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David J. Marshall: SEC breaks new ground, bans employer-imposed waiver of right to whistleblower award

The Securities and Exchange Commission sent a strong message to employers nationwide last week when it issued a cease-and-desist order against a company that required departing employees, as a condition of receiving severance, to sign an agreement waiving their right to any award from the SEC Whistleblower Program for reporting securities law violations.

The practice violated SEC Rule 21F-17, which makes it unlawful to take “any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation….” As part of last week’s settlement with the SEC, building-products wholesaler Blue Linx Holdings agreed to pay a $265,000 penalty and to reform all agreements with its employees to comply with the rule.

The SEC’s order against Blue Linx follows two earlier enforcement actions — one in April 2015 against KBR, Inc., and another against Merrill Lynch in June 2016 — in which the Commission outlawed employer-imposed agreements that placed restrictions on employees’ ability to disclose information to government agencies, such as allowing disclosure only if required by law, in response to subpoena, or with the company’s permission.  

While last week’s action against BlueLinx also struck down similar provisions in that company’s agreements, it is groundbreaking because it represents the first time that the SEC has taken aim specifically at a provision designed to impede whistleblowers by requiring them to waive their right to an SEC whistleblower award. 

Such provisions have become commonplace in the five years since SEC Rule 21F-17 went into effect in August 2011. As this author explained to the SEC commissioners in a May 2013 letter that first alerted them to the negative impact of these and other provisions in employer-imposed agreements, employers were responding to the issuance of Rule 21F-17 with a wide range of tactics that they hoped would effectively dissuade employees from speaking with the SEC while staying just inside letter of the law.

The mandatory waiver of the right to an award from the SEC Whistleblower Program had become an especially insidious threat to the success of the program, as its intended effect was to undermine the incentives that Congress believed were needed to in order to encourage participation by employees who feared losing their jobs if their employers grew to suspect them as whistleblowers.  Such waivers are also particularly offensive because a company’s only reason for including them in its agreement with employees is to discourage the employees from reporting the company for violating U.S. securities laws. 

These violations can include violations of the Foreign Corrupt Practices Act, which the SEC enforces through civil actions aimed at foreign bribery by companies whose stock is traded on U.S. exchanges.

The SEC’s decisive action against Blue Linx represents a tremendously positive development for would-be whistleblowers. It also protects the interests of the investing public, who continue to benefit from the SEC Whistleblower Program and from the courage of the thousands of individuals who have stepped forward to provide information that can strengthen the SEC’s ability to police the integrity of the nation’s financial markets.

With last week’s action, the SEC has made its position clear on the most direct and harmful impediments that employers have used to discourage employees from reporting securities violations and participating in the SEC Whistleblower Program. To avoid a knock on their own door by the SEC, most companies will act promptly in revising their agreements with employees to remove such offending provisions. 

Continued vigilance on the part of whistleblowers and their counsel is needed, however, as various other terms that remain in many employment agreements can be written and implemented so as to impede individuals from providing information to the SEC.  As long as some employers have that goal in mind when drafting their agreements, both whistleblower advocates and the SEC must be ready to take action to protect the continued success of the SEC Whistleblower Program.


David J. Marshall, pictured above, is a founding partner of Katz, Marshall & Banks, LLP, where he specializes in the representation of whistleblowers before the SEC, CFTC and IRS, in qui tam actions under the False Claims Act, and in claims of retaliation for blowing the whistle on unlawful conduct. He is also the author of the SEC Whistleblower Practice Guide. He can be reached here.

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