According to a February 25, 2015 Wall Street Journal
report, in recent weeks the SEC has sent requests to a number of
companies seeking years of nondisclosure agreements, employment
contracts and other documents as part of an agency probe into the
potential silencing of corporate whistleblowers.1 The
reported probe comes as SEC officials have expressed concerns about
"pre-taliation"—the alleged use of express
provisions in employment agreements, codes of conduct and severance
agreements designed to deter employees from voluntarily
communicating with the SEC. Sean McKessy, Chief of the SEC's
Whistleblower Office, has repeatedly warned that the agency's
Enforcement Division is looking not only at companies that use such
provisions, but also at the attorneys responsible for drafting
them.2
The reported SEC inquiry also comes several months after a
coalition of whistleblower advocacy groups and plaintiffs firms
submitted a petition seeking SEC rulemaking to curb the use of
tactics allegedly designed to undermine the SEC's whistleblower
bounty program.3 The coalition filed a second petition
in July 2014 urging the SEC to launch a series of field hearings on
whistleblower retaliation and to create an Advisory Committee on
Whistleblower Reporting and Protection. The coalition cited several
types of contractual provisions that can create inappropriate
barriers between whistleblowers and the SEC, including:
- Confidentiality agreements that prohibit employees from producing or disclosing the terms of such agreements to any individual or entity, without a carve out for law enforcement and regulatory authorities;
- Provisions that permit an employee to make a complaint or claim to any federal, state or other government agency, but by doing so waive his or her right to receive compensation or relief arising from such a complaint or claim;
- Provisions that require employees to notify their employer of any communications with the SEC or other governmental agencies; and
- Provisions that require employees to represent that they have not made a prior claim or complaint about the employer to the SEC, or shared confidential company information with any third party, including the SEC or other government agencies.
SEC Whistleblower Rule 21F-17(a)
The Dodd-Frank Act mandates that the rights and remedies available
to whistleblowers and reporting employees may not be waived by
"any agreement, policy form, or condition of
employment."4 That statutory directive is
reinforced by SEC Rule 21F-17(a), which instructs that "[n]o
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."5
Information Sought in the SEC's Probe
According to the Wall Street Journal, the SEC's
request seeks "every nondisclosure agreement, confidentiality
agreement, severance agreement and settlement agreement [the
companies] entered into with employees since Dodd-Frank went into
effect, as well as documents related to corporate training on
confidentiality." The Journal reports that the
SEC's request also asked for "all documents that refer or
relate to whistleblowing" and a list of terminated
employees.
Mitigating Risks in Employment Agreements
All companies should review their employment agreements, codes of
conduct, internal reporting policies and separation agreements to
confirm that they do not expressly or impliedly interfere with the
employees' right to report to the SEC under Dodd-Frank. In
particular, express provisions that prohibit employees from
voluntarily communicating with regulators without prior internal
reporting pose a risk that the SEC will take the position that such
provisions violate SEC Rule 21F-17(a).
While less obvious, even plain vanilla annual compliance
certifications and non-disparagement, confidentiality and
non-disclosure provisions can put companies at risk of SEC
scrutiny. For example, many standard confidentiality provisions
provide that no proprietary or confidential information of the
company may be shared with any third party, except if the employee
is compelled to do so, and even then may be shared only after
notification to the employer. If not carefully drafted to carve out
interactions with regulators, these provisions could be read as
interfering with an employee's ability to communicate with the
SEC.
Mitigating Whistleblower Risks Generally
In light of the SEC's focus on whistleblower retaliation,
companies should consider implementing the following risk
mitigation strategies:
- Processes to review internal reports of compliance concerns
- Written procedures for safeguarding the identity of reporting employees
- Periodic mandatory training for managers on confidentiality and anti-retaliation
- Regular communications across the organization about internal reporting mechanisms
- Internal processes to resolve retaliation complaints
For a more detailed discussion about mitigating the retaliation
risks associated with whistleblowers, see Don't Tread on
Whistleblowers: Mitigating and Managing Retaliation Risks —
Part II6 available
here.
WilmerHale's
Dodd-Frank Whistleblower Working Group focuses on SEC and CFTC
enforcement investigations, corporate compliance and employment
issues arising from the SEC and CFTC's whistleblower rules. In
addition to more than 20 lawyers spanning WilmerHale's
Securities, Litigation and Transactional Departments, the working
group includes Mark Cahn, former General Counsel for the SEC,
and Matthew Martens, former Chief Litigation
Counsel for the Division of Enforcement at the SEC. Cahn and
Martens both played a significant role in the development of the
SEC's Whistleblower Program.
1 See Rachel Louise Ensign, SEC Probes
Companies' Treatment of Whistleblowers, WALL STREET
JOURNAL, Feb. 25, 2015.
2 See Ben DiPietro, SEC Warns To Take
Whistleblowers Seriously, WALL STREET JOURNAL, Sept. 17, 2014
(discussing remarks by SEC Whistleblower Office Chief Sean McKessy
who warned, "If you are an in-house lawyer drafting language
saying you can't come to the SEC, it's not just the company
that is in peril, you are too.").
3 Launched in 2011, the program offers individuals who
report potential securities violations to the SEC a reward of
between 10 and 30 percent of any monetary recovery exceeding $1
million.
4 Dodd-Frank Wall Street Reform & Consumer
Protection Act, § 922(c)(2).
5 17 C.F.R. § 240.21F-17(a).
6 SEC. REG. & LAW REP., 46 SRLR 167 (Jan. 27,
2014).
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