Can I Submit a Tip to the SEC Despite a Confidentiality Agreement?

Whistleblowers play a vital role in the world of financial compliance and regulation. They are the insiders who can disclose detailed information about fraud, misconduct, or wrongdoing within their organization. Without whistleblowers, these frauds may continue for many years, if not decades, destroying the marketplace and harming investors.

This article aims to explore an important question that arises for these individuals, particularly in the context of the U.S. Securities and Exchange Commission (SEC): Can an SEC whistleblower submit a tip if they have agreed to a confidentiality provision in an employment or severance agreement?

The SEC Whistleblower Program was established by Congress to incentivize individuals to come forward and report possible violations of the federal securities laws.

This program, bolstered by provisions within the Dodd-Frank Wall Street Reform and Consumer Protection Act, provides substantial protections and monetary rewards for whistleblowers, should their information lead to a successful enforcement action.

During the fiscal year 2022, the Commission dispensed roughly $229 million across 103 awards. This marked FY 2022 as the second most lucrative year in terms of total monetary value and quantity of awards granted by the Commission. From the inception of the program, the SEC has disbursed over $1.3 billion via 328 awards to informants whose crucial information contributed to the triumph of enforcement actions by the SEC and other agencies.

Often, employees are asked to sign confidentiality agreements or non-disclosure agreements (NDAs) as a part of their employment contracts or severance agreements. These documents may purportedly aim to protect proprietary company information, trade secrets, and other sensitive data. However, they are often designed to restrict whistleblowers from reporting violations of law to government regulators. This can create a “chilling effect” and uncertainty for potential whistleblowers who may worry about legal repercussions of being accused of breaching such agreements.

Introduced under the auspices of the Dodd-Frank Act, SEC Rule 21F-17 prohibits any action that impedes someone from communicating directly with the SEC and other regulators about a potential securities law violation. This includes enforcing, or threatening to enforce, a confidentiality agreement that impedes communications with the SEC and other government agencies, or which restricts other activities that are protected by law.

The SEC has shown its commitment to uphold this rule by penalizing firms that attempt to stifle whistleblowing through restrictive language in their confidentiality agreements. This stance has been seen as a strong message to companies that attempts to muzzle potential whistleblowers will not be tolerated.

Despite protections offered by the SEC under Rule 21F-17, whistleblowers may still feel reluctant coming forward out of fear of retaliation. It’s important to note that while the SEC provides protections against retaliation under certain conditions, these may not cover all scenarios, and some risk may still be involved, including costly lawsuits, being blacklisted, emotional and mental stress, and other forms of adverse employment actions.

If you are considering blowing the whistle on potential securities law violations, it’s essential to seek professional advice. An attorney experienced in SEC matters can provide valuable guidance to help you navigate your particular concerns. They can help interpret the nuances of your confidentiality agreement, evaluate potential risks, and formulate a plan of action. Remember, the law is complex and is often updated, so staying abreast of current regulations with the help of a legal professional is essential.