SEC’s Increased Scrutiny of Employment and Separation Agreements Under the Whistleblower Rule Continues

By: Jordan M. White

Per Rule 21F-17(a) of the Securities Exchange Act of 1934, “No 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[,]” i.e., the whistleblower rule. In September 2023, the Securities and Exchange Commission (SEC) announced three whistleblower protection enforcement actions that serve as a cautionary reminder to public and private companies alike—even those not directly involved in the securities markets—to review certain common provisions in employment and separation agreements and specifically those seemingly innocuous confidentiality protections that are commonplace in the industry. Importantly, the SEC took action in all three settled cases because the challenged agreements and/or practices tended to discourage whistleblowers, even though no employees were shown to have been impeded or deterred from communicating with the SEC about a possible securities law violation. The cease-and-desist orders can be found on the SEC’s website.[1]

It is worth noting that the orders—both from the wide range of employers impacted and the scope of time covered by the challenged agreements and practices—are broad and far-reaching. Employers would be well-served to review their employment, separation, and similar employment-related agreements and practices to ensure they comport with the SEC’s most recent interpretations and enforcement of the whistleblower rule. In particular, confidentiality clauses or similar restrictions should include carve outs for whistleblower reporting; employers should do away with any affirmation-type language that would otherwise require the employee to disclose to the employer the filing of complaints or similar claims with the SEC or other governmental agencies; and the agreements should not contain restrictions related to the receipt of whistleblower awards.  

[1] September 29, 2023 cease-and desist order involving $10,000,000 civil penalty, available at 34-98641.pdf (sec.gov); September 19, 2023 cease-and-desist order involving $375,000 civil penalty, available at 34-98429.pdf (sec.gov); and September 8, 2023 cease-and-desist order involving $225,000 civil penalty, available at 34-98322.pdf (sec.gov).