SEC Fines Private Employer for Language in Employee Separation Agreements That Restricted Whistleblower Awards

Quick Hits

• The SEC settled charges against an employer, alleging it used separation agreements that required employees to waive their rights to monetary awards for reporting possible securities law violations to the SEC.
• The SEC levied fines even though it noted that it was “unaware of any instances” in which a separated employee failed to make a report because of such a separation agreement or the company attempted to enforce an agreement to prevent such a report.
• The enforcement action is the latest by the SEC alleging that employment agreements and policies have impeded reporting to the SEC.

Background

In September 2023, the SEC announced that it had settled charges against Monolith Resources, LLC, a privately held energy and technology company, alleging the company’s prior separation agreements required former employees to waive their rights to monetary awards for reporting securities law violations to the SEC or participating in SEC investigations.

According to the SEC’s order, Monolith Resources, without admitting or denying any of the SEC’s findings, agreed to cease and desist from the alleged violations and pay a $225,000 fine.

The SEC alleged that the separation agreements violated the whistleblower protection rule in Section 21F of the Securities Exchange Act of 1934, which prohibits actions to impede an individual’s reporting of potential securities violations or cooperation in an investigation into such allegations.

Specifically, Monolith Resources’ separation agreements included a provision that stated that a departing employee “retain[ed] the right to participate in any [governmental investigation], but not the right to recover money damages or other individual legal or equitable relief awarded by any such governmental agency.” (Emphasis added.)

The company used such agreements between February 2020 and March 2023, with at least twenty-two separated employees, according to the SEC’s order. Notably, the SEC stated that the agency was “unaware of any instances” in which a separated employee subject to such an agreement failed to report a potential securities law violation or the company sought to enforce the provision to prevent a report from being made.

The SEC nevertheless alleged that the provision “raised impediments to participation in the Commission’s whistleblower program by having the employees forego the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.”

According to the SEC’s order, Monolith Resources “voluntarily” amended its separation agreements to “make clear” that the agreements do not restrict separated employees from communicating with the SEC or other governmental agencies and that they do “not in any way limit” a separated employee’s ability to obtain a financial incentive for making a report.

The revised separation agreement now provides, “[N]othing in this Agreement shall bar or impede in any way your ability to seek or receive any monetary award or bounty from any governmental agency or regulatory or law enforcement authority in connection with protected ‘whistleblower’ activity.”

Whistleblower Protections—Actions Taken to Impede Reporting

Congress created the “Securities Whistleblower Incentives and Protection” program in the Dodd-Frank Wall Street Reform and Consumer Protection Act, adding Section 21F to the Exchange Act and creating financial incentives to encourage whistleblowers to come forward. According to the SEC, the agency has awarded more than $1 billion to whistleblowers since 2012, including an award of nearly $279 million in May 2023.

Rule 21F-17(a) states 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.”

In addition to the Monolith Resources case, the SEC levied fines for violations of Rule 21F-17 in a February 2023 case where separation agreements did not expressly prohibit separated employees from filing complaints with a government administrative agency, but instead required the employees to provide notice to the employer if they received a request from an administrative agency in connection with a report or complaint.

The SEC has also levied fines where a company’s compliance manual and training materials stated that employees were prohibited from initiating contact with a government agency without prior approval of the company, though the company’s code of conduct permitted employees to report possible violations of the law.

Next Steps

The SEC’s Monolith Resources action and others illustrate the agency’s willingness to pursue enforcement actions and impose hefty civil fines against employers to protect employees’ and former employees’ ability to report potential securities law violations. The Monolith enforcement comes in the context of broader federal scrutiny of post-employment restrictive covenants that allegedly limit or restrict the rights of former employees.

As such, employers may want to consider reviewing and revising their separation agreements and other employment policies to the extent that they prevent or discourage employees and former employees from “blowing the whistle” to the SEC or other administrative agencies.

Ogletree Deakins will continue to monitor developments and will provide updates on the Ethics / Whistleblower and Unfair Competition and Trade Secrets blogs.

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