The Securities and Exchange Commission has sanctioned real estate giant CBRE for including pre-taliation clauses in employee severance agreements. This is the second pre-taliation enforcement action we’ve seen from the SEC in recent weeks, so apparently we have to review this nonsense yet again because it’s still a thing.
Pre-taliation, as all compliance professionals should know by now, is the bad habit of inserting clauses in employee contracts that forbid the employee from reporting misconduct concerns to regulators, or require employees to first seek permission from their employer before doing so, or require employee to forfeit any whistleblower awards, or some similar demand. Any such case is a violation of the Dodd-Frank Act’s whistleblower protection provisions, now enshrined as Rule 21F-17 at the Securities and Exchange Commission.
The SEC fired off a volley of enforcement actions against pre-taliation policies in 2016 to get its message across, and we’ve only seen a handful of cases in subsequent years. Moreover, almost all pre-taliation cases have been against small- or mid-sized public companies, not giants such as CBRE ($30.8 billion in annual revenue) which should know better.
So what happened? As described in the SEC settlement order, from 2011 into 2022, as a condition of receiving severance pay, CBRE employees had to sign a release attesting that they had not filed a complaint against CBRE with any federal agency. The specific problematic paragraph was this:
Employee represents and acknowledges that employee has not filed any complaint or charges against CBRE, or any of its respective subsidiaries, affiliates, divisions, predecessors, successors, officers, directors, shareholders, employees, representatives or agents (hereinafter collectively “agents”), with any state or federal court or local, state or federal agency, based on the events occurring prior to the date on which this agreement is executed by employee.
Apparently when the SEC launched its first pre-taliation enforcement wave seven years ago, CBRE did have some sense of the problem here, because after 2015 the company added this carve-out language:
Nothing in this agreement shall be construed to prohibit employee from filing a charge with or participating in any investigation or proceeding conducted by the Equal Employment Opportunity Commission, National Labor Relations Board, the Securities and Exchange Commission, the Department of Justice, or a comparable federal, state or local agency.
In today’s order, however, the SEC said that carve-out was not good enough. “Read together with the employee representation, this carve-out was prospective in application, and therefore did not remedy the impeding effect of the employee representation.”
The good news is that the SEC found no evidence that CBRE ever actually enforced the pre-taliation agreements employees were signing. (That has only happened once in all the pre-taliation cases we’ve seen, and the offending company ended up with a $1.4 million fine from the SEC.) The SEC also praised CBRE for swift and extensive remediation, including:
- Within one month of learning about the SEC investigation, revising all its U.S. severance agreement templates to assure compliance; followed by an audit of similar agreements worldwide, reviewing some 300 templates used by CBRE affiliates in 54 countries.
- Updating the CBRE Code of Conduct to add new language against pre-taliation.
- Training more than 50 members of the compliance team globally on the Rule 21F-17 language added to all relevant templates;
- Undertaking a mandatory re-certification process, where more than 100,000 employees worldwide certified that they had reviewed the updated Code of Conduct, and attested to their understanding that they were always free to bring concerns to regulators without any advanced notice to CBRE.
Put simply, CBRE had to revamp its Code of Conduct and employee agreement templates, and then inform all employees about what the new policies were. That sounds simple in theory, but in practice CBRE is a huge company with offices all over the world, so it was quite an expensive unforced error.
CBRE will pay $375,000 in a civil penalty, and as usual with SEC cases, neither admits to nor denies any of the statements in the SEC settlement order.
Another Enforcement Action
The SEC also brought an enforcement action recently against Monolith Resources, a privately held energy company in Nebraska. The issue here was another common pre-taliation scenario: Monolith’s employment agreement did say workers could bring concerns to regulators, but required them to forfeit any money they might receive in a whistleblower award.
The problematic severance agreements were in force from February 2020 until earlier this year. The agreements did expressly say, “Nothing in this agreement is intended to limit in any way your right or ability to file a charge or claim with any federal, state, or local agency,” but then dropped this language into the mix a few paragraphs further down:
These [governmental] agencies have the authority to carry out their own statutory duties by investigating charges or claims, issuing determinations, filing lawsuits in their own name or taking other action authorized by statute. You retain the right to participate in any such action, but not the right to recover money damages or other individual legal or equitable relief awarded by any such governmental agency.
Um, yeah. You can’t say that. When contacted by the SEC, Monolith promptly amended its agreements to say, “Nothing in this Agreement shall bar or impede in any way your ability to seek or receive any monetary award or bounty from any governmental agency or regulatory or law enforcement authority in connection with protected ‘whistleblower’ activity” — which, really, is what all employee severance agreements should say for any company subject to the Dodd-Frank Act.
Twenty-two Monolith employees signed the star-crossed severance agreements, although again, the SEC didn’t identify any specific instances of Monolith using that problematic language against whistleblowers. Without admitting or denying the SEC’s findings, Monolith consented to a cease-and-desist letter and also agreed to pay a civil penalty of $225,000.
The lesson here, as we’ve said numerous times before, is that pre-taliation is an unforced error in corporate compliance. The fix is relatively straightforward: amend your employment contracts to clarify that employees always have free discretion to report misconduct to regulators and to work with regulators in misconduct investigations however they choose.
Sure, for large companies like CBRE the mechanics of updating all those templates can be a hassle, but you do need to grapple with this challenge head-on. Otherwise your company is just asking for a run-in with the SEC — and as these cases demonstrate, the SEC will be happy to oblige.