If your organization prevents whistleblowing, the firm could be at risk

Organizations often try to protect company information by having employees sign confidentiality and nondisclosure agreements. This has caused some regulators to actively enforce prohibitions against agreements that contain provisions that could prevent or deter whistleblowing activity and as a result violate various aspects of federal law (e.g., Rule 21F-17 of the Dodd-Frank Wall Street Reform and Consumer Protection Act). The focus of these enforcement actions has been on whistleblowing and other provisions that may prohibit employees from talking to investigators or impede them from engaging in protected activity.

In a recently issued SEC litigation release, the subject company was found to have:

  • impeded employee participation in the SEC’s whistleblower program since departing employees had to notify the company’s legal department before disclosing any information to any third parties (the SEC was not exempted), leaving employees to choose to either identify themselves to the company as whistleblowers or potentially lose their severance pay and benefits; and
  • removed financial incentives designed to encourage persons to communicate directly with the Commission staff about possible securities law violations by requiring departing employees to forgo any monetary recovery in connection with providing information to the Commission.

As noted in the order, such restrictions undermine the purpose of Section 21F by impeding individuals from communicating directly with the Commission staff about possible securities law violations.

What should companies do?

The terms of this and other related settlements should prompt a company subject to the SEC’s jurisdiction to reassess some key documents. Start by reviewing your policies and severance and confidentiality agreements to ensure they do not prohibit employees from exercising the rights granted to them by federal whistleblower laws. A separate review of existing agreements should be undertaken to determine if some sort of communication is needed with former employees to ensure that such agreements will not be interpreted as restricting the former employee’s ability to provide information to the SEC or accept SEC whistleblower awards. These and other measures are summarized below.

Lessons Learned

Avoid broad confidentiality language in contracts with employees that do not contain an express carve-out for reporting to governmental entities.

Check not only separation agreements or settlements with departing employees, but also other confidentiality and employment agreements, as well as codes of conduct and HR policies to make sure they do not run afoul of protected whistleblowing activities.

Consider using the carve-out language provided in the order, copied below, which the company was required to implement as part of its settlement.

“Protected Rights. Employee understands that nothing contained in this Agreement limits an Employee’s ability to file a charge or complaint 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 federal, state or local governmental agency or commission (“Government Agencies”). Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee’s right to receive an award for information provided to any Government Agencies.”

Note: At the end of August, the CFTC proposed to remove any question about a gap in statutory whistleblower protection under the securities laws and the Commodity Exchange Act. Consistent with the SEC’s approach in its rule, the CFTC proposes to add new rules to implement its enforcement authority. To review the proposal, click here.


Patty Tehrani

Patty P. Tehrani is an experienced compliance counsel and advisor and the founder of the Policy Patty Toolkit (www.policypatty.com). Patty has expansive knowledge and expertise on policy development as well as governance and risk management programs, processes and controls. You can follow her on LinkedIn or contact her via [email protected].

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