Watchdogs Petition SEC to Strengthen Prohibitions Against Impeding Complaints to SEC

by Proskauer - Whistleblowing & Retaliation
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On July 18, 2014, a coalition of plaintiff-side lawyers and government watchdog groups proposed ways to strengthen the SEC whistleblower program in two petitions filed with the SEC. The groups urged the SEC to update Rule 21F-17, which prohibits any action that would “impede” an individual from communicating with the SEC about securities law violations, by expanding its rules governing the use of nondisclosure agreements and increasing the scope of protections for whistleblowers.

The first petition addresses concerns that employers (and their attorneys) have attempted to use internal mechanisms to prevent employees from providing whistleblower tips to the SEC. The petitioners noted that they had seen repeated examples of employment, severance, and confidentiality agreements that attempt to limit the extent to which employees or former employees can participate in the whistleblower program. Examples of such restraints include provisions in employment contracts that prohibit employees from consulting independent legal counsel and agreements that require employees to waive any right to receive compensation or relief arising from their submissions. These types of provisions, according to the petitioners, impede whistleblowing and undermine Dodd-Frank by effectively putting employees in the same position they would have been in had the law never been passed. As a result, petitioners seek to have Rule 21F-17 revised to preclude the use of private agreements that hinder participation in the whistleblower program.

The first petition also addressed the need for a policy statement regarding the extent to which anti-retaliation employment protections offered by Dodd-Frank and SEC whistleblower rules extend to employees who have reported possible securities law violations to their employers but have not filed complaints with the SEC. Citing to the split among courts concerning whether making internal reports constitutes protected conduct, petitioners requested that the SEC issue a policy statement that is in accord with those courts that have taken the expansive pro-plaintiff view.

The second petition, filed by a coalition of organizations including plaintiff-side law firms, nonprofits and community activist groups, asked the SEC to launch a series of public hearings to discuss the problem of workplace retaliation and ways to increase reporting. First, the petition urges the SEC to strengthen whistleblower protections by making clear that whistleblowers who report internally are eligible for protection and by clarifying that any actions made in effort to block the flow of whistleblowing evidence is illegal. Second, petitioners asked the SEC to launch a series of field hearings around the country to discuss workplace retaliation and explore ways to increase reporting. Third, the petition asked the SEC to create an Advisory Committee on Whistleblower Reporting and Protection that would serve as a vehicle for the Commission to gather advice, best practices and recommendations related to whistleblower reporting and protection.

These petitions demonstrate that there are vocal groups seeking to expand employee rights under the Dodd-Frank anti-retaliation provisions. Based on earlier SEC comments, these petitions are likely to meet a receptive audience. Whether adopted or not, employers must take care to avoid language in nondisclosure or other employment agreements or from otherwise seeking to impede employees from reporting concerns to the SEC.

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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