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SEC Targets Severance Agreements That Impede Whistleblowers

The U.S. Securities and Exchange Commission (SEC) is cracking down on severance agreements that prohibit former employees from contacting regulators or accepting whistleblower awards under threat of losing their severance payments or other post-employment benefits. More and more, the SEC’s Enforcement Division has announced new cases filed against, and settlements made with, companies which restrict former employers from blowing the whistle through severance agreement clauses. Many of the scrutinized companies are not in the securities industry, and the problematic contract language is not as obvious as you may think.

Dodd-Frank Act Established Whistleblower Programs

The 2010 Dodd-Frank Act established whistleblower programs for the SEC as well as the Commodity Futures Trading Commission. Under the SEC’s whistleblower program, eligible whistleblowers who provide unique and useful information about securities-law violations to the SEC can collect significant awards of 10-to-30 percent of a penalty that exceeds $1 million.

Essential to the program, however, are the anti-retaliation provisions, which prevent whistleblowers from suffering adverse actions as a result of their whistleblowing activities. In addition, an SEC rule, Rule 21F-17, prohibits any action that impedes an individual from communicating with the SEC about possible securities violations. Rule 21F(h)(1) of the Dodd-Frank Act prohibits employers from taking retaliatory actions against whistleblowers who make protected reports.

Award Waivers, Confidentiality, and Non-Disparagement Clauses

Severance agreements often contain boilerplate language, occasionally including clauses that restrict a former employee from disclosing any confidential company information and disparaging the company or its officers and managers. Agreements also sometimes require that a former employee agree to waive any awards or monetary recovery should he or she file a complaint with a governmental agency. These severance provisions are exactly the type of restrictive language that the SEC has been targeting.

In its first whistleblower protection case involving restrictive language, in 2015 the SEC charged a global technology and engineering firm with a violation of Rule 21F-17. The company had required witnesses involved in internal investigations to sign confidentiality agreements that stated that the employee could face discipline or termination if they discussed the matter with outside parties without the prior approval of the company’s legal department. Because the investigations could involve possible securities-law violations and the clause prohibited employees from reporting possible violations directly to the SEC, the SEC found that the restrictive language in the confidentiality agreements impeded whistleblowers. The company agreed to pay a $130,000 penalty to settle the charges and voluntarily amend its confidentiality statements to add language to inform employees that they may report possible violations to the SEC and other federal agencies without company approval or fear of retaliation.

Recent SEC Cases Targeting Severance Agreements 

Additional whistleblower severance agreement cases highlight other clauses targeted by the SEC. In mid-2016, the SEC charged a building products company with using severance agreements that required former employees to waive their rights to a monetary recovery if they filed a complaint with the SEC or another government agency. The clause stated that the departing employee was required to waive possible whistleblower awards or risk losing their severance payments and other post-employment benefits. The company did not admit liability, but agreed to settle with the SEC for a $265,000 penalty.

Also in mid-2016, the SEC charged a financial services company for using language in agreements that restricted employees’ ability to disclose information to government agencies. Problematic wording included restricting any disclosure of confidential information, except when disclosure is required by law, in response to a subpoena, or with the company’s permission.

In late 2016, two additional SEC severance agreement cases were settled. In the first, the SEC charged that a technology and analytics company used voluntary severance agreements that included a problematic non-disparagement clause. Specifically, the non-disparagement clause stated that the departing employee agreed not to engage in any communication that “disparages, denigrates, maligns or impugns [the company]” or its officers, directors, or other associates, including communications with regulators such as the SEC. A separate clause in the severance agreements required the former employee to acknowledge that a breach of the non-disparagement clause would cause irreparable injury and damage to the company, and required the former employee to forfeit all but $100 of any severance compensation paid to them in the event of a breach. The SEC found that over a four-year period, at least 246 employees had signed the severance agreements containing the non-disparagement and forfeiture clauses. The company agreed to pay a $180,000 penalty to settle the charges.

In the second late-2016 case, a petroleum and natural gas exploration company agreed to a whopping $1.4 million settlement with the SEC. The SEC had charged the company with violating Rule 21F-17 for using separation agreements containing numerous restrictive clauses. First, the agreements contained a “Future Activities” clause that stated that a former employee could not voluntarily contact or cooperate with any governmental agency in any complaint or investigation concerning the company. Second, the separation agreements included a “Confidential Information” provision that required departing employees to agree “not to make any independent use of or disclose to any other person or organization, including any governmental agency, any of the Company’s confidential, proprietary information unless [the employee] obtain[ed] the Company’s prior written consent.” Third, the form separation agreements included a clause entitled “Preserving Name and Reputation.” That clause stated that employees could not at any time in the future defame, disparage, or make disparaging remarks which could embarrass or cause harm to the company’s name and reputation, or that of any of its officers, employees, or other named parties, to any governmental or regulatory agency or to the press or media. With approximately 546 former employees who signed separation agreements with the company containing all or some of those provisions from 2011 to 2015, the company agreed to pay a civil money penalty of $1.4 million.

The SEC continued its enforcement trend during the first month of 2017 , when it announced additional settlements in enforcement actions targeting separation agreements that impede whistleblowers. On January 17, 2017, the SEC announced that a large asset management firm agreed to pay a $340,000 civil penalty and implement a mandatory yearly training program designed to inform employees of their whistleblower rights. The firm had used separation agreements with over 1,000 employees that required them to waive their ability to obtain whistleblower awards. Just two days later, the SEC announced that a Seattle-based financial services company had agreed to pay $500,000 to settle charges that it conducted improper hedge accounting and later took steps to impede potential whistleblowers by conditioning the receipt of severance payments and other post-employment benefits on the waiver of potential whistleblower awards.

EEOC Also Targets Standard Separation Agreement Clauses 

The Equal Employment Opportunity Commission (EEOC) also has targeted similar clauses in separation agreements, arguing that they interfered with the agency’s authority to investigate potential violations of the various nondiscrimination statutes. The EEOC has taken issue with common separation provisions, including clauses involving covenants not to sue, non-disparagement of the company, non-disclosure of confidential information, and general releases of all claims.

Review Your Severance Agreements Carefully

Employers tend to use the same form severance and separation agreements for long periods of time, with minimal changes. Before you use your next severance agreement, take the time to review the restrictions on post-employment activities carefully so as not to impede potential whistleblower actions. And you are also well advised to look at other relevant documentation – e.g., employment contracts, NDAs, handbooks – for relevant language as well. Additionally, note that Rule 21F-17’s prohibitions are not expressly limited to public companies only; so private companies should take note of these matters as well.

Remove any wording that restricts a former employee from contacting, communicating with, or cooperating with government agencies, including the SEC. Do not include a waiver of whistleblower awards or any monetary recovery based on/related to communications with government agencies, or require the former employee to forfeit any part of the severance payment or other benefits should the person engage in whistleblowing activities. Ensure that any confidentiality and non-disparagement clauses are not too broad so that they prohibit contact with the SEC or other agencies; a good way to do this is to note in the agreement that the provisions are not intended to interfere with the former employee’s right to file a claim or report with, or to otherwise participate in an investigation with, an administrative agency. And do not require a former employee to obtain advance approval from the company before disclosing confidential information to government agencies or participating in agency investigations or proceedings. A thorough review of your employment documentation may help prevent your organization from being embroiled in an SEC investigation.

Copyright Holland & Hart LLP 1995-2022.National Law Review, Volume VII, Number 38

About this Author

mark wiletsky, holland hart, law firm, attorney, corporate attorney

Mark Wiletsky provides quick, practical solutions to difficult employment-related problems so that clients can stay focused on achieving their business objectives. With experience in multiple industries, companies count on Mr. Wiletsky to find workable solutions to their various issues.

Mr. Wiletsky also helps companies protect their most critical information, including trade secrets and other sensitive data, from being used by competitors, past employees, or others. His industry experience is wide-ranging, including healthcare, aerospace,...

Brian Hoffman, Securities, White Collar Defense, Attorney, Holland Hart Law FIrm
Of Counsel

Mr. Hoffman is an experienced counselor for securities, enforcement, and white-collar defense clients. Mr. Hoffman represents entities and individuals in government and self-regulatory organization investigations and proceedings. He also conducts corporate internal investigations and defends shareholder class action and derivative lawsuits. His matters have included, among other things, potential Foreign Corrupt Practices Act (FCPA) concerns; financial reporting and disclosure issues; matters concerning investment advisors and private equity firms; alleged insider trading; and matters...