In April, 2015, we reported on the $130,000 fine imposed by the Securities Exchange Commission (SEC) on Houston-based KBR for drafting employee confidentiality agreements which might discourage whistleblowing in cases of corporate malfeasance. This was a clear sign from SEC to all employers in the sector that such internal agreements would not be tolerated.
Since then, the SEC has been working on creating a more propitious terrain for willing whistleblowers to speak up about fraudulent conduct.
On October 24th, 2016, the Office of Compliance Inspections and Examinations at SEC announced that it was scanning numerous employee agreements, looking for language it considers contrary to its disclosure and whistleblowing regulations.
SEC Rule 21F-17 – Whistleblower Protections
According to the text of SEC Rule 21F-17, “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 ....”
In line with this regulation, the Commission has clearly established that it considers illegal any limitation to an employee´s ability to disclose confidential information, including trade secrets, to SEC. In fact, employers are expected to make whistleblower rights and protections very clear to employees.
This does not only apply to current, but also to former employees, and severance agreements are one of the SEC inspection´s main targets. According to Section 21F, a recent addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act, it is the government´s duty to encourage whistleblowers to “report potential violations of the securities laws by providing financial incentives, prohibiting employment-related retaliation, and providing various confidentiality guarantees.”
In the current environment, any agreement that requires employees to seek authorization from their employers before disclosing relevant information to SEC, is in violation of government regulations. If an agreement establishes that employees must notify employers first, this is also a violation. Simply put, every employee agreement in the sector needs to be reviewed to ensure compliance.
SEC is getting ready to go after companies whose internal policies conflict with whistleblower rights and protections, and the recent fines imposed on non-compliant companies are a clear sign that whoever is not prepared might face serious consequences.
The Sarbanes-Oxley and Dodd-Frank Acts prohibit retaliation of any kind against employees who report securities fraud, wire fraud, fraud against shareholders, and other related violations. The recently released SEC Risk Alert calls for an immediate audit of all relevant agreements and policies.
Whistleblower protections in the financial sector have been slow in the making. But SEC has shown that it is ready to step up its game and eliminate any hindering language from employee agreements and internal documents, in order to encourage whistleblowers. After all, they are the agency´s best allies when it comes to uncovering fraudulent conduct and recovering millions of dollars from dishonest corporations.
Recently the SEC has been issuing record numbers and amounts of whistleblower awards to reward employees and former employees or contractors that blow the whistle to the Commission on evidence of illegal conduct.