The SEC Penalizes a Company for Separation Agreement Language That Allegedly Chills Participation in Its Whistleblower Program

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Patricia Tsipras

September 26, 2023

On September 8, 2023, the Securities and Exchange Commission (SEC) assessed a $225,000 penalty against Monolith Resources LLC, [1] a clean technology company, for violating whistleblower protection rules by including language in its separation agreements that allegedly chills participation in the SEC’s whistleblower program.

A Short Primer on the SEC’s Whistleblower Program
The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Securities Exchange Act of 1934 in July 2010 by adding Section 21F, “Whistleblower Incentives and Protection.”  The purpose of Section 21F is to encourage whistleblowers to report possible violations of securities laws by providing financial incentives, prohibiting employment-related retaliation, and providing various confidentiality guarantees.

To fulfill that purpose, the SEC adopted Rule 21F-17, which became effective in August 2011 and provides, in relevant part, that no person may take any action to impede an individual from communicating directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement with respect to such communications.

Monolith’s Separation Agreement Language
From approximately February 2020 through early March 2023, the agreements that Monolith used when separating employees from the company stated that “nothing in this agreement is intended to limit in any way your right or ability to file a charge or claim with any federal, state, or local agency.”

However, the agreements took away an employee’s right to recover a monetary award for filing a claim with, or participating in an investigation or action by, a governmental agency.  Specifically, the agreements stated, “These [governmental] agencies have the authority to carry out their own statutory duties by investigating charges or claims, issuing determinations, filing lawsuits in their own name or taking other action authorized by statute.  You retain the right to participate in any such action, but not the right to recover money damages or other individual legal or equitable relief awarded by any such governmental agency.”

The SEC believes that Monolith’s separation agreements undermine the purpose of Section 21F and Rule 21F-17 because they required employees to forego the financial incentives intended to encourage people to communicate directly with the SEC about possible securities law violations.

Monolith’s Revised Language
In April 2023, Monolith voluntarily revised its separation agreements to provide that “nothing in this Agreement shall bar or impede in any way your ability to seek or receive any monetary award or bounty from any governmental agency or regulatory or law enforcement authority in connection with protected ‘whistleblower’ activity.”

The SEC’s Penalty Against Monolith
The SEC assessed a $225,000 penalty against Monolith.  In determining how and whether to resolve its allegations against Monolith, the SEC considered the company’s remedial actions.  For example, Monolith revised its separation agreements to make clear that they do not limit a separated employee’s ability to obtain an incentive award for providing information to governmental agencies.  In addition, Monolith notified, or used reasonable efforts to notify, former employees who had signed separation agreements with the offending language that the agreement does not limit their ability to obtain such an incentive award.  In addition, the SEC noted that it is unaware of any instances in which (1) a former employee of Monolith who executed the separation agreement with the offending language did not communicate directly with the SEC about potential securities law violations or (2) Monolith took any action to enforce that provision or otherwise prevent such communications.

Employer Takeaways
Just as employers should do with respect to the 2023 decisions of the National Labor Relations Board (NLRB) regarding separation agreements (see our NLRB articles here and here), in response to this SEC Order, employers should consult with counsel to review company agreements, handbooks, and policies to ensure that they do not contain language that could be perceived as hindering access to governmental agencies, like the SEC.

This article is designed to provide one perspective regarding recent legal developments, and is not intended to serve as legal advice.  Always consult an attorney with specific legal issues.

[1] Monolith is a private company.  Though not all private companies are subject to SEC review, the SEC has reminded private companies that they, too, can be subject to penalties for violating its whistleblower protection laws.