SEC Whacks Whistleblower Waivers Again

Well we didn’t expect that so soon: for the second time in less than a week, the Securities and Exchange Commission has fined a company for trying to strong-arm employees into waiving whistleblower rewards for reporting potential misconduct.

This time around the target is Health Net, an insurer based in Los Angeles. The company agreed to pay $340,000 and dump its whistleblower waiver clause, which it had been inserting into employee severance agreements since 2013. That language, the SEC said, violates Rule 21F of the Securities Act—the rule that allows employees to report potential misconduct directly to the SEC, and win rewards up to 30 percent of any damages the agency collects thanks to the tip.

Last week the SEC fined Blue Linx Corp., an Atlanta building products distributor, $265,000 for the same offense. That was the first time we saw the definition of “pre-taliation” expanded to include waivers of whistleblower rewards—although, clearly, the SEC had at least Health Net already in the pipeline. There may be more.

Most of the lessons compliance officers can glean from the Health Net case are the same as what I discussed last week about Blue Linx. The particulars for Health Net seem to involve more employees who signed agreements with these clauses (600 at Health Net, compared to less than 200 at Blue Linx), but broadly speaking both companies were trying to achieve the same end: discourage employees from talking to regulators about potential misconduct.

whistleblowerThe main lesson, therefore, is still the same: do your employee agreements impede people from reporting misconduct? If the answer is “yes,” then you have a problem that needs to be fixed.

Potentially the timing of these two enforcement actions is just coincidence. Prudent compliance officers, however, should assume the worst—that the SEC is sending a specific message, and you should get on the phone with the HR and legal departments pronto to be sure you don’t have similar language in your own contracts.

The other point to remember is that while retaliation is an action that somebody does, pre-taliation is a condition that organizations create. The result, however, is the same: you discourage employees from speaking up about misconduct. A best-in-class compliance program should always strive for a speak-up culture—even if employee decides to speak up to regulators instead of you.

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