Federal Court Strikes Down NLRB Joint Employer Rule

On March 8, 2024, just days before it was set to take effect, U.S. District Judge J. Campbell Barker of the Eastern District of Texas vacated the National Labor Relations Board’s (“NLRB’s”) recent rule on determining the standard for joint-employer status.

The NLRB issued the rule on October 26, 2023. It established a seven-factor analysis, under a two-step test, for determining joint employer status. Under the new standard, an entity may be considered a joint employer if each entity has an employment relationship with the same group of employees and the entities share or codetermine one or more of the employees’ essential terms and conditions of employment which are defined exclusively as:

  • Wages, benefits and other compensation;
  • Hours of working and scheduling;
  • The assignment of duties to be performed;
  • The supervision of the performance of duties;
  • Work rules and directions governing the manner, means and methods of the performance of duties and grounds for discipline;
  • The tenure of employment, including hiring and discharge; and
  • Working conditions related to the safety and health of employees.

Set to take effect on March 11, 2024, the NLRB’s decision would have rescinded the 2020 final rule which considered just the direct and immediate control one company exerts over the essential terms and conditions of employment of workers directly employed by another firm. The new rule would have expanded the types of control over job terms and conditions that can trigger a joint employer finding.

In the lawsuit, filed by the United States Chamber of Commerce and a coalition of business groups, the Chamber and coalition claimed that the NLRB’s rule is unlawful and should be struck down because it is arbitrary and capricious. Judge Barker agreed as he held that the NLRB’s new test is unlawfully broad because an entity could be deemed a joint employer simply by having the right to exercise indirect control over one essential term. Judge Barker faulted the design of the two-step test which says an entity must qualify as a common-law employer and must have control over at least one job term of the workers at issue to be considered a joint employer, finding that the test’s second part is always met whenever the first step is satisfied. The Court vacated the new standard and indicated it will issue a final judgment declaring the rule is unlawful.

The NLRB quickly responded to the Court’s ruling. In a statement on March 9, 2024 NLRB Chairman Lauren McFerran said the “District Court’s decision to vacate the Board’s rule is a disappointing setback but is not the last word on our efforts to return our joint-employer standard to the common law principles that have been endorsed by other courts.” According to the NLRB, the “Agency is reviewing the decision and actively considering next steps in this case.”

What Employers Need to Know

The legality of the NLRB’s joint-employer standard has been a contested issue since the October 2023 announcement. The rule will not go into effect as scheduled, but Judge Barker’s decision is unlikely to be the final word on the matter.

For more on the NLRB, visit the NLR Labor & Employment section.

SEC Issues Long-Awaited Climate Risk Disclosure Rule

INTRODUCTION

On Wednesday, 6 March 2024, the Securities and Exchange Commission (SEC) approved its highly anticipated final rules on “The Enhancement and Standardization of Climate-Related Disclosures for Investors” by a vote of 3-2, with Republican Commissioners Hester Peirce and Mark Uyeda dissenting. Accompanying the final rules was a press release and fact sheet detailing the provisions of the rulemaking. The final rules will go into effect 60 days after publication in the Federal Register and will include a phased-in compliance period for all registrants.

This is likely to be one of the most consequential rulemakings of Chairman Gary Gensler’s tenure given the prioritization of addressing climate change as a key pillar for the Biden administration. However, given the significant controversy associated with this rulemaking effort, the final rules are likely to face legal challenges and congressional oversight in the coming months. As such, it remains unclear at this point whether the final rules will survive the forthcoming scrutiny.

WHAT IS IN THE RULE?

According to the SEC’s fact sheet:

  • “The final rules would require a registrant to disclose, among other things: material climate-related risks; activities to mitigate or adapt to such risks; information about the registrant’s board of directors’ oversight of climate-related risks and management’s role in managing material climate-related risks; and information on any climate-related targets or goals that are material to the registrant’s business, results of operations, or financial condition.
  • Further, to facilitate investors’ assessment of certain climate-related risks, the final rules would require disclosure of Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions on a phased-in basis by certain larger registrants when those emissions are material; the filing of an attestation report covering the required disclosure of such registrants’ Scope 1 and/or Scope 2 emissions, also on a phased-in basis; and disclosure of the financial statement effects of severe weather events and other natural conditions including, for example, costs and losses.
  • The final rules would include a phased-in compliance period for all registrants, with the compliance date dependent on the registrant’s filer status and the content of the disclosure.”

NEXT STEPS

The final rules are likely to face significant opposition, including legal challenges and congressional oversight. It is expected that there will be various lawsuits brought against the final rules, which are likely to receive support from several industry groups, or potentially GOP-led state attorneys general who have been active in litigating against environmental, social and governance (ESG) policies and regulations. It is also possible that the final rules could face criticism from some climate advocates that the SEC did not go far enough in its disclosure requirements.

Further, it is expected that the House Financial Services Committee (HFSC) will conduct oversight hearings, as well as introduce a resolution under the Congressional Review Act (CRA), to attempt to block the regulations from taking effect. HFSC Chairman Patrick McHenry (R-NC) indicated that the Oversight and Investigations Subcommittee will hold a field hearing on March 18 and the full Committee will convene a hearing on April 10 to discuss the potential implications of the rules. If a CRA resolution were to pass the House and garner sufficient support from moderate Democrats in the Senate to pass, it would likely be vetoed by President Biden.

Ultimately, the SEC climate risk disclosure rules are unlikely to significantly change the trajectory of corporate disclosures made by multinational companies based in the U.S., most of whom have already been making sustainability disclosures in accordance with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures. The ongoing problem for investors is that such disclosures are not standardized and therefore are not comparable. Consequently, many of these large issuers may continue to enhance their sustainability disclosures in accordance with standards issued by the International Sustainability Standards Board and the Global Reporting Initiative as an investor relations imperative notwithstanding the SEC’s timetable for implementation of these final rules.

A more detailed analysis of the SEC rules is forthcoming from our Corporate and Asset Management and Investment Funds practices in the coming days.

U.S. Corporate Transparency Act: CTA is Declared Unconstitutional in U.S. District Court Case

The Corporate Transparency Act has been declared unconstitutional. On March 1, 2024, U.S. District Court Judge Liles C. Burke issued a 53-page opinion[1] granting summary judgment for the National Small Business Association and held that the Corporate Transparency Act “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.”

As a result, Judge Burke found the CTA to be unconstitutional because it exceeds the Constitution’s limits on Congress’ power, without even reaching a decision on whether it violates the First, Fourth, and Fifth Amendments. The Court then permanently enjoined the government from enforcing the CTA against the named plaintiffs and ordered a further hearing on the award of costs of litigation.

While it is likely that this litigation will continue to play out in the federal court system, the initial victory has gone to small business and importantly that means that compliance with this now unconstitutional regulatory regime can be set aside for the current time being.


[1] Nat’l Small Bus. United v. Yellen, No. 5:22-cv-01448-LCB (N.D. Ala. 2022)

Federal Court Strikes Down the Corporate Transparency Act as Unconstitutional

On March 1, 2024, the federal judge presiding over the lone case testing the validity of the Corporate Transparency Act (CTA) struck down the CTA as unconstitutional. As we have explained, through the CTA, Congress imposed mandatory reporting obligations on certain companies operating in the United States, in an effort to enhance corporate transparency and combat financial crime. Specifically, the CTA, which took effect on January 1, 2024, requires a wide range of companies to provide personal information about their beneficial owners and company applicants to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). More than 32.5 million existing entities are expected to be subject to the CTA, and approximately 5 million new entities are expected to join that number each year. By mid-February, approximately a half million reports had been filed under the CTA according to FinCEN.

The CTA’s enforceability is now in doubt. In National Small Business United d/b/a National Small Business Association v. Yellen, the Honorable Liles C. Burke of the United States District Court for the Northern District of Alabama held that the CTA exceeded Congress’s authority to regulate interstate commerce, and that the CTA was not necessary to the proper exercise of Congress’ power to regulate foreign affairs or its taxing power. The Court issued a declaratory judgment—stating that the CTA is unconstitutional—and enjoined the federal government from enforcing the CTA’s reporting requirements against the plaintiffs in that litigation. A nationwide injunction, which would have raised its own enforceability concerns, was not included in the Court’s ruling.

The Court focused on three aspects of the CTA. First, the Court highlighted that the CTA imposes requirements on corporate formation, which is traditionally left to state governments as matters of internal state law. Second, the Court observed that the CTA applies to corporate entities even if the entity conducts purely intrastate commercial activities or no commercial activities at all. Third, the Court concluded that the CTA’s disclosure requirements could not be justified as a data-collection tool for tax officials as that would raise the specter of “unfettered legislative power.”

What the Decision Means for Entities Subject to the CTA

The Court’s decision creates uncertainty on entities’ ongoing obligations under the CTA. Although the Court purported to limit its injunction to the parties in the litigation before it, the lead plaintiff in the suit is the National Small Business Association (NSBA). In its opinion, the Court held that the NSBA had associational standing to sue on behalf of its members. Based on precedent, this means the Court’s injunction likely benefits all of the NSBA’s over 65,000 members. If so, the government is prevented from enforcing the CTA’s reporting requirements against any entity that is a member of the NSBA.

Regardless of membership in the NSBA, however, the Court’s declaratory judgment that the CTA is unconstitutional also raises serious doubts about the government’s ability to enforce the CTA’s reporting requirements. This could amount to a de facto moratorium on CTA enforcement, depending on the government’s view of the decision.

What Happens Next

The government will likely appeal this decision, but the Court’s injunction and declaration will remain in effect unless a stay is granted. To receive a stay, the government will first likely need to file a motion in the district court, which will consider (1) how likely it is that the government will succeed on appeal; (2) whether the government will be irreparably harmed without a stay; (3) whether a stay will injure other parties interested in the litigation; and (4) whether a stay would benefit the public interest. If the district court denies a stay, the government will be able to seek a stay from the Atlanta-based United States Court of Appeals for the Eleventh Circuit.

The government has 60 days to appeal, though it will likely file its appeal sooner given the grant of an injunction and decision’s far-reaching consequences. The grant or denial of stay should be resolved in the coming weeks, but the timing of any final decision from the Court of Appeals is uncertain. In 2023, the median time for the Eleventh Circuit to resolve a case was over 9 months. However, the key deadline by which tens of millions of companies otherwise must file their initial report under the CTA is January 1, 2025.

An Update on the SEC’s Cybersecurity Reporting Rules

As we pass the two-month anniversary of the effectiveness of the U.S. Securities and Exchange Commission’s (“SEC’s”) Form 8-K cybersecurity reporting rules under new Item 1.05, this blog post provides a high-level summary of the filings made to date.

Six companies have now made Item 1.05 Form 8-K filings. Three of these companies also have amended their first Form 8-K filings to provide additional detail regarding subsequent events. The remainder of the filings seem self-contained such that no amendment is necessary, but these companies may amend at a later date. In general, the descriptions of the cybersecurity incidents have been written at a high level and track the requirements of the new rules without much elaboration. It is interesting, but perhaps coincidental, that the filings seem limited to two broad industry groups: technology and financial services. In particular, two of the companies are bank holding companies.

Although several companies have now made reports under the new rules, the sample space may still be too small to draw any firm conclusions or decree what is “market.” That said, several of the companies that have filed an 8-K under Item 1.05 have described incidents and circumstances that do not seem to be financially material to the particular companies. We are aware of companies that have made materiality determinations in the past on the basis of non-financial qualitative factors when impacts of a cyber incident are otherwise quantitatively immaterial, but these situations are more the exception than the rule.

There is also a great deal of variability among the forward-looking statement disclaimers that the companies have included in the filings in terms of specificity and detail. Such a disclaimer is not required in a Form 8-K, but every company to file under Item 1.05 to date has included one. We believe this practice will continue.

Since the effectiveness of the new rules, a handful of companies have filed Form 8-K filings to describe cybersecurity incidents under Item 8.01 (“Other Events”) instead of Item 1.05. These filings have approximated the detail of what is required under Item 1.05. It is not immediately evident why these companies chose Item 8.01, but presumably the companies determined that the events were immaterial such that no filing under Item 1.05 was necessary at the time of filing. Of course, the SEC filing is one piece of a much larger puzzle when a company is working through a cyber incident and related remediation. It remains to be seen how widespread this practice will become. To date, the SEC staff has not publicly released any comment letters critiquing any Form 8-K cyber filing under the new rules, but it is still early in the process. The SEC staff usually (but not always) makes its comment letters and company responses to those comment letters public on the SEC’s EDGAR website no sooner than 20 business days after it has completed its review. With many public companies now also making the new Form 10-K disclosure on cybersecurity, we anticipate the staff will be active in providing guidance and commentary on cybersecurity disclosures in the coming year.

Compliance Update — Insights and Highlights January 2024

On December 7, 2023, the Consumer Financial Protection Bureau (CFPB) ordered Atlantic Union Bank, an approximately $20 billion bank headquartered in Richmond, Virginia, to pay $6.2 million for “illegal overdraft fee harvesting” and “illegally enrolling thousands of customers in checking account overdraft programs.” The bank was ordered to pay $5 million in refunds and $1.2 million to a victims’ relief fund.

Regulation E provides that a bank may not charge a fee for an ATM or one-time debit card transaction unless it completes four steps. First, the bank must provide the customer with a notice describing the bank’s overdraft services in writing. Then, the bank must provide the customer with a “reasonable opportunity” for that customer to “affirmatively consent” to the payment of the ATM or one-time debit card transaction fee. Third, the customer must provide that “affirmative consent” or opt-in to the bank. And finally, the bank must provide the customer with written confirmation of their consent, including a statement of the right to revoke the consent at any time.

The CFPB alleged that Atlantic Union Bank failed to obtain proper consent when an account was opened in person at a branch. Bank employees orally provided customers with options for opting in to the payment of one-time debit card and ATM transaction fees pursuant to Regulation E. Bank employees asked customers to opt in orallyand then input the option into the bank’s account-opening computer system before printing the written consent form. The consent form was printed at the end of the account-opening process and was pre-populated with the customer’s oral opt-in choice.

In instances in which a customer was given options for opting in to the payment of one-time debit card and ATM transaction fees over the phone, bank employees did not have a script and allegedly provided misinformation and misleading statements about the benefits, costs, and other aspects of opting in to the payment of one-time debit card and ATM transaction fees pursuant to Regulation E.

The CFPB has taken the logical approach that a bank must provide the customer with a written disclosure of its overdraft practices prior to having them opt in. Additionally, without providing the customer with a prior written disclosure, a bank should not pre-populate its Regulation E opt-in form. Now is the time to review the consent order and your bank’s Regulation E opt-in processes and procedures.

For more news on CFPB Compliance, visit the NLR Financial Institutions & Banking section.

OECD Tour de Table Includes Information on U.S. Developments on the Safety of Manufactured Nanomaterials

The Organization for Economic Cooperation and Development (OECD) has published the latest edition of the Developments in Delegations on the Safety of Manufactured Nanomaterials and Advanced Materials — Tour de Table. The Tour de Table compiles information provided by delegations on the occasion of the 23rd meeting of the OECD Working Party on Manufactured Nanomaterials (WPMN) in June 2023. The Tour de Table lists U.S. developments on the human health and environmental safety of nanomaterials. Risk assessment decisions, including the type of nanomaterials assessed, testing recommended, and outcomes of the assessment include:

  • The U.S. Environmental Protection Agency (EPA) completed review of four low volume exemptions (LVE) that included a graphene material, a titanium dioxide material, and two graphene oxide materials, one of which was a modification to an existing exemption. EPA denied two of the LVEs and granted two under conditions that limited human and environmental exposures to prevent unreasonable risks.
  • According to the Tour de Table, EPA has under review 17 premanufacture notices (PMN), 16 of which are for multi-walled carbon nanotube chemical substances and one of which is for a graphene material. The Tour de Table states that EPA is still reviewing these 17 chemical substances for potential risks to human health and the environment. EPA completed its review of one significant new use notice (SNUN) for a single-walled carbon nanotube, regulating it with a consent order due to limited available data on nanomaterials. The consent order limits uses and human and environmental exposures to prevent unreasonable risks.

The Tour de Table includes the following information regarding risk management approaches in the United States:

  • Between June 2022 and June 2023, EPA received notification of two nanoscale substances based on metal oxides that met reporting criteria pursuant to its authority under the Toxic Substances Control Act (TSCA) Section 8(a), bringing the total number of notifications to 87. Reporting criteria exempted nanoscale chemical substances already reported as new chemicals under TSCA and those nanoscale chemical substances that did not have unique or novel properties. According to the Tour de Table, most reporting was for metals or metal oxides.
  • Since January 2005, EPA has received and reviewed more than 275 new chemical notices for nanoscale materials under TSCA, including fullerenes and carbon nano-onions, quantum dots, semiconducting nanoparticles, and carbon nanotubes. EPA has issued consent orders and significant new use rules (SNUR) permitting manufacture under limited conditions. A manufacturer or processor wishing to engage in a designated significant new use identified in a SNUR must submit a SNUN to EPA at least 90 days before engaging in the new use. The Tour de Table notes that because of confidential business information (CBI) claims by submitters, EPA may not be allowed to reveal to the public the chemical substance as a nanoscale material in every new chemical SNUR it issues for nanoscale materials. EPA will continue to issue SNURs and consent orders for new chemical nanoscale materials in the coming year.
  • Because of limited data to assess nanomaterials, the consent orders and SNURS contain requirements to limit exposure to workers through the use of personal protective equipment (PPE), limit environmental exposure by not allowing releases to surface waters or direct releases to air, and limit the specific applications/uses to those described in the new chemical notification.

Regarding updates, including proposals, or modifications to previous regulatory decisions, the Tour de Table states that “[t]he approaches used, given the level of available information, are consistent with previous regulatory decisions. EPA’s assessments now assume that the environmental hazard of a nanomaterial is unknown unless acceptable hazard data is submitted with nanomaterial submission.”

The Tour de Table lists the following new regulatory challenge(s) with respect to any action for nanomaterials:

  • Standards/methods for differentiating between different forms of the same chemical substance that is a nanomaterial;
  • Standardized testing for the physical properties that could be used to characterize/identify nanomaterials; and
  • Differentiation between genuinely new nanoscale materials introduced in commerce and existing products that have been in commerce for decades or centuries.

SEC Enforcement Targets Anti-Whistleblower Practices in Financial Firm’s Settlement Agreements with Retail Clients by Imposing Highest Penalty in Standalone Enforcement Action Under Exchange Act Rule 21 F-17(a)

As the year gets underway, the Securities and Exchange Commission (SEC or Commission) is continuing its ongoing enforcement efforts to target anti-whistleblower practices by pursuing a broader range of entities and substantive agreements, including the terms of agreements between financial institutions and their retail clients. The most recent settlement with a financial firm signifies that the SEC is imposing increasingly steep penalties to settle these matters while focusing on confidentiality provisions that do not affirmatively permit voluntary disclosures to regulators. We discuss below the latest SEC enforcement actions in the name of whistleblower protection and offer some practical tips for what firms and companies may do to proactively mitigate exposure.

On 16 January 2024, the SEC announced a record $18 million civil penalty against a dual registered investment adviser and broker-dealer (the Firm), asserting that the use of release agreements with retail clients impeded the clients from reporting securities law violations to the SEC in violation of Rule 21F-17(a) of the Securities Exchange Act of 1934 (Exchange Act).1

The SEC found that from March 2020 through July 2023, the Firm regularly required its retail clients to sign confidential release agreements in order to receive a credit or settlement of more than $1,000. Under the terms of these releases, clients were required to keep confidential the existence of the credits or settlements, all related underlying facts, and all information relating to the accounts at issue, or risk legal action for breach of the agreement. The agreements “neither prohibited nor restricted” the clients from responding to any inquiries from the SEC, the Financial Industry Regulatory Authority (FINRA), other regulators or “as required by law.” However, the agreements did not expressly allow the clients to initiate voluntary reporting of potential securities law violations to the regulators. The SEC found that this violated Rule 21F-17(a) “which is intended to ‘encourag[e] individuals to report to the Commission.’”While the Firm did report a number of the underlying client disputes to FINRA, the SEC found this insufficient to mitigate the lack of language in the release agreements that expressly permitted the clients to report potential securities law violations to the SEC.

The SEC initiated a settled administrative proceeding against the Firm, which neither admitted nor denied the SEC’s findings. In addition to the $18 million civil monetary penalty, the settlement requires that the Firm cease and desist from further violations of Rule 21F-17(a). Notably, the SEC credited certain remedial measures promptly undertaken by the Firm, including revising the at-issue release language and affirmatively alerting affected clients that they are not prohibited from communicating with governmental and regulatory authorities.

This enforcement action is significant for several reasons. First, it signals a broader enforcement focus by the SEC with respect to Rule 21F-17(a) in that this is the first action involving the terms of agreements between a financial institution and its retail clients, which are prevalent throughout the financial services industry. Previously, enforcement had focused squarely on restrictive confidentiality provisions involving employees, such as those found in employment or severance agreements or in connection with internal investigation interviews.

Second, the unprecedented magnitude of the penalty in a standalone Rule 21F-17(a) case underscores the SEC’s emphasis on preventing practices that it views as obstructions of whistleblower rights. SEC Enforcement Director Gurbir Grewal’s statement announcing the settlement reflects this position, “Whether it’s in your employment contracts, settlement agreements or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing.” Companies (public and private), broker-dealers, investment advisers, and other market participants should expect to see continued enforcement investigations in connection with the SEC’s ongoing attention toward compliance with Rule 21F-17(a), as discussed further below.

The SEC’s Whistleblower Protection Program

Established in 2011 pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC Whistleblower Program provides monetary awards to individuals who “tip” the SEC with original information that leads to an enforcement action resulting in monetary sanctions that exceed $1 million. Through the end of the SEC’s FY2023, the SEC has awarded almost $2 billion to 385 whistleblowers.In FY2023 alone, the SEC received over 18,000 whistleblower tips and awarded more than $600 million in whistleblower awards to 68 individuals.4

In furtherance of the Whistleblower Program, the SEC also issued Exchange Act Rule 21F-17(a), which provides that “no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”5

SEC Struck Several Blows in 2023 Against Companies that Failed to Carve out Whistleblower Protections in Their Confidentiality Agreements

The SEC has been aggressively enforcing Rule 21F-17(a) since its first enforcement action in 2015 with respect to that Rule,through several waves of enforcement actions. During 2023, the SEC was especially active with a number of settled enforcement actions asserting violations of Rule 21F-17(a) in which the respondents neither admitted nor denied the SEC’s findings:

  • In February 2023, the SEC fined a video game development and publishing company $35 million for violating federal securities laws through its inadequate disclosure controls and procedures. The settled action also included a finding that the company had violated Rule 21F-17(a) by executing separation agreements in the ordinary course of its business that required former employees to provide notice to the company if they received a request for information from the SEC’s staff.7
  • In May 2023, the SEC imposed a $2 million fine on an internet streaming company for: (i) retaliating against an employee who reported misconduct to the company’s management prior to and after filing a complaint with the SEC; and, (ii) impeding the reporting of potential securities law violations, by including provisions in employee severance agreements requiring that departing employees waive any potential right to receive a whistleblower award, in violation Rule 21F-17(a).8
  • In September 2023, in another standalone enforcement action for violations of Rule 21F-17(a), the SEC imposed a $10 million civil monetary penalty on a registered investment adviser (RIA) for requiring that its new employees sign employment agreements that prohibited the disclosure of “Confidential Information” to anyone outside of the company, without an exception for voluntary communications with the SEC concerning possible securities laws violations.Further, the RIA required many departing employees to sign a release in exchange for the receipt of certain deferred compensation and other benefits affirming that, among other things, the employee had not filed any complaints with any governmental agency. Although the RIA later revised its policies and issued clarifications to employees that they were not prevented from communicating with the SEC and other regulators, the RIA failed to amend its employment and release agreements to provide the carve out.
  • Also in September 2023, the SEC charged two additional firms with violations of Rule 21F-17(a). In one case imposing a $375,000 civil penalty, the SEC found that a commercial real estate services and investment firm impeded whistleblowers by requiring its employees, as a condition of receiving separation pay, to represent that they had not filed a complaint against the firm with any federal agency.10 In another case, the SEC imposed a $225,000 civil penalty against a privately-held energy and technology company for requiring certain departing employees to waive their rights to monetary whistleblower awards.11 This particular action underscores that Rule 21F-17 applies to all entities, and not only to public companies.

Mr. Grewal, in an October 2023 speech before the New York City Bar Association Compliance Institute, emphasized that potential impediments to the SEC’s Whistleblower Program would be a continued focus of the agency’s enforcement efforts, stating, “we take compliance with Rule 21F-17 very seriously, and so should each of you who work in a compliance function or advise companies. You need to look at these orders and the violative language cited by the Commission and think about how those actions may impact your firms. And if they do, then take the steps necessary to effect compliance.”12

Key Take-Aways

The SEC’s recent enforcement actions demonstrate that violations of Rule 21F-17(a) can carry significant fines and reach virtually any confidentiality agreement that does not carve out communications between a firm’s current or former employees or customers and the SEC or other regulators about potential securities violations. Moreover, although many of the enforcement actions relate to language in agreements, Rule 21F-17 is not so limited and can also apply to language in internal policies, procedures, guidance, manuals, or training materials. The message from the SEC is clear: it will continue to enforce Rule 21F-17 with respect to public companies, private companies, broker-dealers, investment advisers, and other financial services entities.

The SEC in its recent orders has provided credit to companies for cooperation as well as for instituting remedial actions.13 Being proactive in identifying and correcting potential violations in advance of any investigation by the SEC can result in mitigation of any action or penalties.

Legal and compliance officers may want to consider the following steps in order to evaluate and potentially mitigate any potential exposure to an enforcement action:

  • Conduct a review of all employee-facing and client-facing documents or contracts with confidentiality provisions and remove or revise any content that may be viewed as impeding (even unintentionally) a person’s ability to report potential securities law violations to the SEC. Depending on the circumstances, this may involve including a reference expressly permitting communications with the SEC and other government or regulatory entities without advance notice or disclosure to the company.
  • Remove any language from the templates that could be interpreted as hindering an employee’s or client’s ability to communicate with the SEC concerning potential securities law violations, including language threatening disciplinary action against employees for disclosing confidential information in their communications with government agencies when reporting potential violations.
  • Prepare addenda or updates to current employee- and client-facing agreements that reflect the revised confidentiality clauses.
  • Include reference in written anti-retaliation policies that employees’ communications and cooperation with the SEC and other government agencies will not result in retaliation from the company.
  • Conduct trainings for company managers and supervisors regarding appropriate communications to employees regarding their interactions with the government.
  • Implement policies that prevent any company personnel from taking steps to block or interfere with an employee’s use of company platforms or systems to communicate with the SEC and other government agencies.14

In the Matter of JP Morgan Securities LLC, Admin. Proc. No. 3-21829 (Jan. 16, 2024), https://www.sec.gov/files/litigation/admin/2024/34-99344.pdf.

Id. (quoting Securities Whistleblower Incentives and Protections Adopting Release, Release No. 34-63434 (June 13, 2011)).

SEC Office of the Whistleblower Annual Report to Congress for Fiscal Year 2023 (Nov. 14, 2023), https://www.sec.gov/files/2023_ow_ar.pdf; SEC Whistleblower Office Announces Results for FY 2022 (Nov. 15, 2022), https://www.sec.gov/files/2022_ow_ar.pdf; 2021 Annual Report to Congress Whistleblower Program (Nov. 15, 2021), https://www.sec.gov/files/owb-2021-annual-report.pdf; 2020 Annual Report to Congress Whistleblower Program (Nov. 16, 2020), https://www.sec.gov/files/2020_owb_annual_report.pdf.

SEC Office of the Whistleblower Annual Report to Congress for Fiscal Year 2023 (Nov. 14, 2023), https://www.sec.gov/files/2023_ow_ar.pdf.

17 C.F.R. § 240.21F-17.

In the Matter of KBR, Inc., Admin. Proc. No. 3-16466 (Apr. 1 2015), https://www.sec.gov/files/litigation/admin/2015/34-74619.pdf (imposing a US$130,000 fine on a company in a settled enforcement action for requiring that witnesses in certain internal investigations sign confidentiality agreements warning that they could be subject to discipline if they discussed the matters at issue outside the company without prior approval of the company’s legal department).

In the Matter of Activision Blizzard, Inc. Admin. Proc. No. 3-21294 (Feb. 3, 2023), https://www.sec.gov/files/litigation/admin/2023/34-96796.pdf.

In the Matter of Gaia, Inc. et. al., Admin. Proc. No. 3-21438 (May 23, 2023), https://www.sec.gov/files/litigation/admin/2023/33-11196.pdf.

In the Matter of D.E. Shaw & Co., L.P., Admin. Proc. No. 3-21775 (Sep. 29, 2023), https://www.sec.gov/files/litigation/admin/2023/34-98641.pdf.

10 In the Matter of CBRE Inc., Admin. Proc. No. 3-21675  (Sept. 19, 2023), https://www.sec.gov/files/litigation/admin/2023/34-98429.pdf.

11 In the Matter of Monolith Res., LLC, Admin. Proc. No. 3-21629 (Sept. 8, 2023), https://www.sec.gov/files/litigation/admin/2023/34-98322.pdf.

12 Gurbir S. Grewal, Remarks at New York City Bar Association Compliance Institute (Oct. 24, 2023), https://www.sec.gov/news/speech/grewal-remarks-nyc-bar-association-compliance-institute-102423.

13 See, e.g., In the Matter of CBRE Inc., Admin. Proc. No. 3-21675  (Sept. 19, 2023), https://www.sec.gov/files/litigation/admin/2023/34-98429.pdf (crediting respondent’s remediation program, which included, among other measures, an audit of relevant agreements, updates to policies with respect to Rule 21F-17, and mandatory trainings); In the Matter of Monolith Res., LLC, Admin. Proc. No. 3-21629 (Sept. 8, 2023), https://www.sec.gov/files/litigation/admin/2023/34-98322.pdf (crediting respondent’s prompt remedial acts including revisions to the at-issue release language and affirmatively alerting affected clients that they are not prohibited from communicating with governmental and regulatory authorities.)

14 Cf.  In the Matter of David Hansen, Admin Proc. 3-20820 (Apr. 12, 2022), https://www.sec.gov/enforce/34-94703-s (settled SEC enforcement action against former Chief Information Officer of a technology company for violating Rule 21F-17(a) by, among other things, removing an employee’s access to the company’s computer systems after the employee raised concerns regarding misrepresentations contained in the company’s public disclosures).

Supreme Court Upholds Corporate Whistleblower Protections in Landmark Ruling

Today, the U.S. Supreme Court issued a unanimous ruling holding that whistleblowers do not need to prove that their employer acted with “retaliatory intent” to be protected under the Sarbanes-Oxley Act (SOX). The decision in the case, Murray v. UBS Securities, LLC, has immense implications for a number of whistleblower protection laws.

“This is a major win for whistleblowers and thus a huge win for corporate accountability,” said leading whistleblower attorney David Colapinto, a founding partner of Kohn, Kohn & Colapinto.

“A ruling in favor of UBS would have overturned more than 20 years of precedent in SOX whistleblower cases and made it exceedingly more difficult for whistleblowers who claim retaliation under many similarly worded federal whistleblower statutes,” Colapinto continued.

“Thankfully, the Court was not swayed by UBS’ attempt to ignore the plain meaning of the statute and instead upheld the burden of proof that Congress enacted to protect whistleblowers who face retaliation,” added Colapinto.

In an amicus curiae brief filed in the case on behalf of the National Whistleblower Center, the founding partners of Kohn, Kohn & Colapinto outlined the Congressional intent behind the burden of proof standard in SOX.

“In crafting the unique ‘contributing factor’ test for whistleblowers, Congress left an incredibly straight-forward legislative history documenting the value of whistleblowers’ contributions, the risks and retaliation whistleblowers faced, the barriers the previous burden of proof presented for whistleblowers, and Congress’ explicit intention to lower that burden of proof for whistleblowers,” the brief states.

In the Court’s opinion, Justice Sonia Sotomayor likewise pointed to the Congressional intent of SOX’s contributing-factor burden of proof standard:

“To be sure, the contributing-factor framework that Congress chose here is not as protective of employers as a motivating-factor framework. That is by design. Congress has employed the contributing-factor framework in contexts where the health, safety, or well-being of the public may well depend on whistleblowers feeling empowered to come forward. This Court cannot override that policy choice by giving employers more protection than the statute itself provides.”

This article was authored by Geoff Schweller.

Client Alert: New Reporting Requirements Under the Corporate Transparency Act

On January 1, 2024, the Corporate Transparency Act (CTA) took effect. This new federal anti-money laundering law obligates many corporations, limited liability companies and other business entities to report to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), certain information about the entity, the entity’s beneficial owners and the individuals who created or registered the entity to do business. This client alert summarizes the CTA’s key requirements and deadlines. For more detailed information, please review the official “Beneficial Ownership Information Reporting FAQs” and the “Small Entity Compliance Guide” published by FinCEN.

Frequently Asked Questions

WHO MUST REPORT INFORMATION UNDER THE CTA?

The following “reporting companies” are subject to the CTA’s reporting requirements: (a) any U.S. corporation, limited liability company or other entity created by the filing of a document with a state or territorial government office; and (b) any non-U.S. entity that is registered to do business in any U.S. jurisdiction.

The CTA provides for 23 types of entities that are exempt from its reporting requirements, including companies that currently report to the U.S. Securities and Exchange Commission, insurance companies and tax-exempt entities, among others. Most notably, a company does not need to comply with the CTA if it has more than $5,000,000 in gross receipts for the previous year (as reflected in filed federal tax returns), at least one physical office in the U.S. and at least 20 employees in the U.S. For a full list of exemptions, including helpful checklists, please see Chapter 1.2, “Is my company exempt from the reporting requirements?”, of the Small Entity Compliance Guide.

A subsidiary of an exempt entity also will enjoy exempt status.

WHAT INFORMATION MUST BE REPORTED?

A reporting company is required to report the following information to FinCEN, and to keep the information current with FinCEN on an ongoing basis:

  1. The reporting company’s full legal name;
  2. Any trade name or “doing business as” (DBA) name of the reporting company;
  3. The reporting company’s principal place of business;
  4. The reporting company’s jurisdiction of formation (and, for non-U.S. reporting companies, the jurisdiction where the company first registered to do business in the U.S.); and
  5. The reporting company’s Employer Identification Number (EIN).

A reporting company also is required to identify its “beneficial owners” and “company applicant.” A beneficial owner is an individual who either: (a) exercises “substantial control” over the reporting company; or (b) owns or controls at least 25 percent of the ownership interests of the reporting company. A company applicant is an individual who directly files or is primarily responsible for filing the document that creates or registers the reporting company.

A reporting company must report and keep current the following information for each beneficial owner and company applicant:

  1. Full legal name;
  2. Date of birth;
  3. Complete current address;
  4. Unique identifying number and issuing jurisdiction from, and image of, one of the following non-expired documents:
    a. U.S. passport;
    b. State driver’s license; or
    c. Identification document issued by a state, local government or tribe.

WHEN ARE REPORTS DUE?

A reporting company that was first formed or registered to do business in the United States before January 1, 2024 will need to file its initial report with FinCEN no later than January 1, 2025.

A reporting company that is first formed or registered to do business in the United States between January 1, 2024 and January 1, 2025 will need to file its initial report with FinCEN within 90 calendar days after the effective date of its formation or registration to do business.

A reporting company that is first formed or registered to do business in the United States on or after January 1, 2025 will need to file its initial report with FinCEN within 30 calendar days after the effective date of its formation or registration to do business.

HOW DOES MY COMPANY FILE REPORTS WITH FINCEN?

Reports must be filed electronically through the BOI E-Filing System. For additional instructions and other technical guidance, please see the Help & Resources page.

WHAT HAPPENS IF MY COMPANY DOES NOT COMPLY WITH THE CTA?

At the time the filing is made, a reporting company is required to certify that its report or application is true, correct, and complete. Therefore, it is the reporting company’s responsibility to identify its beneficial owners and verify the accuracy of all reported information.

A person or reporting company who willfully violates the CTA’s reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues, plus criminal penalties of up to two years’ imprisonment and a fine of up to $10,000.

In the case of an accidental violation – for instance, if an initial report inadvertently contained a typo or outdated information – the CTA provides a safe harbor for reporting companies to correct the original report within 90 days after the deadline for the original report. If this safe harbor deadline is missed, the reporting company and individuals providing inaccurate information may be subject to the CTA’s civil and criminal penalties.

OTHER THAN FILING ACCURATE REPORTS, HOW CAN MY COMPANY STAY COMPLIANT?

A reporting company should consider taking the following actions to facilitate compliance with the CTA’s reporting requirements:

  • Amending existing governing documents, such as LLC or stockholder agreements, to require beneficial owners to promptly provide required information and otherwise cooperate in the company’s compliance with the CTA;
  • Designating an officer to oversee the company’s initial and ongoing CTA reporting;
  • Maintaining, reviewing and updating records on a regular cadence to reflect equity transfers, option grants and other transactions that affect ownership interest calculations; and
  • Developing a secure process for collecting and storing a beneficial owner’s photo identification and other sensitive information for CTA reporting purposes.