On Friday, September 29, 2023, the Securities and Exchange Commission (the “SEC”) issued an order that censured D. E. Shaw & Co., L.P., a registered investment advisor in New York, and assessed a civil penalty of $10,000,000 following the SEC’s investigation of its practices with respect to its employment agreements and separation agreements. The remarkable order came close on the heels of two other SEC orders that impact language in separation agreements, confidentiality agreements, employment agreements with confidentiality provisions, Codes of Conduct and other similar documents. Notably, the SEC did not find that anyone was actually impeded from engaging in whistleblower activity; it was enough that the companies used agreements that the SEC found could impede such activity.
In the Matter of D. E. Shaw & Co, L.P., the SEC found that D. E. Shaw’s employment agreements and separation agreements raised impediments to whistleblowing for several reasons. First, its form employment agreements that were used from 2011-2019 included broad nondisclosure provisions and did not include adequate whistleblower protection language. Second, the firm’s separation agreements, under which employees released claims in exchange for post-termination payments, conditioned the post-termination payments on a representation that the employee had not filed any complaint or commenced any proceeding with any governmental agency. Third, D. E. Shaw issued exit letters to certain employees who departed voluntarily that reiterated that the nondisclosure provisions in their employment agreements that did not comply with Rule 21F-17 continued to be in effect. Fourth, certain employees who departed and who were subject to noncompetition agreements were required to execute the defective separation agreements or would be required to return any deferred compensation that had been paid along with attorney’s fees incurred by D. E. Shaw to recover such payment.
In March 2017, in response to several SEC enforcement actions charging violations of Rule 21F-17, D. E. Shaw notified its then-current employees via email that, notwithstanding anything to the contrary in any applicable employment agreement, confidentiality agreement or other firm policy or agreement, they had the ability to communicate with regulators and other governmental agencies regarding possible violations of law or regulation without notice to the firm. D. E. Shaw also updated its Internal Reporting Policy, Code of Ethics and Employee Handbook to include substantially similar language. However, D. E. Shaw waited over two years (until April 2019) to add whistleblower protection language to its employment agreements, and over six years (until June 2023) to add whistleblower protection language to its separation agreements. Taking into account D. E. Shaw’s remedial acts – revising its separation agreements in June 2023 and making reasonable efforts in September 2023 to notify former employees who signed a defective employment agreement or separation agreement that they were permitted to provide information and documents to and communicate with the SEC without notice or approval from D. E. Shaw – the SEC censured D. E. Shaw and imposed a penalty of $10,000,000.
The D. E. Shaw order followed two other SEC orders involving whistleblower protection language in agreements signed by employees – one against a large public company and the other against a private one.
In the Matter of CBRE, Inc., the SEC closely examined the company’s template separation agreement and determined that a representation that the employee had not filed any charges against the company prior to the last date of employment had an unlawful chilling effect on potential whistleblowers. CBRE required its employees to delay signing such agreements until the date of termination. By providing its employees with the separation agreements before the date of termination and requiring the representation on or after the date of termination, the SEC found that the representation required by CBRE impeded potential whistleblowers from coming forward with complaints. The SEC acknowledged that the agreement included a savings clause, which expressly provided that nothing in the agreement would be construed to prohibit the employee from filing a charge or participating in an investigation conducted by any government agency. The SEC, however, found that the savings clause was insufficient since it was “prospective in application and therefore did not remedy the impeding effect” of the employee representation. After learning of the SEC’s Rule 21F-17 investigation, CBRE commenced a comprehensive audit of its template agreements and policy documents (including its Standard of Business Conduct), modified all of the whistleblower protection language, rolled out a comprehensive Rule 21F-17 “toolkit” with edited and conforming templates and policies, and notified more than 800 former employees who had signed separation agreements that they had a right to communicate directly with the SEC regarding any potential violation of federal securities laws. While noting CBRE’s extensive efforts and cooperation in the SEC investigation, the SEC nevertheless ordered CBRE to pay a civil monetary penalty of $375,000.
In the Matter of Monolith Resources, LLC., the SEC scrutinized the separation agreements used by Monolith Resources, LLC, a privately held energy and technology company in Nebraska with fewer than 250 employees. Monolith also used separation agreements with express whistleblower protection language that made clear that the signatory was free to file a charge with any federal, state, or local agency. However, the form of separation agreement required the employee to agree to waive the right to individual monetary and injunctive relief without an exception that permitted the employee to recover awards or bounties for providing information to the SEC. Only 22 employees signed separation agreements with the defective language, and Monolith used reasonable efforts to notify them that they were not limited in their ability to obtain an incentive award from the SEC. Monolith also revised its template separation agreement to conform with the SEC’s interpretation of Rule 21F-17. Nevertheless, the SEC fined Monolith $225,000.
The SEC’s focus on whistleblower protection language is consistent with actions of other governmental authorities, including the National Labor Relations Board (the “NLRB”), the Equal Employment Opportunity Commission (the “EEOC”), and state legislatures. Earlier this year, we alerted clients that the NLRB concluded that provisions in separation agreements prohibiting disparagement of the employer and requiring confidentiality of the terms of the separation agreement unlawfully interfered with the separated employees’ rights under Section 7 of the National Labor Relations Act (“NLRA”). See NLRB Concludes that Separation Agreement Provisions Prohibiting Disparagement and Requiring Confidentiality of Agreement Terms Violate Employee Rights. The EEOC has also challenged non-disparagement, cooperation, and confidentiality clauses without adequate whistleblower protection language. In addition, states across the country, including California, New York, New Jersey, Washington, Oregon, and Illinois have been enacting laws that require various forms of express carveouts to non-disparagement and non-disclosure provisions relating to discussing or disclosing information about unlawful acts in the workplace, such as harassment, discrimination, or other conduct the employee has reason to believe is unlawful.
These recent developments are a call to action for all employers, both privately held and publicly traded, to review templates and policies that include confidentiality, non-disparagement, and/or release of claims provisions for compliance with evolving legal requirements and regulatory interpretations. Goodwin would be pleased to assist. Please contact any member of the Employment Practice for template review inquiries and Jonathan Hecht, Jennifer Chunias, Emily Unger or another member of Goodwin’s Securities & White Collar Litigation & Investigations Practice with questions about Rule 21F-17 compliance more generally.