On September 9, the SEC charged seven companies with violating a whistleblower protection rule by, among other things, utilizing agreements which required employees to waive their rights to whistleblower awards.

Key Takeaways

• The seven charged companies agreed to pay a combined $3 million in civil penalties
• SEC Rule 21F-17(a) prohibits companies from impeding the ability of individuals to blow the whistle to the SEC
• Recently, the SEC has dramatically increased enforcement efforts around Rule 21F-17(a)

Over the past year, the U.S. Securities and Exchange Commission (SEC) has increased enforcement efforts around Rule 21F-17(a), which prohibits companies from impeding the ability of individuals to blow the whistle to the SEC. On September 9, the SEC announced settled charges with seven companies for the use of restrictive agreements which allegedly impeded whistleblowing. The companies are to pay more than $3 million in combined penalties.

According to the SEC, the companies used employment, separation, and other agreements which violated Rule 21F-17(a) by, among other things, requiring employees and former employees to waive their rights to recover a monetary award for participating in an investigation by a government agency. The SEC has previously sanctioned other companies for including language in agreements requiring employees to waive rights to whistleblower awards.

“The SEC’s whistleblower program strengthens market integrity by providing protection and incentives for those who come forward and report potential violations of the securities laws,” said Jason J. Burt, Director of the SEC’s Denver Regional Office. “According to the SEC’s orders, among other things, these companies required employees to waive their right to possible whistleblower monetary awards. This severely impedes would-be whistleblowers from reporting potential securities law violations to the SEC.”

The seven companies charged by the SEC are:

• Acadia Healthcare Company, Inc.
• a.k.a. Brands Holding Corp.
• AppFolio, Inc.
• IDEX Corporation
• LSB Industries
• Smart for Life, Inc.
• TransUnion

In each order, the SEC details the language allegedly used in agreements which violated Rule 21F-17(a). For example, according to the SEC, a.k.a. Brands entered into three employment agreements and two severance agreements “that, while expressly permitting them to participate in government whistleblower programs, also required the employees to waive their right to a potential award.”

The SEC details that these releases stated: “Notwithstanding the above, I further acknowledge that I am not waiving and am not being required to waive any right that cannot be waived under applicable law, including the right to file an administrative charge or participate in an administrative investigation or proceeding; provided, however, that I disclaim and waive any right to share or participate in any monetary award resulting from the prosecution of such charge or investigation or proceeding.”

As part of the settlements, the companies have agreed not to violate Rule 21F-17(a) in the future and have “taken steps to remediate the violations, including making changes to the relevant agreements.”

“Ensuring that potential whistleblowers can communicate directly with the Commission is a critical part of the SEC’s oversight mandate,” said Creola Kelly, Chief of the SEC’s Office of the Whistleblower.

Increased Enforcement of Rule 21F-17(a)

While the SEC instituted Rule 21F-17(a) in 2011 and first took an enforcement action over alleged violations of it in 2016, the Commission’s enforcement efforts around the rule have increased dramatically over the past year.

Notably, in January, the SEC sanctioned J.P. Morgan $18 million for utilizing confidentiality agreements which impeded clients from blowing the whistle to the SEC Whistleblower Program. This was the largest penalty ever levied for Rule 21F-17(a) violations.

“Corporations should be looking at the SEC’s recent 21F-17 rulings as a sign that the age of blocking whistleblowers from disclosing in contractual agreements is over — it is now more expensive for a corporation to try to cover up fraud and corruption by silencing whistleblowers than it is for them to do the right thing,” wrote whistleblower attorney Benjamin Calitri of Kohn, Kohn & Colapinto in an article for NYU Law’s Compliance and Enforcement blog.