Are Whistleblower Protection Violations the New SEC Sweep?

Since the enactment of the Dodd Frank Act, the SEC has paid billions of dollars in whistleblower awards, with almost $2 billion awarded just in fiscal year 2023. The SEC continues to pay these awards, and has begun to bring enforcement actions against companies whose employment and client agreements could appear to infringe on the right to report cases in violation of Section 21f-17(a) of the Exchange Act. The Dodd Frank Act added Section 21f-17(a) to the Exchange Act to protect whistleblowers and encourage them to come forward, and it reads: “[n]o person may take 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 . . . with respect to such communications.”

Beginning in 2023 through early 2024, the SEC settled with five public companies for having language either (1) in employment agreements that appeared to prohibit employees from disclosing certain information to third parties, or required employees to affirm in a release of claims that they did not file any complaints with any government agency in order to receive a part of their compensation, or (2) in customer agreements that required clients to keep settlement information confidential and did not permit such clients to voluntarily contact the government. 

On September 4, 2024, the SEC announced that a broker-dealer and two affiliated investment advisers agreed to pay $240,000 to settle charges that they violated a whistleblower protection rule through the use of restrictive language in confidentiality agreements. In those cases, the issues concerned confidentiality agreements for retail clients that contained language that impeded clients from reporting potential securities violations. Some of the agreements also required clients to represent that they had not reported the underlying dispute and would never report it.

On September 9, 2024, the SEC announced settlements with seven more companies that had required employees, contractors, and/or former employees to forego their right to file a complaint with a government agency or to receive a financial reward to do so. The largest civil penalty was $1,386,000, which involved language in 98 employment, separation, retention, and settlement agreements that protected the right to file an administrative charge or participate in an investigation, but waived the right to participate in any monetary award from such a proceeding. That same company also executed another 56 separation and settlement agreements that required employees to waive their right to file a complaint or charge with any federal agency. Additional settlements involved agreements with contractors that prohibited those contractors from providing information about the company’s business operations to government agencies and required them to notify the company of any disclosure required by a court or government agency. While one of the companies that settled did not limit the employee’s right to file or participate in an investigative proceeding of any federal, state, or local agency, the SEC nevertheless found a violation solely on the fact that it prohibited the employee from recovery of any monetary remedy. The seven companies agreed to pay civil penalties ranging from $19,500 to $1,386,000, totaling more than $3 million.

Notably, in each case, the SEC made no finding that any company had actually attempted to enforce the challenged restrictions. The SEC determined that the provisions alone created impediments to participation in the whistleblower program because they required individuals to forego the financial incentives that are intended to encourage persons to report possible securities law violations.

While all of the seven most recent settlements are with public companies, private companies have exposure in this area as well. One year ago, the SEC charged a privately held energy and technology company for using employee separation agreements that violated the SEC’s whistleblower protection rules. In addition, other financial regulators are also cracking down on overly broad and restrictive nondisclosure agreements (NDAs). On June 7, 2024, the Commodity Futures Trading Commission (CFTC) announced a settlement with a commodities trading firm that included, among other conduct, a finding that the firm violated CFTC Rule 165.19(b) by requiring employees to sign employment and separation agreements with broad nondisclosure provisions that impeded voluntary communications with the CFTC. Thereafter, the Consumer Financial Protection Bureau (CFPB) issued a circular warning that broad and restrictive NDAs may violate federal whistleblower protection laws. Similarly, language prohibiting employees from filing or participating in a charge or investigation likely conflicts with the position of the Equal Employment Opportunity Commission (EEOC) that employees cannot waive the right to file an EEOC charge or participate in any EEOC investigation, hearing, or proceeding.

This focus by multiple agencies on language in both employment agreements and retail customer agreements should prompt public and private companies to review all such agreements to ensure they contain no language that could be interpreted to restrict or impede an individual’s whistleblower rights. As the recent settlements have instructed, it is not sufficient to have a broad, favorable whistleblower policy. Rather, the SEC and other agencies are looking at each individual agreement. This is particularly concerning for large companies with multiple businesses because it may be easier to overlook language buried in individual agreements that unwittingly impedes an employee’s or client’s whistleblower rights. Furthermore, not only are companies at risk of potential violations based on the language, but given the current environment regarding the importance of self-reporting to various agencies, along with the Department of Justice’s recent pilot program that financially awards whistleblowers, companies need to be particularly vigilant with respect to their internal conduct concerning whistleblowers. 

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