SEC Targets Whistleblower Clauses in Private Company Severance Pacts
For the first time, the SEC has fined a privately held company for using a separation agreement that could discourage employees from becoming whistleblowers, putting all employers on notice to review their standard agreements.
The Securities and Exchange Commission is intensifying its enforcement of whistleblower protection rule 21F-17, recently taking action against companies for language in employment and separation agreements deemed to impede communication with the agency. In a significant expansion of this focus, the SEC settled its first-ever enforcement action on this issue with a privately held company, Monolith Resources, fining it for a provision that required departing employees to waive their rights to monetary awards from government agencies. Corporate counsel should note that the SEC's scrutiny is granular. The agency has also targeted clauses in which employees must represent that they have not filed any complaints against the company, viewing them as unlawful impediments even when the agreement explicitly carves out the right to file a charge with the SEC. Broad definitions of 'confidential information' are also under fire. These enforcement actions demonstrate the SEC’s expansive view of its authority to protect potential whistleblowers. Companies, both public and private, should consider reviewing their template employment, confidentiality, and separation agreements to align with the SEC's aggressive compliance posture and remove any potentially restrictive language.