United States: SEC Enforcement Actions May Require Changes To Severance Agreements

Last Updated: August 23 2016
Article by Todd Lebowitz

Public companies should revisit their template severance agreements, in light of two recent orders by the Securities and Exchange Commission (SEC).1 Standard severance clauses covering (1) confidential information and (2) prohibitions against receiving additional monetary awards have been deemed unlawful by the SEC, resulting in settlements and fines exceeding $600,000, plus other sanctions.

The SEC’s allegations in both cases were based on the Whistleblower Incentives and Protection section of the amended Securities and Exchange Act, which reads:

(a) 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.

This section, contained in Rule 21F-17, was enacted as part of the Whistleblower Program contained in the Dodd-Frank reforms of 2010.

The alleged violations in these two cases were not that the company’s standard severance agreement prohibited individuals from making reports to the SEC. To the contrary, both companies’ agreements made clear that the outgoing employees could raise allegations with a government agency.

The violations, rather, were (1) that the individuals had to waive their right to any further recovery if they were to raise allegations with a government agency, and (2) that if the filing of a charge (or the raising of allegations) involved disclosing confidential company information to the agency, the individuals would have to provide notice to the company first.

(1)  “No further recovery” clauses

“No further recovery” clauses have become commonplace in severance agreements because companies cannot prohibit their employees (or ex-employees) from making complaints of wrongdoing to government agencies, even where the employees have waived their right to bring a civil suit based on the same facts. To disincentivize employees from making such complaints to government agencies, severance agreements often include clauses in which employees agree that, even if they make such allegations, they will not accept any monetary award beyond what they are receiving as severance pay.

The SEC, however, considers the financial incentives made available to whistleblowers by Dodd-Frank to be a “critical component” of the Whistleblower Program. It deems these financial rewards as necessary to offset the “enormous risk [to an individual] of blowing the whistle in calling attention to fraud.” The SEC found that requiring individuals to waive these payouts as a condition of accepting severance is a violation of Rule 21F-17. Such a requirement, the SEC concluded, “impedes individuals” from participating in the SEC’s whistleblower program. The waiver of additional financial recovery removes “important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.”

(2) Confidentiality Clauses and Employer Notification Requirements

Confidential information clauses have also become commonplace in severance agreements, serving to remind employees of the importance of preserving company confidential information. These clauses often include carve-outs recognizing that the disclosure of confidential information may sometimes be required by law or by a subpoena. Under such circumstances, however, a typical confidentiality clause might also require the individual to provide the company with advance notice before disclosing the confidential information. Such clauses are intended to provide the company with an opportunity to object to the subpoena or to seek an appropriate protective order before the individual discloses confidential information.

The SEC found that these clauses, requiring prior notice before disclosure, also violate Rule 21F-17. A “critical” whistleblower protection provided under Dodd-Frank is the ability of whistleblowers to remain confidential, according to the Commission. Prior disclosure requirements are illegal, the SEC wrote, because they force individuals to choose between identifying themselves to the company as whistleblowers (i.e., agreeing to notify the company before blowing the whistle) or forfeiting a severance package.

The SEC noted that the confidentiality and prior notice clauses at issue did not contain any exception that would permit disclosure to the government without prior notice to the company. Had the severance agreement included such an exception, it likely would have withstood the SEC’s scrutiny.

Action Items for Public Companies

In light of these two settlements and the accompanying findings by the SEC, public companies should review their severance agreements and modify or remove language that the SEC would find objectionable.

“No further recovery” clauses may need to be removed or redrafted to permit recovery of whistleblower bounties under Dodd-Frank.

Confidentiality clauses may require redrafting as well. Such clauses may need carve-outs that permit disclosure to the SEC or other government agencies, without requiring prior notification to the company.

The SEC’s targets in these two actions were a health care company in California and a construction company in Georgia. The settlement agreements and accompanying orders were released within six days of each other. The diversity in industries and locations of these two companies sends a signal that the SEC’s enforcement initiative regarding these types of clauses is not limited to a particular type of public company. In one of the cases, the SEC noted that it had no evidence that the severance clauses actually discouraged any individual from making a report to the SEC. The mere existence of the clause was deemed sufficient, in the view of the SEC, to violate Rule 21F-17.

All companies whose activities are subject to SEC requirements should consider proactive steps to avoid becoming the target of a similar action.

Footnotes

1 In the Matter of BlueLinx Holdings Inc., Administrative Proceeding, File No. 3-17371, Order dated Aug. 10, 2016; In the Matter of Health Net, Inc., Administrative Proceeding, File No. 3-17396, Order dated Aug. 16, 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Hunton Andrews Kurth LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Hunton Andrews Kurth LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions