Category Archives: Securities and Exchange Commission

2nd Circuit Speaks On SEC Whistleblower Retaliation

pillarsOn September 10th, the 2nd Circuit Court of Appeals (New York, Connecticut and Vermont) handed down its decision in Berman v. Neo@Ogilvy, holding that an internal report of what an employee deems to be a securities law violation can protect him from retaliation under the Dodd-Frank Act.

The Act defines “whistleblower” as “any individual who provides … information relating to a violation of the securities laws to the Commission, in a manner established by rule or regulation, by the Commission.” (Emphasis added.)  And retaliation against “whistleblowers” is prohibited by the Act. However, the Act also prohibits retaliation against those making disclosures that are protected by the Sarbanes-Oxley Act, which provides protection for internal reports.  The Securities and Exchange Commission (SEC) has taken the position (in its regulations and interpretive rules) that although “whistleblower” is defined in the Act as an individual who provides information to the Commission, this other provision of the anti-retaliation section protects individuals who make an internal report to their employer.

In 2013, the 5th Circuit (Texas, Louisiana and Mississippi) rejected the SEC’s position, and ruled that the plain language of the Act requires a covered “whistleblower” – an individual who provides information relating to a violation of the securities laws to the Commission. Thus, under the 5th Circuit’s holding an employee can’t base a retaliation claim on an internal report.

In this case, the 2nd Circuit disagreed with the 5th Circuit, giving deference to the SEC’s interpretation of the Act. According to the 2nd Circuit, employees do not need to report the alleged violations of securities laws to the SEC to be protected from retaliation under the Act.

Given the circuit split, it is quite possible that the issue will find itself before the Supreme Court. Until then, and regardless of what state(s) you operate in, we recommend that you carefully consider any employment action that follows an internal or external complaint of any kind to determine whether the complaint may be considered “protected activity” and whether taking the employment action opens you to a retaliation claim.

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SEC Takes Aim at Confidentiality Agreements

We – and the SEC – think it’s a good time to review your confidentiality agreements.confidentiality-agreement (2)

It’s no secret that the Securities and Exchange Commission (SEC) has had employee confidentiality agreements on its mind for some time now. In the eyes of the SEC, confidentiality agreements, if overly-broad, may prevent or discourage would-be whistleblowers.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 amended the Securities Exchange Act to include protections and incentives for individuals who come forward with allegations of wrongdoing. Rule 21F-17(a) explicitly prohibits employers from taking action that would “impede” an employee from “communicating directly” with the SEC about a “possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.”

On April 1, 2015, the SEC announced that it had settled its first enforcement action involving an overly-restrictive confidentiality provision under Rule 21F-17(a). The action primarily focused on a confidentiality statement that employees were required to sign in connection with the company’s internal investigation procedures. The statement read:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

The SEC determined that this statement violated the whistleblower protections under Rule 21F-17(a), even though there was no evidence that any employee was prevented or discouraged from communicating with the SEC because of the language. The company agreed to resolve the matter by: (i) paying a penalty; (ii) agreeing to cease and desist from any future violations, (iii) amending the language of the provision; and (iv) agreeing to make reasonable efforts to contact employees who had already signed the agreement to inform them that they did not need to gain permission from anyone to contact governmental agencies. The SEC approved the following amended language:

Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.

In light of this ruling (and the NLRB’s activity in this area that we discussed in our post yesterday), we recommend that you review all agreements containing confidentiality clauses – including employment agreements, severance agreements, employee handbooks, settlement agreements, nondisclosure agreements and any other similar agreements. If necessary, these clauses should be revised to include an express statement that nothing in the agreement discourages and/or prevents any individual from communicating with any government agency, including the SEC.