One area where SEC Enforcement appears to have focused its attention recently is whistleblower protections. In this Order against CBRE, Inc., the SEC brought settled charges against the commercial real estate services and investment firm for using an employee release form that the SEC alleged violated Exchange Act Rule 21F-17, the SEC's whistleblower protection rule. The purpose of the whistleblower provisions in the Exchange Act, added in 2010 as part of Dodd-Frank, was to "encourage whistleblowers to report possible securities law violations by providing, among other things, financial incentives and confidentiality protections." To prevent obstruction of that reporting, the SEC adopted Rule 21F-17, which provides that "[n]o 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." The SEC's order found that, "by conditioning separation pay on employees' signing the release, CBRE took action to impede potential whistleblowers from reporting complaints to the Commission." According to an SEC Regional Director, it "is critical that employees are able to communicate with SEC staff about potential violations of the federal securities laws without compromising their financial interests or the confidentiality protections of the SEC's whistleblower program....We commend CBRE for its swift and far-reaching remediation and for its high level of cooperation with our staff, which is reflected in the terms of the resolution." Is it time to take another look at your employee separation agreements and release forms?
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As the Order observes, back in 2015, the SEC brought its first settled action against a company for including in confidentiality agreements improperly restrictive language with the potential to derail the whistleblowing process. It's worth noting that, at that time, the director of the SEC's whistleblower office said in an interview that he was encouraging his staff to be "on the hunt" for instances involving problematic severance, employment or confidentiality agreements that included language that crossed the "fine line" from "encouraging" to effectively "forcing" internal reporting to the exclusion of reporting to the SEC, even if the prohibition on external reporting was not explicit. (See this PubCo post.) In that first case, the SEC charged KBR, Inc. with violating Rule 21F-17 as a result of language contained in a form confidentiality agreement that KBR used for employees interviewed for internal investigations, including investigations of allegations of federal securities law violations. The agreement imposed requirements to obtain authorization from the company before disclosing certain information, and threatened disciplinary action in the event of violation. The SEC found the form to be a potential impediment to SEC reporting by employees interviewed, thereby undermining the whistleblower rule's purpose to encourage SEC reporting. (See this PubCo post.)
Since then, the Order indicates, the SEC "has instituted many additional settled cease-and-desist proceedings involving alleged violations of Rule 21F-17." Just this year, for example, the SEC charged Activision Blizzard, Inc. with violation of Section 21F of the Exchange Act, alleging that the company's template separation agreements with departing employees, which contained requirements that employees notify the company of requests from an administrative agency in connection with a report or complaint, undermined "the purpose of Section 21F and Rule 21F-17(a) to 'encourag[e] individuals to report to the Commission.'" (See this PubCo post.) In many of these cases, the SEC found that the provisions in the agreements created impediments to participation by employees in the SEC's whistleblower program.
Background. The Order alleges that CBRE regularly enters into separation agreements with its employees when they end their employment and will be receiving separation pay. According to the Order, beginning in 2011, the agreements required a representation from the employee that the employee had not filed charges or complaints against CBRE or any of its agents with any court or agency based on events prior to the date of the agreement. By requiring this representation, the SEC charged, "CBRE took action to impede potential whistleblowers from reporting complaints" to the SEC. After 2015, CBRE added a provision indicating that the agreement should not be construed to prohibit the employee from filing charges or participating in investigations conducted by any of several agencies, including the SEC. But that addition didn't do the trick. As interpreted by the SEC, "together with the Employee Representation, this carve-out was prospective in application, and therefore did not remedy the impeding effect of the Employee Representation." Even though the SEC did not discover any specific instances in which a former CBRE employee was prevented from communicating with the SEC or in which CBRE took action against a former employee based on the representation, the SEC still found a violation.
According to the Order, once CBRE learned of the SEC's investigation, it began a remediation program, including revisions to standard form agreements and policies, training and communication with former employees who had signed these agreements about their rights to communicate with SEC staff.
Violations. The SEC concluded that CBRE violated Rule 21F-17(a), which prohibits any person from taking action to impede an individual from communicating directly with the SEC staff about a possible securities law violation. Based on CBRE's cooperation, however, the SEC imposed a civil penalty of only $375,000.
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