As Rachel Louise Ensign reported earlier this week in the Wall Street Journal (subscription required), the Securities Exchange Commission (“SEC”) continues to probe obstacles to corporate employees blowing the whistle. This time, according to Ms. Ensign, the agency has requested that companies “turn over every nondisclosure agreement, confidentiality agreement, severance agreement, and settlement agreement they entered into with employees since Dodd-Frank went into effect, as well as documents related to corporate training on confidentiality.”
In a follow-up article today, Ms. Ensign interviewed Steve Pearlman, co-head of Proskauer’s whistleblowing and retaliation group, about the potential for a “formal case against a company for silencing a whistleblower.” Mr. Pearlman forecasted that “[t]he best result for the SEC is to be able to show . . . that the language had a real deterrent effect.”
This is just the latest effort by the SEC to investigate contractual impediments to whistleblower complaints. As we wrote about last March, SEC whistleblower chief, Sean McKessy, cautioned in-house attorneys who draft contracts incentivizing employees to report securities fraud complaints in-house rather than to the agency.
The SEC also has received calls from legislators and interest groups to scrutinize employment, severance, and confidentiality agreements that, in their view, limit attempts to blow the whistle. Back in October, in a letter to the SEC, top democrats in the U.S. House of Representatives “urge[d] the Commission to send a strong message” against “preemptive legal maneuvering to silence prospective whistleblowers.” And, as we noted last July, plaintiff-side lawyers and government watchdog groups have made similar pleas.
The SEC is not alone in these efforts. Last October, we blogged about the Financial Industry Regulatory Authority (FINRA) also continuing to warn firms against the use of confidentiality provisions in settlement agreements that prohibit or otherwise restrict customers or anyone else (such as current employees) from communicating with the SEC, FINRA, or any federal or state regulatory authority regarding a possible securities law violation.
Given this increased regulatory scrutiny, firms in the securities industry should review and, if necessary, adjust the non-disclosure provisions in any number agreements to comply with applicable laws, rules, and guidance.