC found that provisions in employment and separation agreements that expressly or impliedly restrict a current or former employee from communicating with the SEC and those that provide for the waiver of awards payable by the SEC pursuant to Section 21F of the Securities Exchange Act of 1934, as amended by The Dodd-Frank Wall Street Reform and Consumer Protection Act, violate the Rule.
The Commission has also taken issue with provisions that “may contribute to violations of Rule 21-F.” The Risk Alert lists, as examples, provisions that:
“(a) require an employee to represent that he or she has not assisted in any investigation involving the registrant;
(b) prohibit any and all disclosures of confidential information, without any exception for voluntary communications with the Commission concerning possible securities laws violations;
(c) require an employee to notify and/or obtain consent from the registrant prior to disclosing confidential information, without any exception for voluntary communications with the Commission concerning possible securities laws violations; or
(d) purport to permit disclosures of confidential information only as required by law, without any exception for voluntary communications with the Commission concerning possible securities laws violations.”
The Risk Alert points out that recent enforcement actions have called for remedial actions including making form documents compliant on a going-forward basis, providing notice to employees who have previously signed restrictive covenants that notwithstanding such covenants, they have a right to communicate with the SEC, and advising former employees with signed severance agreements that those agreements do not prohibit them from communicating with the SEC and do not preclude them from accepting whistleblower awards.
Given the increased activity of the Office of the Whistleblower, now is the time for employers to revisit old form agreements and policies. Indeed, the Risk Alert encourages registrants to review compliance manuals, codes of ethics, employment agreements (including but not limited to stand alone non-disclosure and/or restrictive covenant agreements), severance agreements and other documents for compliance with Rule 21F-17.