In just over a six-week span, the U.S. Securities and Exchange Commission has fined three different companies for employee agreements that, in its view, could impede individuals from communicating with the commission about securities law violations. The SEC’s prioritization of this issue, combined with its incredibly expansive interpretation of its rule, places companies at a heightened risk of SEC scrutiny based on standard employee, consultant, vendor, confidentiality, separation and other agreements.
SEC Rule 21F-17 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 ….” The SEC has taken the position that standard confidentiality, nondisparagement and other provisions in company agreements violate the rule if they do not contain explicit carveouts making clear that nothing in the agreements restricts communications with the SEC.
For example, on Aug. 10, 2016, the SEC filed an enforcement action against BlueLinx Holdings Inc., asserting that the company violated Rule 21F-17 by including the following types of provisions in its standard severance agreements: (1) acknowledgements that employees could file charges with agencies including the SEC, but would waive the right to any monetary recovery for same; (2) representations that employees would not disclose company confidential information unless compelled by law and after notice to the company’s legal department; and (3) representations that employees would hold in a fiduciary capacity all confidential information and would not, for two years after termination, share it with anyone without prior written company consent.
With respect to this bounty waiver, the commission held that “by requiring its departing employees to forgo any monetary recovery in connection with providing information to the Commission, BlueLinx removed the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.” With respect to the confidentiality provisions, the SEC held that BlueLinx “raised impediments to participation by its employees in the SEC’s whistleblower program” because “[b]y requiring departing employees to notify the company’s Legal Department prior to disclosing any financial or business information to any third parties without expressly exempting the Commission from the scope of this restriction, BlueLinx forced those employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits.” BlueLinx settled the charges for $265,000.
Less than a week later, on Aug. 16, 2016, the SEC filed a similar enforcement action against Health Net
Inc., alleging that its separation agreement language ran afoul of Rule 21F-17. From 2011 to 2013, Health Net’s agreements expressly permitted employees to file charges or complaints with government agencies including the SEC, but required employees to waive any future monetary recovery based on such actions, including SEC whistleblower bounties. In mid-2013, Health Net refined its agreement language to clarify that employees would only waive future monetary recoveries from agency complaints “to the maximum extent permitted by law.”
The SEC held that both the 2011 and 2013 language violated Rule 21F-17 by “directly targeting the SEC’s
whistleblower program by removing the critically important financial incentives that are intended to
encourage persons to communicate directly with the Commission staff about possible securities law
violations.” This is despite the fact that the Health Net agreement explicitly limited its waiver to the
extent permitted by law, and despite the facts that (1) the SEC was unaware of anyone who was actually
impeded from communicating with the SEC as a result of the agreements; and (2) the SEC was unaware
of Health Net ever taking any action to enforce the provisions. Health Net settled with the SEC for
Most recently, on Sept. 28, 2016, the SEC announced that Anheuser-Busch InBev agreed to pay $6
million to settle charges of Foreign Corrupt Practices Act and Rule 21F-17 whistleblower violations. In
this case, an employee who was providing information about FCPA violations to the SEC had mediated
his employment law disputes with the company and entered into a settlement agreement. The
agreement included a $250,000 liquidated-damages provision if the employee violated its confidentiality
provisions. After signing the agreement, the employee stopped communicating with the SEC, claiming
the agreement prevented him from doing so. Only after the commission issued an administrative
subpoena did the whistleblower resume communications with commission staff. The SEC held that AB
InBev’s separation agreement violated Rule 21F-17 because its confidentiality language did not contain
an express carveout for SEC communications.
The SEC’s order in AB Inbev noted that the company had already taken some remedial measures before
the SEC issued its fine, including amending certain of its agreements to state: “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.” The SEC appeared to approve of this carve-out
The SEC’s recent string of fines for company agreements that purportedly “muzzle” whistleblowers
highlights the importance that all companies within the SEC’s enforcement jurisdiction ensure that their
separation agreements, confidentiality agreements, and other employee- and consultant-related
agreements do not contain standard language that the SEC may interpret as chilling individuals from
communicating with the SEC. Companies that do not want to get in the SEC’s crosshairs on this evolving
issue should consider amending their agreements to ensure that they do not contain SEC bounty
waivers, that they would not be interpreted by an average reader as preventing direct communications
with the SEC, and that they would not be interpreted as requiring individuals to inform the company
before engaging in communications with the SEC.
Authored by Renee Phillips
Compliments of Orrick Herrington & Sutcliffe LLP – a member of the EACCNY