On Friday, September 29, 2023, the Securities and Exchange Commission (“SEC”) issued a cease and desist and $10 million civil money penalty against D.E. Shaw & Co, L.P. (“DESCO”). DESCO is a registered investment advisor that has routinely used employment agreements and termination agreements containing certain confidentiality restrictions.
In 2011, in the wake of the 2008 financial meltdown, the SEC implemented new rules pursuant to the Dodd Frank Act designed to encourage whistleblowers to report violations of the securities laws. Exchange Act Rule 21F-17 expressly prohibits any action designed to impede an individual from communicating with the SEC, including through enforcement of a confidentiality agreement. The SEC has brought numerous actions for violations of Rule 21F-17 in the intervening years.
DESCO’s employment agreements included confidentiality provisions prohibiting any unauthorized disclosures of confidential information outside of DESCO “except as may be required by any applicable law or by order of a court of competent jurisdiction, a regulatory or self-regulatory body, or a governmental body.”
Likewise, DESCO required many departing employees to sign termination agreements to receive any severance payments. These termination agreements reemphasized the confidentiality obligations in the employment agreements and required employees to represent that they had not made any complaint regarding DESCO or its affiliates with any governmental agency, department, or official.
According to the SEC, these provisions had the overall effect of making it more difficult for employees to make whistleblowing complaints by creating a fear of violating the confidentiality provisions in their employment agreements and by conditioning significant severance payments on their affirmation that they had not filed any complaints with the SEC or other governmental agencies. The SEC found that these hurdles to making whistleblowing complaints are in direct violation of Rule 21F-7 and imposed a significant financial penalty against DESCO based, in part, on the finding that the violations continued from 2011 through 2023 despite indications that DESCO knew it was not in compliance with Rule 21F-7. Specifically, DESCO updated its Internal Reporting Policy, Code of Ethics, and Employee Handbook in 2017, indicating some awareness of the whistleblowing rules, but failed to update its template employment agreement or termination agreement for several more years.
If your company imposes confidentiality requirements on its employees, whether in employment agreements, handbooks, severance agreements, or in other documents directed at employees or consultants, it should look to make sure they contain express language permitting disclosures to the SEC for whistleblowers. The SEC’s (costly for DESCO) reminder to employers of the restrictions on confidentiality clauses is in addition to the NLRB’s recent pronouncements on the topic as well as Colorado’s new POWR Act, which takes aim at these same provisions.