Increased Focus on Enforcement of Whistleblower Rules by Federal Regulators

By Stephen Quinlivan and Bryan Pitko

Enforcement of whistleblower rules continues to be a key focal point for federal regulators based on recent actions taken by the SEC, CFTC, and OSHA in this area.

Recent SEC settlements of enforcement cases involving the whistleblower provisions under the Dodd Frank Act have put companies and their counsels on notice that restrictions on employee communications with outside parties in severance and confidentiality agreements may be viewed by regulators as impeding an individual’s ability to communicate with regulators about possible securities law violations in breach of whistleblower rules.

One such case, settled August 10th, involved the addition of a monetary recovery prohibition to certain severance agreements (entered into nearly two years after the adoption of the whistleblower rules) that was alleged to have violated the SEC’s prohibition on any impediments to communications with the SEC about securities law violations. The SEC appears to have been particularly concerned with restrictive language that forced employees leaving the company to waive possible whistleblower awards or risk losing their severance payments and other post-employment benefits.

The terms of settlement in these cases are driving companies to mitigate any risk of such violations, including the addition of language in future confidentiality and severance agreements to explicitly provide an employee with the right to communicate with the SEC (and other federal agencies) about potential securities law violations without company approval. Likewise, for further prophylactic effect, companies may consider broad communications highlighting that any existing agreements with former employees do not restrict such former employees’ ability to provide information to the SEC or accept SEC whistleblower awards.

The rules are broadly applicable to any employer subject to SEC jurisdiction. That includes public companies, broker-dealers, investment advisers, and advisers in municipal securities transactions. The rules may also apply to private equity portfolio companies and any other entity that has sold or is selling securities in private placements, issuing securities in private merger transactions, or redeeming securities from shareholders.

Meanwhile, proposed regulations at the CFTC suggest that the SEC’s regulatory cousin is moving to expand its ability to administer rules designed to protect the rights of whistleblowers consistent with the SEC’s authority in this area. As part of a continuing effort to harmonize the SEC’s and the CFTC’s whistleblower programs, the CFTC has recently proposed amendments to its whistleblower rules that reinforce its anti-retaliation authority under the Commodity Exchange Act. The proposed amendments would prohibit the enforcement of confidentiality and pre-dispute arbitration clauses in agreements impacting actions by potential whistleblowers and prohibit employers from threatening, harassing, or retaliating against individuals who participate in the CFTC’s whistleblower program.

The Occupational Safety and Health Administration (OSHA) has similarly moved to align itself with the SEC and CFTC with its recent issuance of guidance regarding settlement agreements with whistleblowers under Section 806 of the Sarbanes-Oxley Act. As in the SEC’s recent settlements and the CFTC’s proposed rules, OSHA’s guidance acts to prohibit “gag” provisions often found in confidentiality or non-disparagement clauses that “prohibits, restricts, or otherwise discourages a complainant from participating in protected activity,” which includes “filing a complaint with a government agency, participating in an investigation, testifying in proceedings, or otherwise providing information to the government.”

Stephen Quinlivan is a member of the firm's Corporate Finance division. He is located in the Minneapolis office. For more information, please contact Mr. Quinlivan or your usual Stinson Leonard Street contact.

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