SEC rules that provisions discouraging current or former employees from raising concerns violate securities law
This week the SEC hit California-based health insurance provider Health Net with a $340,000 fine for illegally using severance agreements requiring outgoing employees to waive their ability to obtain monetary awards from the SEC's whistleblower program.
According to the SEC's order, Health Net violated federal securities laws when it asked departing employees to waive their ability to file applications for SEC whistleblower awards as a condition of receiving severance payments and other post-employment benefits.
"Financial incentives in the form of whistleblower awards, as Congress recognized, are integral to promoting whistleblowing to the Commission," said Antonia Chion, associate director of the SEC Enforcement Division. "Health Net used its severance agreements with departing employees to strip away those financial incentives, directly targeting the Commission's whistleblower program."
SEC Rule 21F-17 specifically prohibits employers “from taking measures through confidentiality, employment, severance or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC.”
Health Net added the provision in August 2011 after the SEC adopted a rule to prohibit any action to impede someone from communicating with the SEC about possible securities law violations. Health Net removed the SEC-specific language from its severance agreements in June 2013, but retained restrictive language that removed the financial incentive for reporting information until finally amending the agreements to strike all such restrictive language last year.
Should Have Known Better
It's not the first time the SEC has pursued a company for discouraging whistleblowing. In April of last year the Commission alleged that engineering firm KBR Inc. violated the rule by implementing employee confidentiality agreements that "potentially discouraged" employees from becoming whistleblowers by reporting misconduct to the SEC. KBR agreed to pay a $130,000 penalty to settle the SEC's charges and the company voluntarily amended its confidentiality statement by adding language making clear that employees are free to report possible violations to the SEC and other federal agencies without KBR approval or fear of retaliation.
Health Net consented to the SEC's cease-and-desist order without admitting or denying the findings. The company agreed to make reasonable efforts to inform former employees who signed the severance agreements between 2011 and 2015 that Health Net does not prohibit former employees from seeking whistleblower awards from the SEC. The company has also agreed to certify to Enforcement Division staff that it has complied with this undertaking.