The SEC has reached settlements with seven companies, totaling more than $3m, for violating rules designed to protect whistleblowers.

Whistleblowers were impeded from reporting potential securities law violations by the companies requiring employees to waive their right to possible monetary rewards, breaking the Whistleblower Protection Rule, SEC Rule 21F-17(a).

The SEC said that under the settlements the companies (listed below) agreed to pay individual civil penalties of between $19,500 and $1.39m.

The firms were each charged in connection with employment, separation or other agreements that violated a rule that prohibits any actions to impede individuals communicating with the regulator directly about possible violations of securities laws, the SEC said in its press release.

“Ensuring that potential whistleblowers can communicate directly with the Commission is a critical part of the SEC’s oversight mandate,” said Creola Kelly, Chief of the SEC’s Office of the Whistleblower.

The fines

The seven public companies that settled with the SEC have all worked toward remediation, including changing the agreements at issue, the SEC said.

The seven firms are:

• Acadia Healthcare Company, Inc, agreed to pay a $1,386,000 civil penalty;
• a.k.a. Brands Holding Corp agreed to pay a $399,750 civil penalty;
• AppFolio, Inc, agreed to pay a $692,250 civil penalty;
• IDEX Corporation agreed to pay a $75,000 civil penalty;
• LSB Industries agreed to pay a $156,000 civil penalty;
• Smart for Life, Inc agreed to pay a $19,500 civil penalty; and
• TransUnion agreed to pay a $312,000 civil penalty.

A spokesperson for TransUnion said the firm cooperated with the SEC’s inquiry and is voluntarily making changes to ensure employees understand their rights and responsibilities.

The Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 amended the Exchange Act by adding Section 21F, “Securities Whistleblower Incentives and Protection.”

The SEC then adopted Rule 21F-17, which provides in relevant part: “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.”

Related cases

Earlier this month, the SEC announced settled charges against three affiliated registrants: SEC-registered broker-dealer Nationwide Planning Associates, Inc; investment adviser NPA Asset Management, LLC; and state-registered investment adviser Blue Point Strategic Wealth Management, LLC. The alleged violations revolved around impeding brokerage customers and advisory clients from serving as whistleblowers and being able to effectively report securities law violations to the SEC.

In September last year, the SEC announced settled charges against Monolith Resources LLC, a privately held energy and technology company, for using employee separation agreements that violated the whistleblower protection rules. Two weeks later, it announced a settlement order with CBRE, Inc, the Dallas-based commercial real estate services and investment firm and a subsidiary of publicly traded CBRE Group, Inc, for using an employee release that violated the SEC’s whistleblower protection rule.

And in February 2023, the SEC charged Activision Blizzard Inc, a video game developer and publisher, for requiring in its separation agreements that former employees “notify the company if they received a request from a government administrative agency in connection with a report or complaint.”

These enforcement actions should serve yet another reminder to businesses to fully review all employee agreements, codes of conduct, employee manuals, and all training materials addressing the reporting of misconduct, for red flags of possible whistleblower protection violations. This includes carefully reviewing templates used by Human Resources and other units, which could be a primary factor in some of these cases.

And, now that we are on the topic of reusing material, anything your generative AI tool produces must be reviewed against regulatory mandates.