SEC Sweeps Up More Companies Over Whistleblower-Impeding Language: Key Takeaways for Public and Private Companies
Earlier this month, the U.S. Securities and Exchange Commission (SEC or Commission) announced settlements with Monolith Resources LLC, a privately-held energy and technology company, and CBRE Inc., a commercial real estate services and investment firm, for using employee separation agreements that violated the SEC’s whistleblower protection rules. These enforcement actions result from an apparent ongoing SEC sweep of potential violations of Rule 21F-17 under the Securities Exchange Act of 1934. The Rule, which became effective in 2011, prohibits anyone from taking steps “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.”
Monolith Relevant Facts
The SEC found that Monolith used separation agreements that required certain departing employees to waive their rights to monetary whistleblower awards in connection with filing claims with or participating in investigations by government agencies. The separation agreements had a carve-out for voluntary reporting to the government, stating that: “nothing in this agreement is intended to limit in any way your right or ability to file a charge or claim with any federal, state, or local agency”. However, the separation agreements also contained the following language:
These [governmental] agencies have the authority to carry out their own statutory duties by investigating charges or claims, issuing determinations, filing lawsuits in their own name or taking other action authorized by statute. You retain the right to participate in any such action, but not the right to recover money damages or other individual legal or equitable relief awarded by any such governmental agency.
While Monolith’s separation agreements did not specify waiving a right to an “award” and instead used the language of “damages” and “relief,” the SEC interpreted the clause as impeding participation in the SEC’s whistleblower program by requiring that employees forego financial incentives to report possible securities law violations. Monolith took remedial actions, including revising the agreements and notifying former employees who had signed the prior separation agreements that the agreements did not limit their ability to obtain financial awards in connection with providing information to government agencies. Monolith was ordered to pay a civil penalty of $225,000.
CBRE Relevant Facts
The SEC found that, as a condition of receiving separation pay, CBRE required its employees to sign a release in which employees attested that they had not filed a complaint against CBRE with any federal agency. The separation agreement contained the following language:
Employee represents and acknowledges [t]hat Employee has not filed any complaint or charges against CBRE, or any of its respective subsidiaries, affiliates, divisions, predecessors, successors, officers, directors, shareholders, employees, representatives or agents (hereinafter collectively “Agents”), with any state or federal court or local, state or federal agency, based on the events occurring prior to the date on which this Agreement is executed by Employee.
The separation agreement also stipulated that “[e]mployee may not execute this Agreement prior to the Date of Termination.” The SEC interpreted this language to require that the employee represent that at the time of executing the separation agreement, that the employee has not filed a complaint or charges based on either (i) events occurring at any time before termination, i.e., events spanning the employee’s entire employment with CBRE, or (ii) events occurring between termination and the employee’s executing the separation agreement.
In 2015, CBRE added the following commonly found government carve-out language:
Nothing in this Agreement shall be construed to prohibit Employee from filing a charge with or participating in any investigation or proceeding conducted by the Equal Employment Opportunity Commission, National Labor Relations Board, the Securities and Exchange Commission, the Department of Justice, or a comparable federal, state or local agency.
The SEC found that, reading both provisions together, the government carve-out was prospective and was, therefore, insufficient to cure the language requiring the employee to attest that they have not filed any compliant with a federal agency.
Notably, the SEC credited CBRE with its extensive remedial actions and cooperation with the investigation. The Order noted that, among other things, CBRE: (i) revised all of its agreements for compliance with the whistleblower protection rules; (ii) communicated with over 800 of its employees who had signed the release, clarifying the protections afforded to them by the rule; and (iii) updated its global policies and conducted worldwide training of over 100,000 of its employees. The SEC noted that it took CBRE’s extensive remedial efforts into account when it set the civil penalty at $375,000.
Catch-all carve-outs for government reporting do not necessarily cure conflicting provisions. Many companies adopted provisions similar to Monolith and CBRE to allow for government reporting after the initial sweep of whistleblower protection Rule 21F-17 cases after 2015. The SEC seems to be sending a message with these cases that violative, contradictory language in the agreements cannot be cured by adding a provision that includes a carve-out for government reporting without correcting the contradictory language. Given the recent number of cases that included agreements with similar catch-all provisions, companies would be wise to undertake a holistic review of all agreements to check for contradictory language and revise where needed.
Companies should undertake a compliance review of all employee documents, not just severance agreements. Rule 21F-17 applies to all employee documents, not just separation agreements. The SEC has brought cases against companies for language included in codes of conduct, ethics manuals, training materials, and investor materials. Companies should consider reviewing these materials to make sure they are compliant with the whistleblower protection rules.
Privately-held companies are not necessarily exempt from SEC scrutiny. Although Monolith is a privately-held LLC with private equity investors, its agreements still came under fire from the SEC. In the press release announcing the settlement, the SEC noted that “[b]oth private and public companies must understand that they cannot take actions or use separation agreements that in any way dis-incentivize employees from communicating with SEC staff about potential violations of federal securities laws.” Other privately held companies may find their documents under SEC scrutiny.
The SEC is bringing charges even when there is no specific evidence of whistleblowers being impeded. SEC’s orders against Monolith and CBRE both expressly note that the Commission was unaware of any instances in which a former employees were actually impeded by the language in the separation agreements nor were they aware of either company attempting to enforce the provisions.
The SEC is still fining companies who provide “far-reaching remediation” and a “high-level of cooperation”. The SEC noted CBRE’s extraordinary remediation and cooperation in both its press release and the order. CBRE was still fined $375,000, although the fine likely would have been higher without the remediation and cooperation.
Verbal statements and conduct also may subject companies to Rule 21F-17 scrutiny. The SEC has previously brought cases on a broad area of conduct, including based on verbal statements and actions, such has denying access to company facilities, cutting off access to a company computer system, and reviewing personal emails for reports to the SEC. Company counsel should be part of the procedural chain and assess risk when considering remedial actions to be taken against an internal reporter or whistleblower.
The SEC is focused on whistleblower protection. The SEC has recently granted record-breaking award amounts to whistleblowers, including and a US$279 million award and a US$104 million award. The SEC has called its whistleblower program “an integral part of the Enforcement Program”. Expect the SEC to protect this key source of information and to continue to scrutinize words and actions that it believes impede whistleblowing.
As the former Chief of the Office of the Whistleblower at the SEC and a Senior Officer in the Division of Enforcement, Ms. Norberg has deep insights into whistleblower issues and best practices for companies. In addition, Christian Schultz and Jon Green were former senior attorneys in the SEC’s Division of Enforcement. Mr. Schultz was Assistant Chief Litigation Counsel, and Mr. Green was Senior Counsel. All are partners in Arnold & Porter’s Securities Enforcement & Litigation group.
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.