SEC Strikes Again on Pre-taliation

The Securities and Exchange Commission took another whack at corporate pre-taliation agreements Monday, fining a Virginia technology company $180,000 for imposing severance agreements that forbid departing employees from talking to the SEC.

The company, NeuStar Inc., had used the agreements with at least 246 employees from 2011 into 2015, according to the SEC. The agreements were framed as non-disparagement clauses that barred employees from engaging with the SEC and other regulators “in any communication that disparages, denigrates, maligns or impugns” the company.  Former employees could be compelled to forfeit all but $100 of their severance pay.

This is the third pre-taliation enforcement action we’ve seen from the SEC this year, and in the grand scheme of things this NeuStar sanction isn’t terribly new. The company never actually tried to enforce these overly restrictive non-disparagement clauses, and amended them promptly as soon as the SEC told the company that its language violates whistleblower protection rules. That’s pretty much what happened with the other two pre-taliation offenders earlier this year.

pre-taliationOn the other hand, the NeuStar case does seem to include the first instance of an employee afraid to speak with the SEC specifically because of the pre-taliation clause. We don’t know much; the SEC complaint only says, “At least one former NeuStar employee was impeded by the non-disparagement cause from communicating with the Commission.”

If NeuStar never actually enforced its pre-taliation clause, and yet we still have that impeded employee, consider what that means: that the employee found the language intimidating unto itself. The mere specter of risking his or her promised severance pay was enough to make said employee decide not to report whatever misconduct he suspected or that the SEC might have been curious about.

Pre-taliation 101

I have said it before, and I fear I will say it again. Do your employment contracts impede people from reporting misconduct?

That’s really the only question you need to ask about pre-taliation risk. If the answer is “yes” then you have a problem that needs to be fixed. If you don’t fix the problem, the SEC will fix it for you.

The good news is that so long as you haven’t actually enforced the pre-taliation clause, the remediation involved is straightforward. For example, NeuStar had to amend its contract language to say the following:

In addition, nothing herein prohibits me from communicating, without notice to or approval by NeuStar, with any federal government agency about a potential violation of a federal law or regulation.

Now it must make reasonable effort within 60 days to find the 246 employees who had signed the original, offending severance contract; and alert them to the amended language and their newfound freedom to chat with the feds. (Plus the $180,000 fine, but NeuStar had $1.05 billion in revenue last year so that doesn’t seem like much of a sting.)

Pre-taliation might have seemed like a novel, and perhaps irritating, concept when the SEC first sanctioned a company for that offense in 2015. Nevertheless, it is also one of the unforced errors in corporate compliance; if you don’t want to risk a fine for it, do a sweep of your employment contracts and swap in more appropriate language—which the SEC even provides. Problem solved.

I’ll be much more interested to see how the SEC responds if it ever finds a company that has enforced its pre-taliation clauses to point of docking pay or pursuing litigation against a would-be whistleblower. I would not want to be the chief compliance officer at that company. This is not a complex problem to solve and the SEC has made is expectations crystal clear.

Update: One day after I wrote the above words, speculating about what sort of punishment the SEC would impose on a company using restrictive severance deals to stifle whistleblowers—the agency announced a sanction against an Oklahoma oil business that did precisely that.

Total pain: $1.4 million.

That amount is far larger than any pre-taliation case we have seen so far. I will have more about this case later, but for now, consider yourselves warned. The SEC means business.


  1. […] December 19, 2016 | SEC Strikes Again on Pre-taliation […]

  2. […] at the SEC might try to curtail the Office of the Whistleblower in 2017 and beyond. Pre-taliation seems like a valid enforcement issue to me under Rule 21F-17(a), which governs whistleblower protection. But it’s also just the sort of novel concept likely to […]

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