In recent months, the Securities Exchange Commission has dramatically expanded the enforcement of Rule 21F-17(a), which prohibits companies from impeding employees, contractors and clients from contacting the SEC and other government agencies about a possible securities law violation.
The rule, included within the Dodd-Frank Act and regulations for the SEC Whistleblower Program in 2010, covers non-disclosure requirements typically found in contracts or agreements. It applies not only to employees, but also to investors, contractors and compliance officials.
Compliance with SEC Rule 21F-17(a) is no longer avoidable now that the SEC has increased its enforcement and is no longer charging merely nominal sanctions. Compliance with Rule 21F-17(a) should be celebrated, not feared by companies. Embracing whistleblowers rather than seeking to silence them is an opportunity to improve corporate culture. Encouraging employees to report wrongdoing, both internally and externally, is an opportunity to improve the company rather than simply cover up wrongdoing.
Ensuring that employee and client contracts comply with SEC Rule 21F-17(a) not only avoids the risk of a hefty fine from the SEC but also helps instill a culture of corporate integrity.
Recent Enforcement of Rule 21F-17(a)
The SEC has made it a priority to sanction companies that use restrictive non-disclosure agreements to interfere with their employees’ right to report violations of law. In enforcing Rule 21F-17(a), the SEC has found illegal language in severance or separation agreements, employee contracts, settlement agreements and compliance manuals.
Recent enforcement actions by the Commission demonstrate the different ways companies can run afoul of Rule 21F-17(a):
- Requiring clients to sign a Release if they receive a credit or settlement (JP Morgan Securities).
- Language in employment agreements that require employees to tell the government when they report. (E. Shaw)
- Requiring departing employees to affirm in writing they had not filed complaints with the government. (CBRE)
- Severance agreements attesting they had not filed whistleblower allegations against their employer within a tribunal or agency. (CBRE and D.E. Shaw)
- Placing limits on an employee’s right to recover incentive rewards for providing information to the government, including rewards from the SEC under Dodd-Frank. (Monolith Resources, LLC)
- Requiring employees or former employees to notify the company if they are requested to provide information to a government agency requiring potential violations of law. (Activision Blizzard Inc.)
These SEC decisions individually and collectively send a strong message to Wall Street: Silencing whistleblowers will no longer be tolerated.
The New Precedent from D.E. Shaw and J.P. Morgan Securities
The SEC’s recent $18 million enforcement order against J.P Morgan Securities for violations of Rule 21F-17(a), now the highest settlement, follows a $10 million enforcement against D.E. Shaw in September 2023. This was a twenty-fold increase to the prior highest penalty, which was $400,000 against Brink’s. The SEC’s significant increase in the number of sanctions for violating Rule 21F-17(a) should send a strong message to companies that they should not use any form of contractual obligations to muffle potential whistleblowers. Furthermore, companies should reevaluate existing contracts to ensure compliance with the rules.
The SEC Enforcement action in J.P. Morgan Securities went beyond prohibiting NDAs against employees and found and held that companies can be sanctioned if they have their clients sign restrictive NDAs.
The Release voided by the SEC prevented the firm’s clients from initiating contact with the SEC and other regulators. J.P. Morgan requested certain clients (typically, advisory and brokerage clients) sign a confidentiality Release if they received a credit or settlement of more than $1,000, regardless of whether JPMS admitted or denied any error or wrongdoing in connection with the credit or settlement. The Release prevented the client from initiating contact with the SEC and other regulators but did not prevent them from responding to inquiries.
The SEC also made clear that Rule 21F-17(a) applied to private companies as well as public companies when they charged Monolith Resources, a private company, with seeking to illegally silence former employees with language in their severance agreements.
The SEC fully understands that attempts to silence whistleblowers through either an adverse employment action or through a contract undermines the rule of law and has a chilling effect on employees and potential witnesses to wrongdoing. The decision in the J.P. Morgan, Shaw and other cases puts teeth behind Rule 21F-17(a).
The SEC’s current regulatory activities should be a warning. Providing potential witnesses with any monetary incentive or disincentive to hide information from law enforcement is an obstruction of justice.
How Companies Can Be Proactive
The SEC has clearly spelled out in detail what constitutes violative contractual language. The commission even provides alternative language in their enforcement orders for what should instead be included in contracts.
The commission has not only fined companies, but has also required remedial enforcement action, including:
- Revising documents on a going-forward basis to make it clear that nothing contained in those documents prohibits employees or former employees from voluntarily communicating with the Commission or other authorities of possible violations of law or from recovering a Commission whistleblower award;
- Providing general notice to employees, or notice to employees who signed restrictive agreements, of their right to contact the Commission or other authorities; and
- Contacting former employees who signed severance agreements to inform them that the company does not prohibit them from communicating with the Commission or seeking a whistleblower award.
Whistleblowing and Corporate Integrity
In the words of Senator Charles Grassley: “whistleblowers should not be viewed as the ‘skunks at the picnic.’” Rather, their contributions to corporate integrity must be celebrated.
Stephen M. Kohn is a founding partner at the whistleblower law firm Kohn, Kohn & Colapinto and is recognized as a leading authority in whistleblower law. He is author of the bestselling book Rules for Whistleblowers: A Handbook for Doing What’s Right.
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