SEC Fines Company that Used Severance Agreements to Discourage Whistleblowing

Last week, the U.S. Securities and Exchange Commission reached at $265,000 settlement with BlueLinx Holdings Inc.  The SEC alleged that BlueLinx violated federal securities law by using severance agreements that required outgoing employees to waive their rights to SEC whistleblower awards.  As we previously reported here, the SEC has taken action against other employment agreements that arguably impair whistleblowing activity in the past.

In 2011, the SEC adopted Rule 21F-17 that prohibits “any action to impede an individual from communicating directly with the Commission staff.”  Even though BlueLinx’s contracts did not prohibit former employees from reporting violations to the SEC, the contracts did—according to the SEC— “impede” reporting by denying the employee the incentive of a whistleblower award.

When announcing the settlement, SEC officials made clear that the agency takes a broad view of Rule 21F-17’s protection for potential whistleblowers.  Jane Norberg, Acting Chief of the SEC’s Office of the Whistleblower, added, “Companies simply cannot undercut a key tenet of our whistleblower program by requiring employees to forego potential whistleblower awards in order to receive their severance payments.”

Although the company did not admit or deny the findings, the company agreed to revise its severance agreements in the future  and to make reasonable efforts to contact former employees who had previously executed the severance agreements at issue.

This settlement serves as an important reminder that the SEC takes a broad view of what constitutes “imped[ing]” a whistleblower report, a point companies should take this into account when reviewing their employee termination policies.