The SEC Wants to Look at Your Severance Agreements (and more)….

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Publically traded companies that are subject to the Dodd-Frank Act should be aware of recent compliance actions by the Securities and Exchange Commission.  The ‘Securities Whistle Blower Incentives and Protection’ section of Dodd-Frank was adopted in 2011, but just last month the SEC issued a compliance warning after initiating a cease-and-desist action against one company.  The company settled the matter quickly for $130,000, but other companies should heed the warning and the lessons learned.

It is standard to have provisions in Severance Agreements, Employment Agreements, Employee Policies and the like proscribing or requiring certain behaviors as a condition of employment or receiving a severance.  As such, it is common to include covenants that:

  • Prohibit employees and former employees from disclosing confidential information;
  • Require permission from legal department before disclosing confidential information;
  • Require an employee to agree that she will not assist in any government agency investigation;
  • Require an employee to agree that he will not participate in any monetary award as a result of a governmental agency action;
  • Prohibit employees from discussing the subject matter of an internal company investigation.

Although these types of provisions would seem to address legitimate concerns an employer might have about limiting potentially damaging disclosures, the SEC views these examples as having a ‘chilling effect’ on an employee’s right to report violations of federal laws.  The SEC wants to remind you that whistleblowers can always report activity that they believe to be illegal – regardless of any policies, agreements or Code of Conduct.  This is consistent with recent National Labor Relations Board decisions striking down policies that restrict an employee’s ability to communicate about workplace conditions.

In the wake of this stepped up action by the SEC and other agencies, companies should, at the least,  review their Compliance Manuals, Codes of Ethics, Employment Agreements and Severance Agreements to ensure that they permit reporting to the SEC and other federal agencies.  Furthermore, avoid blanket confidentiality policies in investigations.  If there is a need to keep information regarding a particular investigation confidential, put that specific reason in writing and provide it to employees who are part of that investigation.

As always, in order to achieve the balance between your company’s interests and the interests of the SEC, the NLRB, the DOL, et cetera, consider consulting with an experienced attorney.

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