House Members Demand SEC Address Corporate Anti-Whistleblower Practices

Yesterday, eight Democratic members of the House Committees on Financial Services and Oversight and on Government Reform sent a letter to U.S. Securities and Exchange Commission Chair Mary Jo White, demanding she address the chilling effect of corporate anti-whistleblower practices.

In their letter to SEC Chair Mary Jo White, Financial Services Ranking Member Maxine Waters (D-CA) joined with Oversight and Government Reform Ranking Democrat Elijah Cummings (D-MD) and six others to express concern about reports of the use of overly restrictive nondisclosure agreements and other employment arrangements that serve to deter whistleblowers. The practice, they assert, could serve as a threat to the effectiveness of the SEC’s Whistleblower Program, created under the Dodd-Frank Act. Kohn, Kohn and Colapinto partners addressed this issue in June with their blog post, “We Must Stop Illegal Gag Orders.” They stated:

“One of the most destructive tools used to silence whistleblowers are non-disclosure agreements (often found in employment contracts and severance agreements) which prohibit employees from disclosing fraud and other crimes to law enforcement agencies. Today’s Washington Post story, “Workplace secrecy agreements appear to violate federal whistleblower laws,” exemplifies the problems faced by employees in every sector of the economy who are required to sign these gag orders in order to obtain jobs or badly needed severance payments.”

In addition, Financial Industry Regulatory Authority recently implemented written guidance to remind firms that any settlement agreement, and other documents, that include provisions that “gag” parties from communicating with the SEC, FINRA, or any federal or state regulatory authority regarding a possible securities law violation,” is a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).

The SEC’s Office of the Whistleblower Protection has seen significant success in just the few years since it was launched, with more than 6,000 whistleblower tips, complaints, and referrals sent to the SEC from every state and 55 countries around the world. Moreover, in just the last fiscal year, 139 enforcement judgments and orders have been issued. More than 3,200 tips were delivered to the U.S. Securities and Exchange Commission in 2013, up 7% from the year before. In September 2014, the SEC program paid out a record award of $30 million for information regarding an ongoing investment fraud which the agency says would have been “difficult to detect” with information from the whistleblowers. In addition, Ms. White, just this week, commented on the “enormously successful” SEC whistleblower rewards program stating that more has been achieved through the SEC whistleblower reward program than could ever have been achieved without it.

The Committee members expressed concern about the continued success of the program due to the “growing body of anecdotal evidence describing retaliation through litigation and on-the-job harassment” which could serve to chill potential whistleblowers from coming forward. The lawmakers stated that such a chilled environment is a danger to the success of the SEC Whistleblower Office. They asked for the SEC to inform the Committee of the efforts taken by the Commission to address these issues.