Whistleblower Protection: Navigating Recent SEC Guidance

Lessons from D. E. Shaw & Co., L.P.'s $10 million penalty

Both public and private companies should review their confidentiality policies and written agreements in light of recent guidance and enforcement actions by the Securities and Exchange Commission (SEC). On September 29, 2023, the SEC issued a $10 million civil penalty against registered investment advisor D. E. Shaw & Co., L.P. for utilizing non-disclosure language in its agreements and policies, which, in the SEC’s view, discouraged potential whistleblowers from reporting wrongdoing to the SEC. The SEC imposed this fine even though the company had previously taken remedial actions to cure older non-conforming agreements.

The D. E. Shaw enforcement action was taken under Commission Rule 21F-17(a), which prohibits employers from taking actions to prevent employees or former employees from contacting the SEC directly to report a possible securities law violation. The Rule states, “[n]o person may take 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 the wake of this and other recent SEC enforcement actions, employers should consult with counsel and take the following steps:

1. Review separation agreements to ensure the agreements do not contain language that might chill or otherwise discourage employees from reporting wrongdoing to the SEC or other government agencies. This includes any language stating that they may not make reports or complaints to government agencies.

2. Remove language from severance agreements requiring employees to confirm they have not reported any wrongdoing by the employer to a government agency or requiring the employee to provide notice to the employer if they are contacted by a government agency in connection with a report or complaint.

3. Make clear in confidentiality and non-disclosure agreements that the employer’s policies do not prevent employees from reporting unlawful or potentially unlawful activity to government agencies or require that they provide notice to the employer prior to doing so.

4. Consider whether actions should be taken to clarify or amend previously issued severance agreements that do not comply with Rule 21F-17(a).

These steps should be taken in addition to other revisions that may be needed due to recent developments and guidelines issued by the NLRB, as addressed in an earlier Farella Braun + Martel publication, “Employers Should Review Common Severance Agreement Terms Due to New NLRB Decision."

This article was originally published on the Farella Braun + Martel LLP website.

Holly Sutton is a Partner at Farella Braun + Martel.