Time to Review Whistleblower Provisions: SEC Charges Seven Public Companies with Violation of Whistleblower Protection Rule
3 min read
On September 9, 2024, the US Securities and Exchange Commission (“SEC”) announced settled charges against seven public companies for violation of the whistleblower protection rule in connection with employment, separation, and other agreements.1 The SEC charged each company with violating whistleblower protection Rule 21F-17(a) under the Securities Exchange Act of 1934, which prohibits impeding an individual from communicating with SEC staff about possible securities law violations.
All seven of the charged companies required waiver of monetary awards for participating in government investigations, including participation in whistleblower programs, in various employee documents.2 These documents included employment agreements, consulting agreements, retention agreements, separation agreements, settlement agreements, and severance agreements. Additional provisions that the SEC found violated whistleblower protection rules included requiring employees to provide several days’ advance notice to the employer before making disclosures to the government, and prohibiting voluntarily disclosure of any information about employer business operations to government agencies.
Notably, there was no allegation that the charged companies took action to enforce these provisions or that employees declined to speak with the government about potential violations of securities laws. In addition, many of the agreements expressly permitted employee participation in government whistleblower programs. Nevertheless, the SEC found that these agreements created “impediments to participation in the Commission’s whistleblower program” by requiring employees to forego either their right to file a complaint with the SEC or the financial award they might receive for doing so.3
While some companies entered into many of these agreements with the violative language, such as one healthcare company that entered into nearly 100, other companies charged had entered into fewer than ten. Civil penalties ranged between $19,500 and $1,380,600, depending primarily upon the number of violative agreements into which the companies entered.
The SEC considered the remedial acts undertaken and the cooperation provided by the seven companies in determining the civil penalties. Each of the charged companies revised or agreed to revise their internal agreement templates to remove the violative provisions, affirmatively advised employees that they are not prohibited from disclosing information to any governmental or regulatory authority, and used reasonable efforts to notify affected employees that their agreements do not limit their ability to contact SEC staff or obtain an award.4
In March 2023, we published an alert describing how to minimize the risk of violation of the whistleblower protection rule in connection with employee-related documents, such as those described in the above actions.5 We published a related alert in January 2024 on minimizing the risk of whistleblower rule violations in connection with settlement agreement confidentiality provisions.6
These latest actions underscore the SEC’s continued focus on impediments to whistleblowers’ ability to report possible securities law violations. As a result, companies should review employee-related documents to confirm that there is no language that could impede reporting to the SEC. Such documents could include employee compliance manuals, codes of ethics, employment agreements, consulting agreements, and separation agreements. As in these latest seven matters, the mere existence of language that may be viewed as impeding reporting to the SEC, and not any actual enforcement of such language by an employer, could result in SEC charges.
Arianna Skipper (White & Case, Law Clerk, New York) contributed to the development of this publication.
1 SEC Charges Seven Public Companies with Violations of Whistleblower Protection Rule, Release No. 2024-118 (Sep. 9, 2024), available at https://www.sec.gov/newsroom/press-releases/2024-118.
2 Release No. 100969 (Sep. 9, 2024); Release No. 100970 (Sep. 9, 2024); Release No. 100971 (Sep. 9, 2024); Release No. 100972 (Sep. 9, 2024); Release No. 100973 (Sep. 9, 2024); Release No. 100974 (Sep. 9, 2024); Release No. 100975 (Sep. 9, 2024).
3 Release No. 100969 (Sep. 9, 2024); Release No. 100970 (Sep. 9, 2024); Release No. 100971 (Sep. 9, 2024); Release No. 100972 (Sep. 9, 2024); Release No. 100973 (Sep. 9, 2024); Release No. 100974 (Sep. 9, 2024); Release No. 100975 (Sep. 9, 2024).
4 Release No. 100969 (Sep. 9, 2024); Release No. 100970 (Sep. 9, 2024); Release No. 100972 (Sep. 9, 2024); Release No. 100973 (Sep. 9, 2024); Release No. 100974 (Sep. 9, 2024); Release No. 100975 (Sep. 9, 2024).
5 That year, the SEC had charged Activision Blizzard Inc. with violating Rule 21F-17(a) by requiring in its separation agreements that former employees “notify the company if they received a request from a government administrative agency in connection with a report or complaint.” The company agreed to pay $35 million to settle the charges. In the Matter of Activision Blizzard, Inc., Release No. 96796 (Feb. 3, 2023).
6 The SEC had brought charges against a registered broker-dealer and investment adviser, expanding the enforcement of the whistleblower protection rule to encompass settlement agreements with clients. The entity agreed to pay an $18 million civil penalty. Exchange Act Release No. 99344 (Jan. 16, 2024). According to the SEC Order, the registered entity violated this rule by asking certain advisory clients and brokerage customers “to whom it had issued a credit or settlement over $1,000 in value” to sign a confidential release agreement that prevented the clients from disclosing potential violations of securities laws to the SEC unless responding to an inquiry from the SEC. Id.
White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.
This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
© 2024 White & Case LLP
