Employment Law Alert: Recent SEC Fines for Failure to Provide Whistleblower Protections

Seward & Kissel LLP

Seward & Kissel LLP

Rule 21F-17 of the Securities Exchange Act of 1934 (“Rule 21F-17”), adopted under Dodd-Frank, prohibits employers from “tak[ing] any action to impede an individual from communication directly with [SEC staff] about a possible securities law violation,” including by “enforcing, or threatening to enforce, a confidentiality agreement.”  In recent years, the Securities and Exchange Commission (“SEC”) has enforced this provision by scrutinizing confidentiality, non-disparagement, covenants not to sue, and other similar provisions without a carveout for employee whistleblower protections.   In September, SEC issued three orders—one against a registered investment adviser, D.E. Shaw & Co., L.P. (“D.E. Shaw”); one against a subsidiary of a public company, CBRE, Inc. (“CBRE”); and one against a private company, Monolith Resources LLC (“Monolith”)—for violating Rule 21F-17 in their agreements with employees.  These orders underscore the importance of including Dodd-Frank whistleblower notices in employment and separation agreements.

Just last week, on September 29, the SEC fined D.E. Shaw $10 million for willful 21F-17 violations.  The SEC found that D.E. Shaw had, since at least 2011 when Rule 21F-17 was adopted, (a) required employees to sign employment agreements that did not include whistleblower protections for voluntary disclosures to the SEC and (b) as a condition to obtaining post-employment compensation, required employees in release agreements to represent that they had not filed complaints with any governmental agencies.  The SEC recognized that D.E. Shaw circulated a firm-wide email in 2017 informing employees of their whistleblower rights, but noted that the firm did not actually revise its agreements until years later, and did not revise one of its forms until after the SEC had already begun investigating the firm.

On September 19, the SEC fined CBRE $375,000 for requiring employees, as a condition for severance, to represent in their separation agreements that they had not filed complaints or charges against CBRE in any court or with any governmental agency.  The SEC found that this representation impeded the ability of employees to communicate freely with the SEC.  Though CBRE did preserve employees’ rights in their agreements to file administrative charges or participate in government investigations, the SEC found that this was “prospective in application, and therefore did not remedy the impeding effect of” the offending representation.  The SEC also fined CBRE despite acknowledging that CBRE cooperated and took extensive remedial action, including by revising all of its agreements and communicating with more than 800 employees who had signed the separation agreement to ensure they understood their rights under Rule 21F-17.

On September 8, the SEC fined privately-held Monolith $225,000 because it failed to inform employees expressly in their separation agreements that they were not waiving any right to receive a financial award from the SEC’s whistleblower program.  The SEC issued the fine even though Monolith (a) advised employees in their separation agreements of their right to file charges and complaints with, and participate in investigations by, governmental agencies, and (b) took remedial action by notifying employees of their rights to receive a financial award (such as a bounty), after the employees had signed the separation agreements.

These SEC orders emphasize the SEC’s continued interest in enforcing Rule 21F-17 following the $35 million resolution in early 2023 with Activision Blizzard for similar violations.  They are a stern reminder for employers to review their confidentiality clauses, non-disparagement provisions, releases and covenants not to sue and exit letters to ensure that they adequately carve out whistleblower protections for current and former employees.

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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