Recently, the U.S. Securities and Exchange Commission (SEC) has increased enforcement efforts around the whistleblower protection rule Rule 21F-17(a) which prohibits companies from impeding the ability of individuals to blow the whistle on potential securities law violations to the Commission. Most notably, the rule prohibits overly broad non-disclosure agreements and other employment agreements which restrict whistleblowing.
In remarks delivered November 6 at Securities Enforcement Forum D.C. 2024, Sanjay Wadhwa, the SEC’s Acting Director of the Division of Enforcement noted the importance of these enforcement efforts and highlighted the increased penalties levied by the Commission in Rule 21F-17(a) cases.
“The SEC’s whistleblower program plays a critical role in our ability to effectively detect wrongdoing, protect investors and the marketplace, and hold violators accountable.” Wadhwa said. “But that program only works if whistleblowers have unfettered ability to share with the SEC information about possible securities law violations. However, all too often we have seen, for example, confidentiality agreements and employment agreements by various advisory firms and public companies that impede that ability, including by limiting customers’ ability to voluntarily contact the SEC or by requiring employees to waive the right to a monetary award for participating in a government investigation. So this past fiscal year, and the year prior, the Commission brought a series of enforcement actions to address widespread violations.”
“There was a similar series of actions addressing this issue some years back,” Wadhwa continued. “And I think for a while there was better compliance, but then things slipped and we’re back here. So, this time around the Commission authorized what I view to be fittingly robust remedies, including the largest penalty on record for a standalone violation of the whistleblower protection rule. It is my hope that these enforcement actions will have a significant deterrent effect and will lead to greater and sustained proactive compliance.”
The record penalty referenced by Wadhwa was an $18 million penalty levied against J.P. Morgan in January. According to the SEC, J.P. Morgan regularly had retail clients sign confidential release agreements which did not permit clients to voluntarily contact the SEC.
In enforcing Rule 21F-17(a), the SEC has found illegal language in severance or separation agreements, employee contracts, settlement agreements and compliance manuals. Language in the various types of contracts found to violate Rule 21F-17(a) has included requiring the prior consent of the company before disclosing confidential information to regulators, preventing the employee from initiating contact with regulators, requiring the employee to waive their right to awards from whistleblowing award programs, including a “non-disparagement clause” that specifically included the SEC as a party the employee could not “disparage” the company to, and requiring the employee to inform the company soon after reporting information to the SEC.
