Recent SEC Enforcement Put Pressure on Companies to Not Stifle Whistleblowing

U.S. Securities and Exchange Commission building

In recent months, the U.S. Securities and Exchange Commission (SEC) has stepped up its enforcement of Rule 21F-17(a), filing a number of enforcement actions against companies for stifling whistleblowing through restrictive nondisclosure agreements and other employee agreements. 

New reporting by The Wall Street Journal details how these actions, including a record $10 million penalty against D. E. Shaw & Co, are causing companies to shift their cost-benefit calculation around the use of nondisclosure provisions which impede whistleblowing.

“Startled by the size of the fine, some companies are taking a second look at the confidentiality provisions and nondisparagement clauses in their various employment contracts,” The Journal reports. “In particular, they are trying to determine whether the language might be seen as squelching whistleblower tips, say lawyers who defend companies in whistleblower cases and others representing the informants themselves.”

Leading whistleblower attorney Stephen M. Kohn of Kohn, Kohn & Colapinto has long been at the forefront of the push for increased enforcement of Rule 21F-17(a). He spoke to The Journal about the impact of the recent SEC actions.

“I think that the commission’s action is having an impact, and I expect there will be more,” he said. “They finally are understanding that these NDAs create a chilling effect on an entire workforce.”

According to The Journal, the SEC found that Rule 21F-17(a) enforcement actions filed in 2016 and 2017 did not limit the amount of non-compliant NDAs and contracts.

“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,” SEC Director of Enforcement Gurbir Grewal told the paper. “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.”

Further Reading:

Nondisclosure Agreements Get Trickier Under New SEC Scrutiny

SEC Continues Increased Enforcement of Whistleblower Protection Rule

More SEC Whistleblower News

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