Around this time last year, the Securities and Exchange Commission’s Office of the Whistleblower warned lawyers that they may be disciplined for drafting contracts to incentivize whistleblowers to not bring alleged company wrongdoing to the SEC’s attention. It appears the SEC is beginning to make good on its threat. Last week, the SEC resolved its first enforcement action against a company for allegedly using improperly restrictive language in confidentiality agreements with the potential to stifle whistleblowers. That company agreed to pay a $130,000 penalty to reach a “no admissions” resolution with the SEC.
According to the SEC, the company required witnesses in certain internal investigations interviews to sign confidentiality statements with language warning that they could face discipline and even be fired if they discussed the matters with outside parties without the prior approval of the company’s legal department. Since these investigations included allegations of possible securities law violations, the SEC asserted that these terms violated Rule 21F-17 (enacted under the Dodd-Frank Act), which prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC.
The SEC said there were no apparent instances in which the company actually prevented employees from communicating with the agency, but that such a “blanket prohibition” on discussing internal investigations with outsiders has a “a potential chilling effect on whistleblowers’ willingness to report illegal conduct to the SEC.”
In addition to paying the fine to the SEC, the company also amended its confidentiality agreements by adding language making clear that employees are free to report possible violations to the SEC and other federal agencies without company approval or fear of retaliation.
As we previously cautioned, general counsel and securities compliance attorneys should be careful when drafting employment contracts to avoid including language that could be interpreted to incentivize employees to keep potential securities fraud whistleblower complaints in-house or confidential, or in this case disincentivize whistleblowers from bringing those complaints to the SEC. While the disclaimer described above should certainly be included in any employee confidentiality restrictions, the SEC has not stated that such a disclaimer would be a safe harbor for companies. Thus, counsel may want to consider additional cautionary language or revisions to their employment agreements to avoid broad restrictions that could discourage potential whistleblowers from reporting violations to the SEC.