September 2016

The Securities and Exchange Commission (“SEC” or the “Commission”) protects whistleblowers through Rule 21F-17, enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which states that “

[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation.”

Prior cases have highlighted that certain language in confidentiality agreements can violate whistleblower protection.  This is also an issue with severance agreements governing an employee’s departure. A recent case involving Blue Linx exemplifies the types of restrictions the SEC has deemed improper with regard to severance agreements.

The SEC found that Blue Linx violated Rule 21F-17 with provisions which

  1. Prohibited employees from disclosing confidential information unless compelled to do so by law or legal process. Even when so compelled, employees were required to notify Blue Linx’s legal department in writing before disclosing confidential information or obtain advance permission in writing, with no carve out for voluntary disclosures to the SEC. Failure to follow these provisions put the former employee at risk for losing severance pay and benefits.
  2. Specified that departing employees waived any “right to any monetary recovery” in connection with any complaint or charge filed with an administrative agency. Such language undermines the substantial financial incentives that the SEC uses to encourage whistleblowers to come forward.  Congress has determined that “a critical component of the Whistleblower Program is the minimum payout that any individual could look towards in determining whether to take the enormous risk of blowing the whistle in calling attention to fraud.”

These provisions resulted in a civil penalty of $265,000, in addition to revisions in future severance agreements and clarifications with those under existing severance agreements.

Public companies and other SEC registrants such as investment advisers, funds, and broker-dealers should ensure their severance agreements are compliant with SEC rules.  Language explicitly acknowledging a whistleblower’s rights is preferred by the SEC, as provided in the agreement with Blue Linx, as follows:

Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (“Government Agencies”). Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee’s right to receive an award for information provided to any Government Agencies.”

Fulcrum Inquiry is a forensic accounting firm that performs fraud and accounting investigations. We use this experience in operating whistleblower collection mechanisms that improve governance processes for public and private businesses, as well as nonprofit organizations.