News

SEC Expands Scope of Rule 21F-17 Enforcement in Sweep of New Settled Cases

By Milton Williams, Barry Rashkover, Paul Ryan, and Christopher Dioguardi

September 10, 2024

On September 9, 2024, the SEC announced seven enforcement actions charging public companies across a range of industries with violating Rule 21F-17(a) of the Securities Exchange Act of 1934, finding that they engaged in conduct that could impede employees and independent contractors from reporting possible securities law violations to the SEC.[1]  These enforcement actions are the most recent in a long line of actions charging violations of Rule 21F-17 over the past decade, and represent an expansion of how the SEC perceives the scope of the Rule.

The SEC’s New Rule 21F-17 Cases

Adopted pursuant to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, Rule 21F-17 prohibits, in relevant part, taking “any action to impede an individual from communicating directly with the SEC staff about a possible securities law violation.”[2]  As Creola Kelly, Chief of the SEC’s Office of the Whistleblower, stated in the SEC’s September 9 Press Release, “[e]nsuring that potential whistleblowers can communicate directly with the Commission is a critical part of the SEC’s oversight mandate.”^[3]

Monday’s settlements continue a decade-long SEC focus into companies’ use of confidentiality and nondisclosure agreements that might interfere with an individual’s ability to report possible securities law violations.  The SEC has brought more than 25 Rule 21F-17 actions since its first one in 2015.

Most of SEC Rule 21F-17 actions have concerned employment contracts and policies.  For example, in September 2023, a New York-based hedge fund adviser agreed to pay $10 million to settle SEC charges of Rule 21F-17 violations where it required (1) new employees to sign agreements that prohibited them from disclosing confidential information to third parties unless authorized by the firm or required by law and (2) departing employees to sign severance agreements affirming that the departing employee had not filed any complaints with the SEC.[4]  Nonetheless, the SEC foreshadowed Rule 21F-17 charges outside the employment context in January 2024 when it brought a Rule 21F-17 enforcement action against a broker-dealer where confidential settlement and release agreements with its retail clients in litigation did not permit the clients to voluntarily communicate with the SEC.  Gurbir S. Gewal, the SEC’s Enforcement Director, stated at the time “[w]hether it’s in your employment contracts, settlement agreements, or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing.”[5]

In the September 9 enforcement actions, for the first time, the SEC has brought Rule 21F-17 charges based on language in independent contractor agreements: two of the seven actions charged companies for including restrictive confidentiality language in consulting agreements.[6]  In those cases, the relevant companies “entered into . . . consulting agreements that prohibited individual contractors from voluntarily providing information about [the company]’s business operations to government agencies and required that these contractors notify [the company] of any legally compelled disclosure of such information.”[7]

Further, all seven of the public companies in the September 9 actions had entered into employment agreements that required employees to “waive their right to recover a monetary award for participating in an investigation by a government agency,” and it did not matter to the SEC that those agreements “expressly permitted participation in government whistleblower programs.”[8]  As such, they follow similar charges the SEC asserted last year in a case against a privately-held company.[9]

In each of the seven cases, the companies settled for civil penalties in the six and seven figure range, aggregating $3 million.  Significantly, the SEC credited each company’s cooperation and remediation when assessing the appropriate remedies.

Takeaways

The September 9 Rule 21F-17 enforcement actions include charges based on language in agreements with third-party vendors.  In this way, the SEC has expanded on its prior Rule 21F-17 enforcement actions.  In light of Monday’s Rule 21F-17 actions, companies should consider examining independent contractor agreements, in addition to employment contracts and policies, contracts with clients, and other confidentiality policies and agreements, to make sure the contracts and policies do not limit any individual’s right to voluntarily report potential securities violations and/or recover a monetary whistleblower award.

Disclaimer:

These materials contain attorney advertising.  Prior results do not guarantee a similar outcome and results depend upon a variety of factors unique to each circumstance.  WMHW provides this information as a service to clients and other friends for educational purposes only.  It should not be construed or relied on as legal advice, or to create a lawyer-client relationship.  Readers should not act upon this information without seeking advice from professional advisers.

[1] SEC Press Release No. 2024-118 (Sept. 9, 2024) (“September 9 Press Release”).

[2] 17 C.F.R. § 240.21F-17(a).

[3] September 9 Press Release.

[4] SEC Press Release No. 2023-213 (Sept. 29, 2023).

[5] SEC Press Release No. 2024-7 (Jan. 16, 2024) (emphasis added).

[6] See In the Matter of AppFolio, Inc., Exchange Act Release No. 100971 (Sept. 9, 2024); In the Matter of TransUnion, Exchange Act Release No. 100975 (Sept. 9, 2024).

[7] See In the Matter of AppFolio, Inc. at 3; In the Matter of TransUnion at 3–4.

[8] See, e.g., In the Matter of Acadia Healthcare Company, Inc., Exchange Act Release No. 100970, at 3 (Sept. 9, 2024); In the Matter of IDEX Corporation, Exchange Act Release No. 100972, at 3 (Sept. 9, 2024).  In one of the September 9 settlements, a company had also “entered into a severance agreement that required a departing employee to waive his right to file a complaint with any federal government agency.”  See In the Matter of a.k.a. Brands Holding Corp., Exchange Act Release No. 100969, at 3 (Sept. 9, 2024).

[9] See SEC Press Release No. 2023-172 (Sept. 8, 2023) (separation agreements required departing employees to waive their rights to monetary whistleblower awards).