On July 24, the Consumer Financial Protection Bureau (CFPB) released a circular warning that broad and restrictive nondisclosure agreements (NDAs) may violate federal whistleblower protection laws.
“Imposing sweeping nondisclosure agreements that do not clearly permit communication with law enforcement may intimidate employees from disclosing misconduct or cooperating with investigations,” the CFPB explains. “This could impede investigations and potentially violate federal whistleblower protections.”
According to the CFPB, overly broad NDAs may violate the whistleblower provision of the Consumer Financial Protection Act (CFPA) which prohibits employers from in any way discriminating against individuals who report potential violations of the laws and regulations subject to the CFPB’s jurisdiction.
“The law enforcement community uncovers serious wrongdoing by financial firms through whistleblower tips,” said CFPB Director Rohit Chopra. “Companies should not censor or muzzle employees through nondisclosure agreements that deter whistleblowers from coming forward to law enforcement.”
In the circular, the CFPB points to the rules and enforcement actions of the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). Both of these agencies have rules which prohibit companies from taking any action which impede individuals from blowing the whistle to authorities on potential violations and both have taken enforcement actions against restrictive NDAs.
In recent months, the SEC has increased its enforcement efforts around cracking down on illegal NDAs which restrict whistleblowing.
“Whether it’s in your employment contracts, settlement agreements or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, in announcing a record $18 million penalty against J.P. Morgan.
In June, the CFTC announced its first enforcement action against a company for using restrictive NDAs which impede whistleblowing.
“This groundbreaking action demonstrates the CFTC’s commitment to protecting potential whistleblowers and puts the market on notice that the CFTC will not tolerate contractual arrangements that could impede communication by potential witnesses,” said Director of the Whistleblower Office Brian Young.