Alert - The Securities and Exchange Commission ("SEC") Rules that Confidentiality Provisions Cannot Impede Whistleblower Reporting

November 7, 2016
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The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, amended the Exchange Act by adding Section 21F, “Whistleblower Incentives and Protection” in order to encourage whistleblowers to report possible violations of the securities laws by providing financial incentives, prohibiting employment-related retaliation, and providing various confidentiality guarantees.

Rule 21F-17(a) provides 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.” The SEC Office of the Whistleblower’s (“OWB”) prior 2014 report to Congress warned that it was investigating practices in the use of confidentiality and other types of agreements that it believed violated Rule 21F-17(a).

In the recent BlueLinx Holdings Inc. decision[1], the SEC issued an order for sanctions and a cease and desist order (the “Order”) pursuant to an Offer of Settlement[2] proposed by BlueLinx. The Order sets forth the key areas where the SEC has been focusing; i.e., confidentiality provisions in employment separation agreements as violating Rule 21F-17(a). The SEC is not just asserting that provisions in such agreements may not prohibit whistleblower complaints, but it is taking the position that the agreements need to reaffirm the employees’ rights to bring these complaints by expressly advising employees that such confidentiality agreement does not bar them from filing claims against their employer with enforcement agencies.

BlueLinx entered into agreements with certain employees who were leaving the company and who were receiving severance or other post-employment consideration from BlueLinx. The agreements contained provisions that prohibited the employee from sharing with anyone confidential information concerning BlueLinx that the employee had learned while employed by BlueLinx, unless compelled to do so by law or legal process. The confidentiality provisions also required employees either to provide written notice to BlueLinx or to obtain written consent from the BlueLinx legal department prior to providing confidential information pursuant to such legal process. Bluelinx’s most recent agreements contained provisions acknowledging the right of the employee to make complaints to the SEC and other agencies, however, it included a provision that read, “Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency.” The SEC took the position that such notice and waiver provisions violated Rule 21F-17(a):

By including those clauses in its Severance Agreements, BlueLinx raised impediments to participation by its employees in the SEC’s whistleblower program. By requiring departing employees to notify the company’s Legal Department prior to disclosing any financial or business information to any third parties without expressly exempting the commission from the scope of this restriction, BlueLinx forced those employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits.

As part of the Order, BlueLinx was required to include the following paragraph in its severance agreements,

Protected Rights. Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (“Government Agencies”). Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee’s right to receive an award for information provided to any Government Agencies.” [Emphasis Added]

The Equal Employment Opportunity Commission has also been challenging similar provisions, although it was unsuccessful in EEOC v. CVS Pharmacy[3], in pursuing the challenge on the basis that the provisions constituted a “pattern and practice”, as opposed to a violation of a whistleblower protection statute or rule.  Nonetheless, employers should review separation agreements and any employment agreement that contains confidentiality provisions with an eye toward strengthening provisions preserving the employee’s right to file administrative charges or lawsuits.

In addition, since Rule 21F-17(a) does not require a whistleblower to be an employee of the company on which it is reporting, companies should consider including provisions protecting the right of an individual to report violations in all of their confidentiality provisions contained in any other agreements with individuals.


[1] https://www.sec.gov/litigation/admin/2016/34-78528.pdf

[2] BlueLinx consented to the SEC’s cease-and-desist order without admitting or denying the findings. 

[3] http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2015/D12-17/C:14-3653:J:Flaum:aut:T:fnOp:N:1673808:S:0

Authored by:
Armand M. Estrada, Esq.
T: (925) 944-9700
aestrada@bpbsllp.com
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