SEC Underscores Use of Routine Confidentiality Agreements for Employees May Violate Whistleblower Protection Rules
For the second time in as many months, the Securities and Exchange Commission (SEC) has signaled that it is back in the business of policing the SEC whistleblower protection rules in a broad, prophylactic manner. This time, the SEC underscored that the use of broad nondisclosure agreements, when used at the beginning and end of the employment process, may violate the SEC’s rules designed to protect whistleblowers.
As we noted last month, after adoption of the Whistleblower Rules in May 2011, the SEC brought 12 enforcement actions asserting violations of Exchange Act Rule 21F-17(a), including a number focused on the use of confidentiality agreements that may potentially discourage a whistleblower from communicating with the SEC. Rule 21F-17(a) prohibits taking “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.” That run came to a halt after the U.S Supreme Court overruled a key provision of those rules in 2018. The SEC’s respite has ended.
Recently, the SEC brought an enforcement action against The Brink’s Company (Brinks). The SEC found that Brinks’ broad use of confidentiality agreements when employees were onboarding and exiting violated Rule 21F. The confidentiality agreements forbid Brinks’ employees from disclosing to any third parties, without Brinks’ prior consent, non-public and confidential Brinks information, including “financial information including financial information set forth in internal records, files and ledgers incorporated into profit and loss statements, financial reports and business plans.” According to the SEC, the form agreements Brinks used for this purpose failed to provide an express exception that would have permitted current and former employees to disclose such information for reporting suspected securities law violations to the SEC. The SEC concluded that Brinks was on notice of the requirements based on the receipt of a number of attorney advisory alerts from external counsel and its use of a different form of agreement when onboarding new Brinks executives. After receipt of the legal advisories and internal discussion of the issue, Brinks did not fix the problem. Rather, Brinks added to its form agreement clauses requiring the payment of a $75,000 liquidated damages clause and Brinks’ legal fees and expenses for violations of the confidentiality agreements. During the relevant period, Brinks required thousands of its employees to enter into the confidentiality agreements in question.
To resolve these violations, Brinks was ordered to pay a civil penalty of $400,000. Under the SEC settlement, Brinks is also required to modify its confidentiality agreements to expressly carve out the employees’ ability to report suspected legal violations to state or federal agencies, including the SEC. Brinks is also required to contact and send to all current and former employees a copy of the SEC’s order as well as a notice stating that they are permitted to provide information to the SEC without prior company approval and accept whistleblower awards under the SEC’s Whistleblower Rules.
Previously, the SEC has taken a prophylactic approach to interpreting Rule 21F-17(a). The SEC applied Rule 21F-17(a) to routine confidentiality agreements, anti-disparagement clauses or internal policies that could theoretically discourage potential whistleblowers from bringing their concerns to the SEC. The Brinks settlement fits that model. As in the past, there were no allegations that Brinks actually sought to enforce the agreements, threatened to enforce the agreements or discouraged any employee from making a report to the SEC.
The Brinks order signals that the SEC five-year period of silence concerning corporate use of broad confidentiality agreements has ended and employers should expect increased enforcement efforts in this space. Given this fact, now is a good time for employers to revisit their confidentiality agreements for onboarding new employees and seek guidance from legal counsel regarding their severance agreements.