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No, Companies Cannot Prevent You from Reporting Securities Fraud to the Government

SecFraud

We previously wrote about common types of securities fraud and how to report that fraud. Oftentimes, companies try to prevent employees or others from reporting any securities law violations. A company that makes such attempts, however, is committing a further securities violation.

Rule 21F-17

Under the U.S. Securities and Exchange Commission’s (“SEC”) Rules and Regulations of the Securities Exchange Act, Rule 21F-17 provides: “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.” 17 C.F.R. § 240.21F–17(a). In other words, employers are prohibited from enforcing any agreement that would hinder an employee’s communications with the SEC about possible securities law violations.

SEC Enforcement Actions Under Rule 21F-17

The SEC recently started bringing enforcement actions against employers for including in their separation, severance, or confidentiality agreements with employees certain provisions that contain language that contributed to violations of Rule 21F-17 by impeding employees and former employees from communicating with the SEC concerning possible securities law violations.

Beginning in April 2015, the SEC issued a cease-and-desist order against KBR, Inc. related to form confidentiality statements that the company used when it conducted internal investigations of alleged misconduct. Order Instituting Cease-And-Desist Proceedings, In the Matter of KBR, Inc., Exchange Act Release No. 34-74619 (April 1, 2015). The confidentiality statement required employees who were interviewed during an internal investigation to agree that they were prohibited from discussing the subject matter of the interview with anyone else without prior authorization from the law department. Id. While the SEC was not aware of any instance where the confidentiality statement prevented an employee from reporting violations to the SEC, the SEC still found that the contents of the confidentiality statement alone violated Rule 21F-17 because “the language found in the form confidentiality statement impedes such communications by prohibiting employees from discussing the substance of their interview without clearance from KBR’s law department under penalty of disciplinary action including termination of employment.” Id. Therefore, KBR was fined $130,000. Id.

In January 2017, the SEC fined BlackRock, Inc. $340,000 for including a provision in their standard separation agreements that forced employees leaving the company to waive any whistleblower award, monetary or otherwise, to which the employee may be entitled in order to receive their severance payments. Order Instituting Cease-And-Desist Proceedings, In the Matter of BlackRock, Inc., Exchange Act Release No. 79804, Administrative Proceeding File No. 3-17786 (January 17, 2017). The SEC stated: “Such restrictions on accepting financial awards for providing information regarding possible securities law violations to the Commission undermine the purpose of Section 21F and Rule 21F-17(a), which is to ‘encourag[e] individuals to report to the Commission,’… and violate Rule 21F-17(a) by impeding individuals from communicating directly with the Commission staff about possible securities law violations.” Id.

In another SEC enforcement action in January 2017, the SEC fined HomeStreet, Inc. $500,000 because, in part, “HomeStreet’s severance agreements required the departing employees to waive, as a condition of being paid monetary severance payments and receiving other consideration from HomeStreet, various potential claims against HomeStreet.” Order Instituting Cease-And-Desist Proceedings, In the Matter of HomeStreet, Inc. and Darrell van Amen, Exchange Act Release No. 79844, Administrative Proceeding File No. 3-17801 (January 19, 2017). As a result, HomeStreet violated Rule 21F-17 of the Exchange Act. Id. Additionally, in exchange for paying indemnification costs, HomeStreet had asked a departing employee to affirm that he was not the whistleblower in an ongoing SEC investigation of the company. Id. According to the SEC, “by taking actions to determine the identity of an individual whom HomeStreet suspected had brought the hedge accounting errors to the [SEC], including suggesting that the terms of an indemnification agreement could allow them to deny payment to an individual who HomeStreet believed to be a whistleblower, HomeStreet acted to impede individuals from communicating directly with the Commission staff about a possible securities law violation.” Id.

Problematic Provisions Under Rule 21F-17

As demonstrated by the above actions, the SEC has stepped up its protection of potential whistleblowers and is committed to removing any impediment that might keep a potential whistleblower from reporting securities law violations. Thus far, the SEC has demonstrated its disapproval of any provisions that (1) purport to limit the types of information that an employee may convey to the SEC or other authorities; (2) require departing employees to waive their rights to any individual monetary recovery in connection with reporting information to the government; (3) require employees to affirm or represent that they have not reported any securities violations to the SEC or other authorities; and (4) prohibit any and all disclosures of confidential information, without any exception for voluntary communications with the SEC concerning possible securities laws violations.

Accordingly, any agreement that an employer or investment adviser has required an individual to sign that contains any of the foregoing provisions may violate Rule 21F-17 and be the basis for an SEC enforcement action or for an additional claim in an SEC enforcement action.

If you feel you have a securities whistleblower case, please contact the lawyers at McCabe Rabin, P.A. for a free confidential consultation.

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