SEC Cracks Down On those Who Would Silence Whistleblowers

The SEC recently took action against seven companies for violating whistleblower protections. The SEC’s whistleblower program is designed to protect employees and encourage them to report potential violations of securities laws. However, these companies included provisions in employment, separation, and other agreements that discouraged employees from reporting misconduct to the SEC. Some of these agreements required employees to waive their rights to financial rewards for whistleblowing, even though the agreements often stated that employees were still allowed to file complaints or participate in investigations. Probably buried within arbitration agreements.

The SEC saw these provisions as harmful because they discouraged whistleblowers from coming forward. By forcing employees to waive their right to a monetary reward for reporting wrongdoing, these companies created obstacles for employees who might otherwise report securities law violations. Even though there were no known cases where the companies enforced these provisions or employees refused to speak with the SEC, the existence of these clauses alone was enough for the SEC to take action. In total, the companies agreed to pay more than $3 million in civil penalties, update their agreements, and notify the employees affected.

One of the key reasons the SEC is so protective of whistleblower rights is that whistleblowers are vital to exposing corporate misconduct. The whistleblower program was established in 2010 as part of the Dodd-Frank Act to provide financial incentives to employees who report potential violations of securities laws. The SEC also adopted Rule 21F-17, which prohibits companies from taking any actions that might prevent individuals from reporting directly to the SEC.

One of the companies involved, Acadia Healthcare, faced the largest penalty of $1.386 million. Acadia’s agreements required employees to waive their rights to receive financial rewards for cooperating with government investigations, including SEC whistleblower programs. Though Acadia revised some of its agreements before being contacted by the SEC, the company still faced charges because its provisions created barriers for whistleblowers.

Other companies charged in the sweep include Smart for Life, IDEX, and TransUnion. Smart for Life was charged for including waivers of monetary damages in its agreements, despite allowing employees to file charges with government agencies. IDEX was similarly charged for requiring employees to waive their right to monetary awards while still permitting them to participate in whistleblower programs. Both companies, along with TransUnion, argued that their waiver provisions were limited by phrases like “to the fullest extent permitted by law,” but the SEC found this insufficient to protect whistleblower rights.

TransUnion also included problematic provisions in severance and transaction agreements with employees and independent contractors. Some of these agreements required contractors to notify the company of any legally compelled disclosures to government agencies, further impeding whistleblower efforts. TransUnion agreed to pay a $312,000 penalty.

In addition to Acadia, Smart for Life, IDEX, and TransUnion, other companies involved in the sweep were a.k.a. Brands Holding Corp., AppFolio, Inc., and LSB Industries. These companies paid penalties ranging from $19,500 to nearly $700,000.

This isn’t the first time the SEC has taken action to protect whistleblower rights. In 2015, the SEC brought its first enforcement action for overly restrictive confidentiality agreements. These agreements prohibited employees from discussing internal investigations with anyone outside the company, including the SEC. The SEC viewed this as a way to stifle whistleblowers and undermine the protections of the whistleblower program. A year later, in 2016, the SEC brought more charges against companies for severance agreements that included confidentiality restrictions and required employees to waive their rights to financial rewards for whistleblowing. The SEC has since pursued several cases, signaling its commitment to ensuring companies don’t use these types of provisions to silence employees.

The bottom line is that companies cannot put up roadblocks that make it harder for employees to report misconduct. The SEC’s whistleblower program is designed to protect employees from retaliation and offer them incentives to come forward. When companies try to limit employees’ ability to benefit from the program, it undercuts these protections. By enforcing these rules, the SEC is sending a clear message: whistleblowers are essential to market integrity, and any attempts to discourage them won’t be tolerated.

In a pro-employee stance, it's important to recognize how brave whistleblowers are for coming forward. They often put their careers on the line to expose wrongdoing, and they deserve protection and compensation for their efforts. These SEC actions reinforce that employees have the right to report misconduct without fear of losing out on financial rewards. If companies try to pressure you into giving up these rights, know that the SEC has your back, and those agreements can be challenged. Whistleblowers are crucial to holding companies accountable, and this sweep by the SEC ensures that companies can’t use fine print to silence them.