SEC’s Expanding Interpretation of Rule 21F-17(a) and Its Implications for Businesses

Introduction

In a rapidly evolving regulatory landscape, companies must stay informed about new legal standards and enforcement actions. Recently, the Securities and Exchange Commission (SEC) has escalated its focus on Rule 21F-17(a) of the Securities Exchange Act of 1934, which prohibits actions that hinder individuals from reporting potential violations to the SEC.

A recent wave of enforcement actions highlights the need for businesses to review their policies, agreements, and practices to avoid inadvertently violating this rule.

Recent Settled Actions: A Case Study

On September 9, 2024, the SEC announced settlements with seven public companies for violations of Rule 21F-17(a). These companies—Acadia Healthcare Company, a.k.a. Brands Holding Corp., AppFolio, IDEX Corporation, LSB Industries, Smart for Life, and TransUnion—were charged with having language in their agreements that impeded whistleblower activities. The SEC found that these companies had employee agreements containing clauses that could discourage whistleblowers from coming forward, even when explicit language allowed employees to participate in whistleblower programs.

Although the companies did not admit to wrongdoing, they agreed to pay penalties ranging from $19,500 to $1.3 million, with the total fines exceeding $3 million. The penalties were based largely on the number of agreements deemed to impede whistleblowers, demonstrating that the SEC is scrutinizing how company policies may inadvertently violate Rule 21F-17(a).

Key Findings from the SEC’s Enforcement

The enforcement actions shed light on critical aspects of Rule 21F-17(a) violations. In the agreements reviewed, language requiring employees to waive their right to recover monetary awards from whistleblower activities was seen as a barrier to reporting, even though the agreements explicitly allowed whistleblowing itself. The SEC has repeatedly emphasized that such language can create a chilling effect, which is enough to constitute a violation, regardless of whether the companies actually enforced those provisions.

The presence of the restrictive language alone was sufficient to warrant penalties.

Interestingly, in these cases, the SEC noted that no companies had enforced the problematic provisions, nor were there any reports of individuals refusing to speak to authorities. However, the presence of the restrictive language alone was sufficient to warrant penalties. This underscores the SEC’s broad interpretation of what constitutes an impediment to whistleblower activities.

Broader Implications: Extending Beyond Employee Agreements

One of the most notable aspects of these recent cases is that the SEC’s interpretation of Rule 21F-17(a) extends beyond traditional employee agreements. For example, the settlements with AppFolio and TransUnion involved consulting service agreements. The inclusion of consulting agreements in the SEC’s whistleblower enforcement activity highlights that the rule applies beyond the employer-employee relationship, covering agreements with a wide range of individuals, including customers and investors.

This broader interpretation is not entirely new. Earlier in 2024, the SEC reached an $18 million settlement with J.P. Morgan Securities LLC related to whistleblower impediments in customer agreements. This precedent, along with the inclusion of consulting agreements in recent cases, should prompt companies to evaluate all contracts and policies that could potentially discourage any form of whistleblowing, regardless of whether those contracts are with employees, contractors, or external stakeholders.

The Importance of Proactive Review and Compliance

Given the SEC’s aggressive stance on whistleblower protections, companies should act now to ensure compliance with Rule 21F-17(a). This involves conducting a thorough review of all agreements, including:

• Employment agreements: Covering onboarding, separation, and retention agreements.
• Consulting and contractor agreements: Often overlooked but subject to Rule 21F-17(a) enforcement.
• Settlement agreements: Terms that involve confidentiality clauses or waivers of whistleblower awards.
• Policies and manuals: Including employee handbooks, compliance manuals, and codes of conduct.

It is critical that these documents explicitly allow whistleblowing activities without imposing restrictions that could be perceived as deterring individuals from reporting violations. Companies must also ensure that whistleblowers can obtain monetary awards if eligible under whistleblower programs.

Summary

The SEC’s recent enforcement actions reinforce its commitment to protecting whistleblowers and ensuring that companies do not take any action, even inadvertently, to impede whistleblowing activities. The broadening scope of Rule 21F-17(a) means that companies must carefully review all agreements, not just those directly related to employees, but also those involving consultants, customers, and investors. With penalties climbing and enforcement widening, a proactive approach to compliance is crucial.

Consulting legal counsel and revising agreements and policies where necessary is the best course of action to avoid costly fines and ensure alignment with SEC expectations. Businesses should view these enforcement actions as a wake-up call, underscoring the importance of fostering a corporate culture that supports transparency and accountability.