November 26, 2022

Volume XII, Number 330


SEC May Seek Companies’ Agreements to Determine Whistleblower Treatment

The SEC continues to focus on its whistleblower initiative.

According to a February 25 Wall Street Journal article titled “SEC Probes Companies’ Treatment of Whistleblowers,” the U.S. Securities and Exchange Commission (SEC) has recently “sent letters to a number of companies asking for years of nondisclosure agreements, employment contracts and other documents.” These inquiries are the latest action by the SEC to further its stated concern that confidentiality and nondisclosure provisions in employment, separation, and settlement agreements and related policies may be chilling reporting to the SEC. The SEC’s inquiries follow the Financial Industry Regulatory Authority’s action last year to warn regulated companies about overbroad confidentiality provisions. Companies should review their agreements and policies in light of the latest SEC actions.

SEC’s Requests to Targeted Companies

The SEC’s Office of the Whistleblower has made clear that it will use its authority to ensure that companies do not use agreements and policies to impede whistleblowers from reporting information to regulators. In public comments last year, Sean McKessy, chief of the SEC’s Office of the Whistleblower, stated, “[W]e are actively looking for examples of confidentiality agreements, separat[ion] agreements, employee agreements . . . that in substance say ‘as a prerequisite to get this benefit you agree you’re not going to come to the commission or you’re not going to report anything to a regulator.’” He also explained that if the SEC finds language that creates a chilling effect for potential whistleblowers to report to the SEC, “not only are we going to go to the companies, we are going to go after the lawyers who drafted it” and may revoke the lawyers’ ability to appear before the SEC.

According to the Wall Street Journal article, “[t]he agency has asked the firms to turn over every nondisclosure agreement, confidentiality agreement, severance agreement and settlement agreement they entered into with employees since Dodd-Frank went into effect, as well as documents related to corporate training on confidentiality, according to the letter and the people familiar with the matter. The agency letter viewed by the Journal also asked for ‘all documents that refer or relate to whistleblowing’ and a list of terminated employees.”

To date, however, the SEC has not articulated specific guidance regarding what language or clauses it considers permissible or impermissible. Its position may become clear through enforcement actions.

FINRA’s Guidance in Last Year’s Regulatory Notice

The SEC’s actions come after FINRA issued a Regulatory Notice in which it “remind[ed] firms that it is a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) to include confidentiality provisions in settlement agreements or any other documents, including confidentiality stipulations made during a FINRA arbitration proceeding, that prohibit or restrict a customer or any other person from communicating with the [SEC], FINRA, or any federal or state regulatory authority regarding a possible securities law violation.”

FINRA’s Regulatory Notice provided “an example of an acceptable confidentiality provision” in a settlement agreement:

Any non-disclosure provision in this agreement does not prohibit or restrict you (or your attorney) from initiating communications directly with, or responding to any inquiry from, or providing testimony before, the SEC, FINRA, any other self-regulatory organization or any other state or federal regulatory authority, regarding this settlement or its underlying facts or circumstances.

Notably, although the SEC and FINRA have been the most vocal in their concerns that agreements and policies should not chill reporting, it is likely that other regulators share those concerns and may follow their lead in scrutinizing such agreements and policies.

Practical Guidance

Companies should review employment, separation, and settlement agreements and related policies in light of the latest actions by the SEC. In particular, companies should review agreements and policies that contain confidentiality and nondisclosure provisions, nondisparagement provisions, releases, covenants not to sue, and clauses relating to cooperation, internal reporting, and company notification. 

In addition, a company that receives a request from the SEC or another regulator to produce its agreements, policies, and related documents should consult with an SEC, FINRA, or other regulatory lawyer. Interactions with, and disclosure of information to, the SEC can have significant ramifications, and companies would be well served to obtain sound advice with respect to such a request.

Copyright © 2022 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume V, Number 58

About this Author

Samuel Shaulson, Morgan Lewis, Litigation attorney

Sam S. Shaulson represents financial services, pharmaceutical, entertainment, retail, and other clients in Fair Labor Standards Act (FLSA), wage and hour class and collective litigation, and other complex litigation. With an emphasis on the financial services industry, he has represented industry trade organizations such as the Securities Industry and Financial Markets Association (SIFMA) and the Mortgage Bankers Association (MBA) in employment law issues of industrywide significance. Sam is co-leader of the labor and employment practice’s financial services team and a...

Andrew Schaffran, Morgan Lewis, Financial services lawyer

Andrew J. Schaffran counsels securities firms, insurance companies, hedge funds, and other financial services companies concerning all aspects of employment law, and defends them in class and collective actions and high-profile single-plaintiff employment litigation of whistleblower, discrimination, wage and hour, defamation, and other claims, including in Sarbanes–Oxley whistleblower proceedings before OSHA and in arbitration before FINRA panels. Chambers USA has named Drew one of the leading US lawyers for employment law annually since 2003. Drew is also a fellow of...

Daryl Landy, Morgan Lewis, labor and employment lawyer

Daryl S. Landy is a partner in Morgan Lewis's Labor and Employment Practice. Mr. Landy's practice focuses on employment litigation and counseling, with a particular emphasis on the securities and financial services industry. He regularly represents well-known securities firms and other financial services companies, as well as companies from a variety of other industries, in a broad range of employment-related litigation, including single-plaintiff, multi-plaintiff and class action employment matters in federal and state courts, before administrative agencies and in...

Amy Greer, Securities lawyer, Morgan Lewis

Amy J. Greer focuses her practice on securities enforcement and litigation matters. A former regional trial counsel for the US Securities and Exchange Commission’s (SEC) Philadelphia office, Amy brings insight from that experience when addressing litigation and investigations by the SEC, the US Department of Justice (DOJ), the US Financial Industry Regulatory Authority (FINRA), and self-regulatory organizations, as well as state attorneys general and securities commissions.