The SEC Continues to Impose Fines and Other Penalties on Companies Based Solely on the Content of Their Standard Corporate Documents

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In August 2016, we highlighted that companies may want to review the content of their standard severance agreements, settlement agreements, confidentiality agreements and similar documents in light of an unprecedented enforcement program initiated by the Securities Exchange Commission (“SEC”). [See previous Legal Alert] As we reported then, the SEC imposed significant fines and other penalties on companies based solely on the content of these standard corporate documents. The types of clauses that the SEC deems impermissible include: 

1. Unlimited non-disparagement clauses;

2. Unlimited confidentiality restrictions;

3. Prohibitions or restrictions on the filing of complaints, or participating, with government agencies; and

4. Prohibitions on the potential recovery of additional monetary relief, for example, whistleblower “bounties.” 

The SEC takes the position that these types of clauses, which have historically been incorporated in most companies’ severance, settlement, confidentiality and similar documents, discourage potential whistleblower activity and therefore constitute independent violations of the statutes they enforce. Other enforcement agencies, such as the Equal Employment Opportunity Commission (“EEOC”) and the Department of Labor (“DOL”), have recently adopted similar positions. Over the holiday period, the SEC announced enforcement actions against two more companies, based either entirely or in part on the contents of their standard corporate documents. In the Neustar matter, the SEC imposed penalties solely because the company’s standard severance agreement contained broad non-disparagement language. In the S.R. Energy matter, the company was fined $1.4 million together with other penalties, in part because the company’s standard separation agreement prohibited employees from voluntarily contacting or participating with government agencies. In the S.R. Energy matter, the SEC emphasized that the company was aware of the SEC’s position regarding such clauses and yet failed to revise its standard agreements.  

Because of this ongoing enforcement program, and the widespread historical use of these types of clauses now deemed impermissible, we have decided to issue this second Alert. Both private and public companies would be wise to consider reviewing and, where appropriate, revising their standard severance, settlement, confidentiality and similar agreements.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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