As you have likely heard by now, the US Securities and Exchange Commission (SEC) has been targeting companies that require departing employees, as a condition to receiving severance benefits, to enter into severance agreements that discourage or prohibit the former employees from contacting regulators or from receiving whistleblower awards. The SEC whistleblower programs, established under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and memorialized in Section 21F of the Securities and Exchange Act of 1934, as amended, and SEC Rule 21F-17, are designed to provide incentives to individuals to encourage their providing information regarding violations of securities laws, and to protect whistleblowers from retaliation resulting from any disclosure.
Most companies require a release, or a severance agreement containing a release, to be executed by a departing employee. Often, the document provides that the former employee may not disclose confidential information about the company gained during employment or make disparaging remarks about the company. Some of these agreements also require the former employee to agree to waive whistleblower awards, or agree that any whistleblower award will offset the severance to which the former employee may otherwise be entitled. Recently the SEC has settled several cases with companies that have required former employees to enter into agreements with these prohibited provisions and, as part of such settlements, the companies have agreed to pay various penalties for violating Rule 21F-17.
Moreover, in a recent spate of shareholder litigation suits, even draft releases and separation agreements, attached to employment agreements or severance agreements filed with the SEC, have been targeted for alleged violations of the SEC’s whistleblower protection program.
Going forward, companies should review, and revise if necessary, their form severance agreements to ensure there is no prohibition on departing employees from corresponding and cooperating with regulators. In fact, an explicit disclaimer of any intent to prevent former employees from communicating with regulators is the best way to accomplish this. The agreements also should not prohibit departing employees from receiving whistleblower awards or require departing employees to forfeit any part of their severance benefits in the event the departing employees communicate with, or receive monetary awards from, regulators. Because regulations and public policy change frequently, and sometimes with little notice, companies should always reserve the authority to amend draft releases and separation agreements attached to employment agreements and severance agreements to comply with applicable law in effect at the time of termination of employment. While Rule 21F-17 is an SEC rule, its reach is not limited to public companies, so private companies should also ensure that their agreements comply with these requirements.