On April 1, 2015, the Securities and Exchange Commission announced its first ever enforcement action against a company for violating Dodd Frank’s whistle blower rules. In this case, the company was found to have required employees to sign a form confidentiality statement when the company conducted internal investigation interviews.
On April 1, 2015, the Securities and Exchange Commission announced its first ever enforcement action against a company for violating Dodd Frank’s whistle blower rules. In this case, the company was found to have required employees to sign a form confidentiality statement when the company conducted internal investigation interviews.
The Dodd Frank Act implemented a whistleblower program in 2010. Whistleblowers who report wrongdoing to the SEC are eligible to receive rewards of 10 to 30% of any SEC recovery, if the recovery is a result of the whistleblower’s information and is greater than $1 million. The rules also provide that whistleblowers are entitled to protection against retaliation from employers for blowing the whistle.1 Whistleblowers are also entitled to report claims anonymously.2
As part of the whistleblower program enacted by Dodd-Frank, the SEC then issued its Rule 21F-17, which provides, in relevant part, that:
(a) 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.
In this case, The SEC determined that the company’s confidentiality statements violated Rule 21F-17 because they warned that witnesses could face disciplinary action, including termination of employment, if they discussed any particulars regarding the subject matter of an interview with anyone without the prior approval of the company’s legal department. Significantly, the violation arose from the confidentiality language itself – the SEC noted that it was not aware of any instance in which an employee was prevented from communicating with the SEC, or that the company even took action to enforce the agreement or otherwise prevent any employee from communicating with the SEC.
The company agreed to pay a $130,000 penalty to settle the SEC’s charges and the company voluntarily amended its form confidentiality statement by adding language to make clear that employees are free to report possible violations to the SEC and other federal agencies without prior firm approval or notifying the company.3
Our perspective:
In this first of its kind SEC case, we note that the confidentiality language that the SEC found problematic was not all that unusual. However, the SEC continues to be aggressive in its enforcement activities, following its record year in 2014 for the number of enforcement cases brought and the dollar amount recovered.
The SEC has stated that its TCR system for reporting tips, complaints and referrals is an important source of its cases and investigations, and whistleblowers have successfully reported wrongdoing which has resulted in several major bounties, including the largest ever award of more than $30 million. Sean McKessy, the Chief of the SEC’s Office of the Whistleblower, has warned in the past that companies not use contracts that could deter whistleblowers from reporting wrongdoing to the SEC.4
In light of this case, advisers should consider whether their standard employee confidentiality provisions in employment, separation or other agreements, or in company manuals or other policies, may need to be updated to clarify that such provisions are not intended to impede their personnel from communicating directly with the SEC about a possible securities law violation. Indeed, non-disparagement provisions have also been found violative of other protected activities, so those may also need to be updated with appropriate language to avoid violating the whistleblower protection rules.
In addition, many advisers also routinely encourage, and some even require, internal reporting of any misconduct or alleged misconduct. The policies and procedures around internal reporting should be similarly carefully scrutinized in light of this case.
SEC3 can assist your firm in creating, implementing, updating and maintaining your policies and procedures. For further information, please contact your SEC3 representative or contact us at info@seccc.com.
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1 The Dodd-Frank Act specifically states that “No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower.” See Section 21F(h)(1) of the Exchange Act. https://www.sec.gov/about/offices/owb/reg-21f.pdf
2 See Section 21F(d)(2) of the Exchange Act https://www.sec.gov/about/offices/owb/reg-21f.pdf
3 The company’s amended confidentiality statement now reads:
“Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.”
4 In speeches last year and earlier, McKessy has been quoted as saying his office is “actively looking for examples of confidentiality agreements, separation agreements, [and] employee agreements” that condition certain benefits on not reporting activities to regulators, including the SEC.
