The Securities and Exchange Commission (SEC) has been moving to prevent employee nondisclosure agreements from including language that could deter potential whistleblowers, The Wall Street Journal reported.
The SEC has taken action against companies who engage in this practice in recent months. In September, the Commission fined hedge fund D.E. Shaw $10 million for violating its whistleblower protection rule.
In response to that, some companies are reassessing confidentiality provisions and non-disparagement clauses in their various employment contracts to determine if the language could be viewed as a rule violation, lawyers who defend companies in whistleblower cases and others representing the informants themselves told The Journal.
“I think that the commission’s action is having an impact, and I expect there will be more,” said Stephen Kohn, a partner at law firm Kohn, Kohn & Colapinto who represents whistleblowers.
Information gleaned from insiders has become a key source for the SEC, which can then monitor events in real time and police the market, Gurbir Grewal, the SEC’s enforcement division chief, said in an interview with The Journal.
Despite efforts by the SEC in 2016 and 2017, such noncompliant provisions in employment contracts and training continued, based on examinations and other sources.
“That necessitated us bringing this most recent initiative looking at this issue, and whether it continues or not is really going to depend on whether folks change behavior after seeing the slew of cases that we brought and the penalties, too,” said Grewal. “I hope that causes other registrants to go update their policies and their trainings to make sure that they’re not employing these types of agreements.”
Attitudes around nondisclosure agreements started shifting after the #MeToo movement and protests prompted by the death of George Floyd, The Journal reported, as attention was brought to NDAs in racial-discrimination complaints.
The SEC’s enforcement of the whistleblower-protection rule has created “a cycle” in corporate compliance, as companies learn to use “craftier” language in their nondisclosure provisions that doesn’t outright prohibit reporting to regulators but suggests that doing so could put them in legal or financial jeopardy, Tammy Marzigliano, a partner at law firm Outten & Golden who represents employees in litigation and negotiations, told The Journal. This nuanced language is vague enough to create unease, she said, effectively discouraging employees from coming forward.
“As a practitioner, we really have to be looking out for this language to make sure that it doesn’t have the same chilling effect because that’s the whole point of it,” she said. “But they do. Companies try to get away with it as much as possible.”
Nondisclosure clauses remain common in the technology sector, Kohn told The Journal. His firm has compiled a list of at least six tech companies that use employment and severance agreements that might violate SEC whistleblower-protection rules, he said.
With this most recent enforcement push, those who work on whistleblower issues told The Journal that they think companies will rework their agreements to comply with the law. One company revised the nondisclosure severance agreement Kohn was helping negotiate on behalf of some whistleblowers within 72 hours of the announcement.
The Shaw penalty could mean “very extreme potential exposure” for companies, Gregory Keating, a partner at law firm Epstein Becker & Green who helps companies defend themselves in whistleblower cases, told The Journal. The expanding damage and scope of SEC actions has prompted many corporate clients to reach out in recent weeks, he said, many asking him to review every clause in their agreements and policies.
Without clear guidance from the SEC on what language would be appropriate in these agreements, he said. But he still defended the right of employers to use nondisclosure agreements to protect confidential information from being disclosed, especially to competitors.