Labor / Employment, On The Job

The SEC Doesn't Like Your Employment Agreements

Companies should examine their employment agreements to ensure compliance with SEC rules.

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Bad contractWe learned back in April 2015 that there would be a new player in the world of employee whistleblower enforcement: the Securities and Exchange Commission. The SEC grabbed everyone’s attention in 2015 by issuing its first administrative order finding that a company violated SEC rules based on language in an employment agreement.

In that case, the company had a provision in its employee confidentiality agreement that subjected an employee to termination for disclosing certain confidential information. The agreement didn’t expressly prevent employees from reporting alleged malfeasance to the SEC or any other government agency. The SEC nevertheless said “no bueno.” It found that such language had a stifling effect on employees, discouraging them from reporting potential violations to the SEC. The company was fined $130,000 and had to revise its employee confidentiality provisions.

In another case, the SEC fined a company $265,000 for similar violations. There, the SEC took issue with the fact that some of the company’s severance, separation, and settlement agreements with former employees included language providing that the employee would not disclose any of the company’s confidential information to third parties unless compelled to do so by law and after notice to the company.

What’s more notable and troubling about that case, however, was that the company previously revised its severance agreements to include the following language:

[N]othing in this Agreement prevents Employee from filing a charge with …the Securities and Exchange Commission…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.

The SEC held that this clause was unlawful because it removed “the critically important financial incentives that are intended to encourage” persons to report suspected violations.

The SEC was on a roll in August 2016. It also fined a California-based company $340,000 for similar violations. The SEC found that the company’s severance agreements with former employees forced employees to waive their right to monetary recovery that they may be otherwise entitled to from being whistleblowers to the SEC. This was despite the SEC’s concession that it had no evidence of any instances in which the provisions actually dissuaded employees from reporting suspected violations, or that the company had ever sought to enforce the provisions at issue.

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The SEC’s enforcement efforts in this area are continuing. In its 2016 Annual Report to Congress on the Dodd-Frank Whistleblower Program issued in November 2016, the SEC specifically stated that “protecting whistleblowers’ rights to report possible securities law violations . . . will continue to be a priority in the coming fiscal year.”

Shortly after issuing its Report, the agency released two more back-to-back decisions on December 19 and 20, 2016. In the first one, the SEC fined a company $180,000 based on a non-disparagement clause in the company’s severance agreement that prohibited employees from communicating with the SEC and other agencies. In the second one, the SEC charged the respondent $1.4 million based on language in its severance agreements preventing employees from contacting government agencies, participating in agency investigations, and disparaging the company to a government agency, among other restrictions.

In the first and only case of 2017, the SEC fined another company $340,000 because its standard severance agreement previously contained a provision in which employees waived recovery of incentive payments from the SEC. The company received the six-figure fine despite having removed the offending provision on its own in March 2016 as part of the company’s regular review process prior to being contacted by the SEC.

You may be asking: How can the SEC do this? It’s not a labor and employment agency like the Equal Employment Opportunity Commission, the Department of Labor, or the National Labor Relations Board. The answer is: The Dodd-Frank Wall Street Reform Act.

Enacted on July 21, 2010, this legislation amended the Securities Exchange Act of 1934, and among its key changes were provisions to encourage and protect whistleblowers reporting suspected violations of U.S. securities laws. Accordingly, after passage of the Dodd-Frank Act, the SEC adopted Rule 21F-17 (codified at 17 C.F.R. § 240.21F-17) on August 12, 2011, that prevents a company from “imped[ing] an individual from communicating directly with the [SEC’s] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement… with respect to such communications.”

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The takeaway is clear: the SEC is on the hunt for violators in this context. Companies should examine their employment agreements to ensure compliance with Rule 21F-17. As these cases demonstrate, failure to do so could result in significant monetary penalties.

evan-gibbsEvan Gibbs is an attorney at Troutman Sanders, where he primarily litigates employment cases and handles traditional labor matters. Connect with him on LinkedIn here, or e-mail him here. (The views expressed in this column are his own.)

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