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SEC Continues Review of Non-Disclosure Agreements and More


The U.S. Securities and Exchange Commission (SEC) continues to review non-disclosure agreements and other confidential business information provisions of publicly traded companies to ensure whistleblowers are not restricted from freely communicating with the agency about potential violations.

The SEC is doing so pursuant to its enforcement authority under SEC Rule 21F-17, which provides:

(a) No 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 (other than agreements dealing with [attorney-client privileged] information covered by § 240.21F-4(b)(4) and § 240.21F-4(b)(4) of this chapter related to the legal representation of a client) with respect to such communications.

(b) If you are a director, officer, member, agent, or employee of an entity that has counsel, and you have initiated communication with the Commission relating to a possible securities law violation, the staff is authorized to communicate directly with you regarding the possible securities law violation without seeking the consent of the entity's counsel.

The SEC has been enforcing Rule 21F-17 since 2015. The SEC has ramped up its enforcement recently.

For instance, on September 29, 2023 in D.E. Shaw & Co., L.P. ("DESCO"), the SEC issued a cease and-desist Order and imposed significant remedial sanctions against DESCO. This included issuing a $10M civil monetary penalty against DESCO, easily the largest ever — by far — for a Rule 21F-17 violation.

In the case, the SEC alleged DESCO, a global investment and technology firm, violated Rule 21F-17. DESCO allegedly did so by including a confidential-information provision in an employment agreement prohibiting employees from voluntarily communicating with the SEC about potential securities laws violations. The problematic provision stated as follows:

Employment Agreement

[Prohibiting disclosure of] Confidential information . . . except as may be required by any applicable court of competent jurisdiction, a regulatory or self-regulatory body, or a governmental body.

In addition, from approximately August 2011 to June 2023, the company required roughly 400 employees to sign releases upon departing the company that affirmed they had not filed any complaint with any governmental agencies. The release language read as follows and was a part of departing employees' receipt of additional payouts that, in some instances, totaled millions of dollars:


The Employee represents and warrants to the Company that the Employee has not made, filed or lodged any complaints, charges, or lawsuits or otherwise directly or indirectly commenced any proceeding against any member of the D.E. Shaw Group and/or any Covered Persons and Entities with any governmental agency, department, or official; any regulatory authority; or any court, other tribunal, or other dispute resolution body.

The SEC's Order also noted how, unlike other recent SEC cases involving Rule 21F-17, at least one former DESCO employee was discouraged from communicating with SEC staff due to the employment agreement and release provisions. According to the SEC, the plain language of the provisions themselves also raised impediments to DESCO's current and former employees' filing whistleblowing complaints with the SEC about potential securities violations. The SEC noted that DESCO revised its policies and employment agreement in 2017 and 2018 to clarify that the language did not bar disclosure to governmental agencies regarding violations of the law. However, DESCO did not change the language of the release until June 2023, during the pendency of the SEC's investigation.

There are several key takeaways for employers in light of the SEC's enforcement in recent cases:

  • Employers should review their separation agreements, non-disclosure agreements, employment agreements, and any confidential business information policy or requirement for any language that might run afoul of Rule 21F-17, or that could be construed to "impede" whistleblowers from contacting the SEC.
  • For separation and settlement agreements with releases, employers typically need to secure a representation that the individual asked to sign the document does not have a pending claim of discrimination, harassment, or retaliation, to determine if certain state-required language under recent #MeToo laws need to be added. This would appear to be permissible because the clause in question above required a representation that the person asked to sign the release had not filed "any complaint or charges," which the SEC might have considered overly broad. Furthermore, in order to address the SEC's objection that the disclaimer above applied only prospectively for employers, it might be prudent to expand the disclaimer for protected rights to be clear that no prior company action or policy prohibits cooperation with government agencies.

If the SEC initiates an enforcement action, plan to cooperate with the SEC. The SEC cites cooperation as a significant factor in resolving a Rule 21F-17 enforcement action.

Bottom line — publicly traded and other SEC-regulated employers should be on alert to the SEC's ongoing attention to enforcement actions under Rule 21F-17.

Posted In: Non-Compete Clause (Restrictive Covenant), Non-Disclosure Agreement (NDA); Workplace Policies/Rules

Want to know more? Read the full article by at Littler Mendelson

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