State Treasurers Call on SEC to Investigate Apple’s Nondisclosure Agreements
In a January 30, 2022 letter to SEC Chair Gensler, eight State treasurers requested that the SEC investigate Apple’s nondisclosure agreements and whether Apple misled the SEC about their use of nondisclosure provisions in employment and post-employment agreements. According to the January 30th letter, “multiple news reports have stated that whistleblower documents demonstrate Apple uses the very concealment clauses it repeatedly claimed it does not use . . .” The January 30th letter also points out the importance of permitting employees to report unlawful conduct and the need for shareholders to have accurate information about workplace culture.
The SEC can investigate whether Apple’s alleged use of concealment clauses in agreement and policies violates the SEC’s anti-gag rule, which prohibits any “person” from taking “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 . . . .” Exchange Act Rule 21F-17, 17 C.F.R. § 240.21F-17.
The purpose of the anti-gag rule is to facilitate the disclosure of information to the SEC relating to possible securities law violations. As explained in the release adopting the SEC’s whistleblower rules, “an attempt to enforce a confidentiality agreement against an individual to prevent his or her communications with Commission staff about a possible securities law violation could inhibit those communications . . . and would undermine the effectiveness of the countervailing incentives that Congress established to encourage individuals to disclose possible violations to the Commission.” Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, Release no. 34-64545 (May 25, 2011).
The SEC has taken enforcement actions for violations of Rule 21F-17, most of which are focused on employer agreements and policies that have the effect of impeding whistleblowing to the SEC. These enforcement actions have strengthened the SEC’s whistleblower program by encouraging whistleblowers to report fraud and encouraging employers to revise their NDAs and policies to clarify that such agreements and policies do not bar lawful whistleblowing.
Apple’s market capitalization of approximately $2.8 trillion renders it the world’s most valuable company. If Apple is using concealment clauses and unlawful NDAs to silence whistleblowers, then Apple shareholders may not have an accurate and complete picture of the company’s financial condition and risks, including Apple’s ESG-related risks and risks stemming from its potential violations of anti-trust laws. Accordingly, it will be critical for the SEC to take enforcement action if it finds that Apple has violated the SEC’s anti-gag rule.
By some estimates, fraud and other white-collar crime costs the US economy $300 billion to $800 billion per year. To combat fraud, regulators and law enforcement need the assistance and cooperation of whistleblowers to detect and effectively prosecute fraud. But there are many substantial risks that deter whistleblowers from coming forward, including the risk of being sued for breaching a confidentiality agreement. The continued success of whistleblower reward programs will hinge in part on regulators taking a firm stand against agreements and policies that impede whistleblowing.
For more information on unlawful restrictions on whistleblowing, see the article De Facto Gag Clauses: The Legality of Employment Agreements That Undermine Dodd-Frank’s Whistleblower Provisions.