SEC Warns In-House Counsel Against Using Incentives to Deter External Whistleblowing
During a recent panel discussion at the 18th Annual Corporate Counsel Institute, the SEC’s whistleblower chief, Sean McKessy, warned companies and their in-house counsel against drafting contracts that discourage employees from reporting potential securities fraud violations to the agency. Mr. McKessy explained that incentives to keep whistleblower complaints in-house may run afoul of federal law and subject the drafting attorney to discipline.
The SEC Whistleblower Program is a product of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which allows eligible whistleblowers who report potential securities violations to the SEC to collect a bounty of up to 30 percent of any monetary sanctions collected as a result of the tip. To protect whistleblowers from adverse employment actions, Dodd-Frank prohibits employers from discharging, demoting, suspending, threatening, harassing, or discriminating against a whistleblower for engaging in protected activity.
Although Dodd-Frank prohibits punishing an employee for engaging in protected whistleblowing activity, the courts have not addressed whether the Act also prohibits employers from encouraging confidential or internal reporting through financial rewards or other incentives. Mr. McKessy’s recent comments at the Corporate Counsel Institute, however, make clear the SEC believes that any incentive discouraging employees from bringing potential violations to the agency is improper and unlawful under the SEC’s broad interpretation of Dodd-Frank and the no-waiver provisions of the Sarbanes-Oxley Act. McKessy warned in-house counsel:
Be aware that this is something we are very concerned about. If you’re spending a lot of your time trying to come up with creative ways to get people out of our programs, I think you’re spending a lot of wasted time and you run the risk of running afoul of our regulations. . . . And we are actively looking for examples of confidentiality agreements, separates agreements, employee agreements that . . . in substance say “as a prerequisite to get this benefit you agree you’re not going to come to the commission or you’re not going to report anything to a regulator.”
McKessy also warned compliance attorneys of the risk of drafting such contracts: “And if we find that kind of language, not only are we going to go to the companies, we are going to go after the lawyers who drafted it . . . We have powers to eliminate the ability of lawyers to practice before the commission.”
Given McKessy’s recent comments, companies and their inside counsel should carefully review their employment agreements to identify any provisions that could be construed as incentives to avoid sharing information with the SEC. Until the courts define the scope of Dodd-Frank’s anti-retaliation provision, the risks of including such a provision likely outweigh its benefits.