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SEC Aggressively Pursuing Companies that Try to Deter Whistleblowing

Restrictive language in confidentiality agreements may subject companies to SEC enforcement action.

On August 16, 2016, the Securities and Exchange Commission announced that Health Net Inc., a California-based health insurance provider, agreed to pay a $340,000 penalty for illegally using severance agreements requiring outgoing employees to waive their ability to obtain monetary awards from the SEC’s whistleblower program in violation of SEC Rule 21F-17. Rule 21F-17, enacted in August 2011 under the Dodd-Frank Act, specifically prohibits confidentiality agreements designed to prevent an individual from communicating with the SEC about potential securities violations.

This marks the third time overall and second time in a week that the SEC has reached a settlement with a company that allegedly violated Rule 21F-17. BlueLinx Holdings Inc., an Atlanta-based building products maker, agreed to pay a $265,000 penalty, as announced by the SEC on August 10, 2016, settling charges that it allegedly violated 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. The SEC previously reached a settlement in April 2015 with KBR Inc., pursuant to which KBR agreed to pay a $130,000 penalty after using restrictive language in its confidentiality agreements that allegedly deterred whistleblowers from reporting to the SEC. In all three of these actions, the SEC held the companies liable for Rule 21F-17 violations without any evidence that any employee had actually been prevented from disclosing confidential information to the government.

In connection with the announcement of the BlueLinx settlement, Jane Norberg, Acting Chief of the SEC’s Office of the Whistleblower, stated, “Companies simply cannot undercut a key tenet of our whistleblower program by requiring employees to forego potential whistleblower awards in order to receive their severance payments.” The SEC’s whistleblower program has paid $85 million to 35 tipsters since the inception of the program in 2011. 

In its annual report, the SEC identified assessing confidentiality agreements for compliance with SEC rules and regulations as a top priority for fiscal year 2016. In addition to these three actions, more cases are likely to be pursued by the SEC. The SEC’s Enforcement Division has been requesting copies of corporate confidentiality policies from public companies and the SEC’s Office of Compliance, Inspections and Examinations has been routinely asking registrants during examinations for copies of employment agreements, severance agreements, employment policies, and any other documents that contain “confidentiality” provisions as they continue to examine whether such documents contain language that could be construed as interfering with the rights of whistleblowers. Given the SEC’s enhanced scrutiny of confidentiality provisions, companies are encouraged consult with legal counsel to review their agreements, policies, and practices to ensure that they do not contain provisions that could be construed as impeding an individual from communicating directly with the SEC about a possible securities law violation.

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