SEC Enforcement Action for Rule 21F-17(a) Violations
Tuesday, November 14, 2023

In September, the U.S. Securities and Exchange Commission (SEC) announced settlements with several companies for violations of Rule 21F-17(a), which prohibits any person from taking action to impede communications with the SEC about possible securities law violations. The lessons from SEC’s recent enforcement actions are clear. They demonstrate the SEC’s prioritization of protecting and promoting whistleblower disclosures. Companies should also be aware that including language in employment agreements, including separation or severance agreements, that may dissuade whistleblowers from reporting to the SEC will be forced to pay—even in the absence of evidence that a would-be whistleblower was actually chilled by the offending language.

Overview of Rule 21F-17(a)

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, amended the Securities Exchange Act by adding Section 21F to encourage whistleblowers to report possible securities law violations.  Pursuant to this Congressional act, the Commission adopted Rule 21F-17.  Rule 21F-17(a) provides 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.”

Since 2015, the SEC has brought nearly twenty enforcement actions for violations of Rule 21F-17(a) against companies using restrictive confidentiality agreements.

Recent SEC Enforcement Actions for Rule 21F-17 Violations

DESCO Employment Agreements and Releases

On September 29, 2023, the SEC announced a $10 million settlement with registered investment adviser D. E. Shaw & Co. L.P. (“DESCO”) for violating Rule 21F-17(a) by including a clause in its employment agreements prohibiting the disclosure of confidential information to third parties, without an exception for potential SEC whistleblowers and requiring departing employees to sign releases affirming that they had not filed any complaints with any government agency in order to receive deferred compensation.

The SEC alleged that DESCO had violated Rule 21F-17(a), despite having circulated a firm-wide email in 2017 notifying employees that they were not prohibited from communicating directly with or providing information to regulators, agencies, and commissions regarding possible violations of law or regulations without notice to DESCO, updating its internal policies with similar language, and requiring employees to acknowledge their receipt and review of those policies annually thereafter, noting that DESCO had not simultaneously revised the language in its separation agreements.  In this case, the SEC was aware of one former DESCO employee initially discouraged from communicating with the SEC about potential securities violations due to the provisions in DESCO’s agreements and releases.

CBRE Separation Agreements

On September 19, 2023, the SEC announced a $375,000 settlement with CBRE, Inc. (CBRE) for violations of 21F-17(a).  Between 2011 and 2022, as a condition for receiving separation pay, CBRE required departing employees to sign a release attesting that they had not filed a complaint or charges against CBRE with any state or federal tribunal or agency “based on the events occurring prior to the date on which this Agreement is executed by Employee.”

Because employees were unable to execute the agreement prior to the date of termination, the SEC determined that the agreement effectively required employees to represent at the time of executing the agreement that they had not filed a complaint or brought charges based on events spanning their entire employment with CBRE or occurring between the time of their termination and the agreement’s execution. The SEC concluded that, by requiring this representation, “CBRE took action to impede potential whistleblowers from reporting complaints to the Commission,” that such conduct “undermines the purpose of Section 21F,” and that “CBRE violated Exchange Act Rule 21F-17(a).”

In 2015, CBRE added a provision to its separation agreements clarifying that employees were not prohibited from filing a charge with or participating in any investigation or proceeding conducted by a federal, state, or local agency.  The SEC determined, however, that this provision was “prospective in application, and therefore did not remedy the impeding effect of the Employee Representation.”  Moreover, the SEC found that CBRE had violated Rule 21F-17 despite being unaware of any instance in which a former CBRE employee was prevented from communicating with the SEC or where CBRE took action against a former employee based on the representation required under its separation agreement.

Monolith Separation Agreements

On September 8, 2023, the SEC also entered into a $225,000 settlement with Monolith Resources, LLC for violating Rule 21F-17(a) by utilizing restrictive language in their settlement agreements limiting employees’ right to recover incentive awards in connection with providing information to government agencies.  The SEC determined that Monolith’s separation agreements “raised impediments to participation in the Commission’s whistleblower program by having the employees forego the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.”  The SEC thus found that the agreements violated rule 21F-17(a) by “impeding individuals from communicating directly with the Commission staff about possible securities law violations.”

SEC Enforcement Trend for Rule 21F-17(a) Violations

The SEC’s recent enforcement actions follow a significant settlement with Activision Blizzard Inc. (“Activision”) earlier this year.  On February 3, 2023, the SEC announced a $35 million settlement with Activision to settle charges that included alleged violations of Rule 21F-17(a).  Those violations arose from separation agreements Activision entered into with employees between 2016 and 2021, which required exiting employees to notify Activision of any requests from an administrative agency in connection with a report or complaint.

The SEC pursued this Rule 21F-17 violation despite the agreements including a provision providing that nothing in the agreement prevented the former employee from communicating with, participating in investigations by, or filing a charge with government or regulatory entities.  Likewise, the SEC found a violation despite finding no known instance of a former Activision employee being prevented from communicating with Commission staff about potential securities violations or any action by Activision to enforce the notification clause or otherwise prevent such communications.

 

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