Client Alerts

SEC Charges Firms for Violating Whistleblower Protection Rules in Employment Agreements, Separation Agreements and Releases

Client Alerts | October 13, 2023 | Executive Compensation | Hedge Funds | Investment Management | Private Equity Funds

Firms should review their employment related agreements to determine if any changes are necessary.

In September 2023, the SEC issued orders against each of D.E. Shaw & Co., L.P. (“D.E. Shaw”), CBRE, Inc. (“CBRE”) and Monolith Resources LLC (“Monolith”) in connection with provisions in their separation agreements and other employment-related documents that violated Rule 21F-17 of the Securities Exchange Act of 1934 (i.e., the whistleblower protection rule).

While the SEC began actively enforcing the whistleblower protection rule several years ago, these recent enforcement actions reflect an intensified focus on whistleblower protections in separation agreements and other employment documents. These enforcement actions occurred despite the fact that the SEC did not generally allege that anyone was actually prevented by the provisions in question from communicating with the SEC, or that the firms enforced the agreements in order to prevent such communications.

Background on the Whistleblower Protection Rule

The whistleblower protection rule was implemented by the SEC in 2011 to fulfill its mandate under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). The rule prohibits employers from taking “any action to impede an individual from communication directly with the [SEC] staff about a possible securities law violation, including enforcing or threatening to enforce, a confidentiality agreement…with respect to such communications.” Dodd-Frank and the whistleblower protection rule encourage employees to report potential securities law violations by providing confidentiality, protections against retaliation, and financial rewards for tips that lead to successful SEC actions.

Enforcement Actions

On September 29, 2023, the SEC fined D.E. Shaw (a registered investment adviser) $10 million for violations of the whistleblower protection rule. The SEC found that D.E. Shaw required employees to sign employment agreements prohibiting the disclosure of confidential information without a standard “whistleblower savings clause”1 and required departing employees to sign, as a condition to post-employment payments or receiving their deferred compensation, a release stating they had not filed any complaints with any governmental agency. In its order, the SEC recognized that D.E. Shaw had circulated a 2017 firm-wide email notifying employees of their rights to communicate with regulators and updated the firm’s policies, but did not update their employment agreements to add whistleblower protections until 2019 and did not update their separation agreements until June 2023 after the SEC’s investigation had already commenced. The SEC took into account the June 2023 updates and D.E. Shaw’s efforts to communicate with former employees that signed the non-compliant agreements (reminding such employees of their rights to communicate with the SEC) in imposing the penalty. This action, as well as the CBRE action discussed below, goes a step further than prior SEC enforcement actions with its focus on how conditioning post-employment benefits on a representation that no claims have been filed with regulators violates the whistleblower protection rule. There is a single sentence in the release indicating that the SEC is aware of a former employee who was initially discouraged from reporting violations to the SEC due to D.E. Shaw’s employment-related documents and this may have been a factor in the unusually stiff penalty in comparison to similar cases.

On September 19, 2023, the SEC and CBRE (a subsidiary of a public company) entered into a settlement relating to the SEC’s investigation into CBRE’s separation agreement practices. While CBRE’s releases had a standard “whistleblower savings clause,” they also required employees to represent that they had not filed a complaint against CBRE with any federal agency. The SEC’s view was that the “whistleblower savings clause” was prospective in application and thus did not remedy the chilling effect of the required representation (i.e., that they had not filed any complaint). After learning of the SEC’s investigation into its whistleblowing violations, CBRE commenced remedial actions, including revising its agreements and policies to comply with the rule, instituting training programs and notifying 800 former employees who had signed separation agreements of their rights to communicate with the SEC. While the SEC noted these substantial efforts, they nonetheless imposed a financial penalty of $375,000.

On September 8, 2023, the SEC imposed a $225,000 penalty on Monolith (a private company in the technology and energy sector) for issuing departing employees separation documentation with a standard “whistleblower savings clause,” which also contained a provision requiring departing employees to waive their rights to individual monetary rewards in connection with their participation in any regulatory action without a specific carve-out for whistleblower monetary awards. The SEC found this violated the whistleblower protection rule because it forced employees to forego financial incentives intended to encourage them to communicate directly with SEC staff about possible securities law violations. Similar to the other actions, Monolith implemented remedial measures after being contacted by the SEC (notifying former employees that they were permitted to obtain whistleblower awards and updating their separation forms) and the SEC stated that it took such remedial actions into account in connection with its settlement with Monolith.

Next Steps

These recent SEC orders emphasize that employers should carefully review and revisit separation agreements, releases and covenants not to sue, and other similar representations and certifications, as well as confidentiality provisions and other provisions in their employment agreements, as updates to these documents may be required.

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For further information regarding the whistleblower protection rule and for assistance in developing policies and procedures designed to comply with this rule, please contact your regular Kleinberg Kaplan attorney.

1 A whistleblower savings clause is a provision along the lines of “nothing in any employment agreement, confidentiality agreement, or any other firm policy or agreement shall prohibit an employee from communicating directly with or providing information, including documents, to any regulator or any other federal, state or local governmental agencies or commissions regarding possible violations of law or regulation, without disclosure to employer”.