Recent SEC Enforcement Actions Prompt Consideration of Whistleblower Carve-outs
The recent settlement of SEC enforcement actions concerning the Dodd Frank Act’s whistleblower provisions are prompting companies and their counsels to evaluate current and prospective severance and confidentiality agreements for language that could be viewed as restricting an individual’s ability to communicate with the SEC about possible securities law violations and/or receive monetary awards in connection with such communications.
One case, settled August 10th, involved the addition of a monetary recovery prohibition to certain severance agreements (entered into nearly two years after the adoption of the whistleblower rules) that were alleged to have violated the SEC’s prohibition on attempts to impede an individual’s communications with the SEC about possible securities law violations. The SEC appears to have been particularly concerned with restrictive language that forced employees leaving the company to waive possible whistleblower awards or risk losing their severance payments and other post-employment benefits.
As part of the settlement, the company agreed to amend its severance agreements to make clear that employees may report possible securities law violations to the SEC and other federal agencies without prior approval and without having to forfeit any resulting whistleblower award, and make reasonable efforts to contact former employees who had executed severance agreements, following the adoption of the whistleblower rules, to notify them that former employees are not prohibited from providing information to the SEC staff or from accepting SEC whistleblower awards. The defendant did not admit or deny the SEC findings in the enforcement action.
The terms of recent settlements should serve as reminder to any company that falls within the SEC’s enforcement jurisdiction (a significantly broader group that just public companies) to consider including provisions in severance and confidentiality agreements to explicitly provide that an employee may communicate with the SEC (and other federal agencies) about potential securities law violations without company approval (notwithstanding other confidentiality and disclosure obligations in the agreement). Likewise, for pre-existing severance and confidentiality agreements with employees, companies should consider broad communications highlighting that any agreements with former employees will not be interpreted as restricting such former employee’s ability to provide information to the SEC or accept SEC whistleblower awards.
Contact Bryan Pitko for more information.