SEC Probe Focuses on Alleged Employee Coercion

February 27, 2015

Yesterday’s Wall Street Journal featured a front page article in the Money & Investing section that reports that the Securities & Exchange Commission (“SEC”) is probing companies for alleged efforts to discourage potential whistleblowers from providing information to the government. The SEC has sent requests to companies for copies of internal documents including non-disclosure agreements, employment contracts, and severance agreements to identify any provisions “that impede employees from telling the government about wrongdoing at the company or other potential securities-law violations.”

In August 2011, under the authority of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) the SEC launched a whistleblower incentive program to encourage employees who suspect wrongdoing in publicly traded companies to report such wrongdoing directly to the SEC. In return, these employees (whistleblowers) would receive between 10-30% of rewards recovered from any settlements with or fines against said companies. (We published an article titled “The Age of the Whistleblower” in September of that year that included comments from key in-house counsels from South Florida and their somewhat tepid opinion about the new law and its potential consequences.)

Now, nearly 3 1/2 years later, this report raises concerns about the SEC’s efforts to reign in wrongdoing. Dodd-Frank explicitly prohibits “retaliation by employers against individuals who provide [the SEC] with information about possible securities violations”, commonly referred to as the anti-retaliation provision. This latest news isn’t direct retaliation but may be interpreted as a form of indirect retaliation. The Final Rules in Dodd-Frank included a response by the SEC to questions from the marketplace* regarding entities that might require employees to waive their anti-retaliation rights. The SEC’s response was decisive, relying on guidance provided by Section 29(a) of the Securities & Exchange Act of 1934, which provides that “any condition, stipulation, or provision binding any person to waive compliance with any provision of this title or any rule or regulation thereunder… shall be void.” That is, employers may not require employees to waive or limit their anti-retaliation rights (either directly, or, in our opinion, indirectly).

It will be interesting to continue to monitor this development to shed light on what the SEC’s probe finds and what perceived actions and complaints are behind these allegations.

* According to the SEC, they received 240 comment letters and 1,300 form letters on the initially proposed whistleblower rules. Commenters included individuals, whistleblower advocacy groups, public companies, corporate compliance personnel, law firms, and audit firms.