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SEC clamping down on anti-informant clauses in severance contracts

Chris Hamblin, Editor, London, 15 September 2016

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The US Securities and Exchange Commission has settled with a non-financial company over clauses it put into severance contracts for its employees. As the Dodd-Frank Act was its authority for doing so, however, this has repercussions for wealth management companies.

Between 2011 and late 2015, Health Net signed voluntary severance agreements (contracts between employers and former employees that lay out the rights and responsibilities of both parties incidental to the employees' departures) with employees who were leaving but, after the SEC announced its displeasure, amended those agreements to remove 'anti-whistleblower' language.

An explicit rule-breach

The Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 amended the Exchange Act by adding section 21F, entitled “Whistleblower Incentives and Protection.” The idea was to encourage tell-tales to come forward with their suspicions about securities laws being broken by offering them financial incentives and confidentiality. The US Congress explicitly noted the importance of financial incentives and in 2011, to please it, the SEC promulgated Rule 21F-17, which states that no person may take any action to impede an individual from talking directly to it about the possibility of a breach of securities law "including enforcing, or threatening to enforce, a confidentiality agreement...with respect to such communications."

The SEC was especially angry about a Health Net clause that expressly required an employee to "waive the right to file an application for award for original information submitted pursuant to section 21F Securities Exchange Act 1934."

Health Net has had to pay a civil money penalty of $340,000, without admitting to any wrondoing. About 600 employees signed agreements that contained the above language between August 2011 and June 2013.

Earlier on last month, the SEC signed another cease-and-desist order with another firm as part of a settlement. BlueLinx, like Health Net, declined to admit wrongdoing but paid a fine of $265,000 which went straight into the coffers of the US Treasury.

Change the name and do the same

In 2011 BlueLinx started using several forms of severance agreement in 2011. The firm gave these documents various names including "a confidential severance agreement and general release" (which it also called, in an odd phrase ostensibly borrowed from the science fiction genre, a "termination agreement"), "a separation agreement," "a settlement agreement" and "a full and final release of claims" (also going by the name of "a settlement agreement"), "a release agreement" and "a letter agreement" that was a severance agreement in the form of a letter to the departing employee. The vast majority of non-management employees who left BlueLinx during the relevant period and who received severance payments were asked to sign letter agreements, which from 2013 contained the same sort of restrictive language as the others had done from the start.

Some of the agreements prohibited the employees from sharing confidential information concerning BlueLinx that they had obtained on the job with others, unless compelled to do so by the law or some legal process or other. They also required employees either to provide written notice to the company or to obtain written consent from the company’s legal department before giving anyone confidential information as part of a legal process. No agreements contained any exemptions permitting employees to provide the SEC or other authorities with information voluntarily. One particularly malodorous example read: "Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency."

The right contractual wording

This is the somewhat eccentric wording that the SEC would prefer to see in every severance agreement, and the wording on which it insisted at BlueLinx in the cease-and-desist order: "Protected Rights. Employee understands that nothing contained in this agreement limits Employee’s ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission. Employee further understands that this agreement does not limit Employee’s ability to communicate with any government agencies or otherwise participate in any investigation or proceeding that may be conducted by any government agency, including providing documents or other information, without notice to the company. This agreement does not limit Employee’s right to receive an award for information provided to any government agencies."

BlueLinx has had to go through the humiliating process of contacting former employees who signed severance agreements in the last five years and provide them with an Internet link to the cease-and-desist order and a statement that BlueLinx does not prohibit them from talking to the SEC without its permission and accepting "whistleblower awards."

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