SEC Whistleblowers' Rights Being Restricted in Severance Agreements

The ability of whistleblowers to provide information to the Securities and Exchange Commission (“SEC”) is being regularly impeded by employers in contractual negotiations, according to a letter that attorneys David Marshall and Debra Katz of the whistleblower law firm Katz, Marshall & Banks sent to the SEC.  In their letter, the lawyers call on the agency to promulgate a regulation or issue an opinion making clear that these tactics will not be tolerated.  The attorneys end the letter by stating that “there is no legitimate justification for allowing companies to impede whistleblowers in this manner.

Marshall and Katz pressed the same theme in a commentary recently published in Law360.  The article describes how since the passage of the Dodd-Frank Act in 2010, which attempted to incentivize employees to report information to the SEC by providing financial rewards for information that led to a successful enforcement action, employers have been developing different tactics to limit the ability of employees to provide potentially damaging information to the government about their company.  The latest in this series, according to the article, has been the insertion of clauses into severance contracts that limit an employee’s freedom to report such information to the SEC after they leave the company.

According to the article, despite SEC Rule 21F-17(a) making it illegal to “impede” someone from communicating directly with the SEC about a possible securities law violation, many employers are seeking to include clauses in severance agreements that have the effect of doing just that.  Specifically, many employers have sought to include clauses in employment or severance contracts which either (a) force the employee to renounce the right to any award the SEC might provide as a result of the employee’s information, or (b) require the employee to disclose any communications she might have with a government agency and to cooperate with the company in the event of an investigation.

While clauses such as these may not be enforceable, there is little doubt that their inclusion in severance and settlement agreements will have a chilling effect on the willingness of former employees to report a company’s fraudulent activities to the SEC.  As the article implores, the SEC should act now to stem the growth of an apparent effort to discourage whistleblowers from providing information to the commission, which is what Congress sought to incentivize through the SEC whistleblower-reward program that it established through the Dodd-Frank Act.