SEC Cracks Down on Waivers in Severance Agreements

Agency prohibits employers from impeding whistle-blowers

Allen Smith, J.D. By Allen Smith, J.D. August 15, 2016
SEC Cracks Down on Waivers in Severance Agreements

​Severance agreements for departing employees must not include waivers of awards from the Securities and Exchange Commission.

Securities fraud affects more than just whistle-blowers and the companies they are calling out. Employees' retirement savings in the stock market can be lost if the market becomes overpriced due to overinflated reports of company assets to shareholders but then crashes as it did during the Great Recession. 

The Securities and Exchange Commission (SEC) is taking a new tack to combat securities fraud, ruling on Aug. 10 that severance agreements can no longer ask departing employees to waive SEC awards because such a waiver constitutes an unlawful impediment to communicate with the agency. The SEC ordered a company that had such a waiver to pay a penalty of $265,000. 

Waivers of whistle-blower bounty awards from the SEC are common, even though the SEC pays for the awards, not employers, said David Marshall, a whistle-blower attorney for Katz, Marshall & Banks in Washington, D.C. A waiver of discrimination claims is different, he said. Employees in that circumstance can't double-dip from the employer's pockets through a severance plus an Equal Employment Opportunity Commission action or lawsuit. 

The SEC is "taking a tough stand on separation and severance agreements," said Greg Keating, an attorney with Choate in Boston. "Employers are well-advised to audit all of their existing policies and agreements to ensure there is not language that has the possible effect of deterring an individual from communicating with the SEC." That includes not only severance agreements, but confidentiality and nondisclosure agreements signed at the outset of employment as well as workplace investigation protocols.

Keating also recommended inserting language in agreements stating, "nothing in this agreement precludes you from communicating or cooperating in any way with any government agency including but not limited to the SEC."

Unlawful Impediments to Communication with SEC

The Dodd-Frank Act added Rule 21F-17, effective in 2011. The rule states, "No person may take any action to impede an individual from communicating directly with the commission staff about a possible securities law violation."

"HR should consider training managers on this rule given that the SEC is actively enforcing it," said Steven Pearlman, an attorney with Proskauer in Chicago.

In the case decided  Aug. 10, BlueLinx Holdings, a building products distributor headquartered in Atlanta, asserted in its severance agreements that the "employee understands and agrees that [the] employee is waiving the right to any monetary recovery in connection with any such complaint or charge that [the] employee may file with an administrative agency." The company also required employees signing severance agreements to report to the legal department if the disclosure of confidential information was required by law. Both of these provisions were ruled unlawful impediments to participate in the SEC's whistle-blower program, which gives whistle-blowers a bounty of 10 percent to 30 percent for awards of more than $1 million in sanctions.

The SEC ordered BlueLinx to include language in its severance agreements that nothing in the agreement impedes an employee's ability to communicate with any government agency or participate in any investigation by any government agency without notice to the company. It also agreed to explicitly state in its severance agreements that "this agreement does not limit [the] employee's right to receive an award for information provided to any government agencies." 

In a previous 2015 order involving Houston-based technology and engineering firm KBR, the SEC had clarified that an employer could not prohibit participants in investigation interviews from sharing confidential information in the interviews with any third party without prior approval of the employer's legal department. 

The SEC also determined in a separate order that Merrill Lynch unlawfully impeded a whistle-blower's communication with the agency by requiring employees to notify the company of any subpoena, Marshall noted.

The most recent SEC decision "is a clarion call for employers to take a hard look at their existing agreements, policies and handbooks" to ensure they don't violate Rule 21F-17, according to Keating.


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