The SEC has long made it clear that it intends to protect whistleblowers and to suppress activities it believes will have the effect of discouraging whistleblower activity. The agency recently launched enforcement actions against companies that had incorporated various waivers in employee severance agreements that discouraged employees from reporting possible securities law violations to the SEC. The agency’s actions shows that the agency is prepared to actively target corporate actions the agency believe may suppress the whistleblowing process.
The SEC’s recent enforcement actions were based on its Rule 21F-17, which was enacted as part of the whistleblower programs under the Dodd-Frank Act. The Rule provides, in subsection (a), that “No person may take any action to impede any 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.”
In April 2015, the agency brought its first ever enforcement action for a violation of Rule 21F-17, when it alleged that KBR’s use of a confidentiality agreement prohibiting witnesses in internal investigations from discussing the subject matter of their interviews was a violation of the rule. The agency brought this action though there was no evidence that any whistleblower had been deterred from making a report.
The agency has continued to make it clear that it intends to continue to target employment agreements or other arrangements that it believes could chill a whistleblowers willingness to come forward. For example, in an April 30, 2015 speech, SEC Chair Mary Jo White said that “a number of … concerns have come to our attention, including that some companies may be trying to require their employees to sign agreements mandating that they forego any whistleblower award or represent, as a precondition to obtaining a severance payment, that they have not made a prior report of misconduct to the SEC. You can imagine our Enforcement Division’s view of those and similar provisions under our rules.”
In two more recent enforcement actions, the agency has – consistent with the SEC chair’s statements — made it clear that it intends to continue to target companies using language in severance agreements that it contends discourage or suppress whistleblower activities.
In the first of these two actions, on August 10, 2016, the agency announced that BlueLinx Holdings had agreed to pay a $265,000 penalty to settle a cease-and-desist proceeding relating to the company’s use of certain language in its severance agreements. As described in the agency’s press release, the SEC alleged that the company violated the securities laws by using severance agreements that required outgoing employees to waive their rights to monetary recovery should they file a charge or complaint with the SEC or other federal agencies.
In addition to paying the penalty, the company agreed to amend its severance agreement to make it clear that employees may report possible securities laws violations to the SEC or other agencies without the company’s prior approval and without forfeiting any resulting whistleblower award. The company also agreed to make reasonable efforts to contact employees who had signed severance agreements after August 12, 2011, to notify them that the company does not prohibit former employees from providing information to the SEC or accepting whistleblower awards.
The agency’s press release quote one agency representative as saying that the agency is “continuing to stand up for whistleblowers” and is clearing away “impediments that may chill them from coming forward with information.” Another representative is quotes as saying that “Companies cannot simply undercut a key tenet of our whistleblower program by requiring employees to forego potential whistleblower awards in order to receive their severance payments.”
In the second of the two recent enforcement actions, on August 16, 2016, the agency announced that Health Net, Inc. had agreed to pay a $340,000 penalty for illegally using a severance agreement requiring outgoing employees to waive their ability to obtain monetary awards from the SEC whistleblower program. In the agency’s press release, an agency spokesperson noted that the whistleblower program financial incentives “are integral to promoting whistleblowing” and that the use of severance agreements “to strip away those financial incentives” had the effect of “directly targeting the Commission’s whistleblower program.”
With these most recent enforcement actions, the agency has made it clear that it intends to act aggressively to target actions or activities that it believes has the effect of suppressing whistleblower activity. The immediate practical implication from the recent enforcement actions is that companies should review the language in their severance agreements and remove language requiring departing employees to waive their right to whistleblower awards or requiring individuals to notify the company before providing information to the SEC. It is critical to note that in none of the enforcement actions discussed above was there any allegation that any particular whistleblower had been deterred or discouraged. Companies should understand that from the agency’s perspective, the mere presence of the language in the relevant severance documents along was sufficient to attract the agency’s enforcement attention.
The agency is clearly interested in communicating the message that it does not want companies to try to use severance agreements to deter potential whistleblowers from making reports to the SEC. More generally, the agency wants to make it clear that it wants to discourage companies from taking any actions that would deter individuals from reporting possible securities law violations. The statements of the agency spokesperson in the BlueLinx press release underscore that fact that the agency sees itself as “stand[ing] up for whisteblowers” when it “clears away impediments that may chill them from coming forward.” Moreover the ability to collect a whistleblower award is a “key tenet of the whistleblower program.”
The agency has made it clear that any corporate action that would require an employees to waive potential rights to a whistleblower bounty award or to notify the company before making a whistleblower report – or otherwise doing anything to discourage or suppress whistleblower activity – represents a violation of the agency’s rules and could attract the attention of the agency’s enforcement officials, whether or not any potential whistleblowers are actually deterred from making reports.
The agency has made it clear that it intends to vigorously defend the right and ability of potential whistleblowers to report potential violations and the potential right of whistleblowers to receive bounty awards. However, as Keith Bishop points out in an August 18, 2016 post on the California Corporate & Securities Law blog (here), the detriment to departing employees from the waiver of their right to receive a whistleblower bounty award may be more theoretical than real. As Bishop notes, in the history of the Dodd-Frank whistleblower program (as of the last official report), there had been 14,116 whistleblower reports. Though the agency has paid out $54 million in whistleblower bounty awards, the vast majority of this amount went to just two whistleblowers. The fact is that only 22 whistleblowers have received bounty awards out of the 14,116 whistleblowers that have made reports.
According to Bishop, the probability of receiving an award is 0.00155301, less than the chance of picking a single number winner at the roulette table (actually, the chance of winning at the roulette table, according to Bishop, is 17 times better than winning a whistleblower award).
The SEC may be committed to protecting the potential rights of whistleblowers to receive bounty awards, but prospective whistleblowers and indeed other observers may well ask whether the agency’s aggressive protection of whistleblower’s rights is matched by its own track record in awarding whistleblowers.
Whatever the merits of the agency’s program and its protection of the program, it is clear that the program has drawn the attention of other regulators around the world. As I noted in a recent post (here), securities regulators in several countries have recently adopted whistleblower programs, in some instances with the program expressly modeled on the SEC’s Dodd-Frank whistleblower program. Though the approaches that the different countries are taking vary, the fact is that the various regulators are taking affirmative steps to encourage whistleblowers to report wrongdoing. The SEC, at least, has made it clear it intends to take active steps to protect the rights of whistleblowers to come forward.