With the Securities and Exchange Commission (SEC) placing a heightened focus on enforcing whistleblower protection rules, companies are being advised to take proactive measures to ensure compliance. This shift in emphasis from the SEC means that businesses should regularly scrutinize their employment agreements to identify any clauses that might impede employees from communicating with the SEC regarding potential violations of securities laws. Problematic clauses include those that restrict direct communication with the SEC and broad confidentiality clauses that lack exemptions for reporting securities law violations to regulatory authorities.
A pertinent example underscoring the importance of adherence to whistleblower protection rules is the recent case involving investment firm D.E. Shaw & Co. The company agreed to pay a substantial fine of $10 million to settle charges related to the inclusion of prohibited clauses in employment agreements, a penalty that stands as the largest ever assessed against a company for violations of Rule 21F-17, the whistleblower rule, according to SEC Enforcement Director Gurbir Grewal.
D.E. Shaw had mandated that new employees sign agreements from 2011 to 2019, preventing them from disclosing confidential corporate information to third parties without authorization. Notably, there was no exception for potential SEC whistleblowers. The company had also required around 400 departing employees from 2011 to 2023 to sign releases affirming that they had not filed complaints with any government agency. This was a prerequisite for receiving deferred compensation and other benefits.
In an attempt to address the situation, the company made changes in 2017 and 2019 by removing the problematic language and implementing a whistleblower carveout. However, it was not until July 2023, subsequent to the initiation of the SEC's investigation, that D.E. Shaw removed the prohibited language from specific separation agreements.
During a recent SEC Enforcement Forum, the agency's renewed emphasis on compliance with whistleblower protection rules was a topic of discussion. Nicole Creola Kelly, the chief of the SEC’s Office of the Whistleblower, pointed out that recent cases, including the one involving D.E. Shaw, underscore the SEC’s commitment to enforcing the whistleblower rule.
In another case this year, the SEC imposed a fine of $375,000 on a subsidiary of CBRE Group for requiring departing employees to sign a release in which they attested that they had not filed a complaint against the company with any federal agency. Earlier in the same month, the SEC imposed a $225,000 fine on Monolith Resources, a privately held technology company, for requiring specific departing employees to waive their rights to monetary whistleblower awards when signing separation agreements.
In a speech delivered at the New York City Bar Association’s Compliance Institute on October 24, Grewal reaffirmed the agency’s commitment to ensuring compliance with its whistleblower protection rule. He emphasized that these enforcement actions and the cited violative language should be taken seriously by compliance professionals and advisors, underlining the need to thoroughly evaluate and enhance firms' compliance efforts to avoid future regulatory issues.
Grewal stated, “Our message through these actions and orders could not be more clear: We take compliance with Rule 21F-17 very seriously, and so should each of you who work in a compliance function or advise companies. You need to look at these orders and the violative language cited by the commission and think about how those actions may impact your firms. And if they do, then take the steps necessary to effect compliance.”
By fLEXI tEAM