SEC challenges bounty waiver provisions

SEC challenges bounty waiver provisions

Publication August 2016

As part of its whistleblower initiative, the Securities and Exchange Commission is launching enforcement actions against companies that improperly restrict their current and former employees from engaging in voluntary whistleblowing activities.  Exchange Act Rule 21F-17(a) provides that "[n]o person may take any action to impede an individual from communicating directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications."  On April 1, 2015, the SEC announced its first settlement involving a purported breach of Rule 21F-17(a), asserting that certain confidentiality agreements used in connection with an internal investigation were improper impediments to blowing the whistle.  Many companies took note and began to clarify in various agreements, including in employee severance agreements, that irrespective of any confidentiality provisions individuals are free to voluntarily communicate with the SEC and other government agencies concerning potential legal violations. 

Two recent settlements demonstrate the SEC’s continued resolve to bring enforcement actions under Rule 21F-17(a) against companies that improperly use confidentiality provisions to impede whistleblowing.  In the first settlement, released on August 10, 2016, the SEC challenged provisions in certain severance agreements that (1) required employees to notify the company’s Legal Department prior to disclosing any financial or business information to third parties and (2) provided that employees waive their right to any monetary recovery in connection with providing information to the SEC or other government agencies.  The SEC contended both of these provisions violate Rule 21F-17(a) by impeding employees from voluntarily communicating with the SEC and from fully participating in the SEC’s whistleblower compensation program.  In order to resolve the matter, and without admitting or denying the SEC’s findings, the company agreed to pay a $265,000 penalty, modify the language used in future agreements, and advise former employees who signed the agreements they are not prohibited from voluntarily communicating with the SEC or accepting a whistleblower award. 

In the second settlement, released on August 16, 2016, the company’s severance agreements expressly provided that employees may voluntarily communicate with government regulators, but also provided that employees waive their right to any monetary recovery in connection with such communications.  The SEC contended this bounty waiver provision violates Rule 21F-17(a).  In order to resolve the matter, and without admitting or denying the SEC’s findings, the company agreed to pay a $340,000 penalty and tell former employees who signed the agreements they are not prohibited from seeking or accepting an SEC whistleblower award. 

The settlements do not constitute binding judicial precedent—they are civil settlements in which the companies neither admitted nor denied wrongdoing.  Nonetheless, the settlements represent a significant escalation in the SEC’s pursuit of Rule 21F-17(a) violators.  Not only are the settlement payments substantially larger than in the initial case last year, but it is now clear the SEC will pursue enforcement claims over contractual provisions even where there is no evidence that (1) the companies actually took action to enforce the contractual provisions in order to prevent an individual from communicating with the SEC or (2) an individual did not communicate with the SEC about a potential securities law violation as a result of the provisions. 

In light of the SEC’s increasingly aggressive efforts to enforce Rule 21F-17(a), companies would be well-served to ensure that confidentiality and other contractual provisions cannot be construed as preventing persons from voluntarily communicating with the SEC and other government agencies concerning potential legal violations or from obtaining monetary compensation through the SEC’s whistleblower program.  To avoid any doubt, companies should strongly consider including express carveout provisions that preserve an employee’s ability to communicate with the SEC. 

For more information regarding Rule 21F-17(a) and its potential impact, or to discuss any other securities law concerns, please feel free to contact a member of Norton Rose Fulbright's securities litigation, investigations, and SEC enforcement team.

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