Pub. 7 2016 Issue 3

www.wvbankers.org 12 West Virginia Banker A recent order issued by the United States Securities and Ex- change Commission (SEC) may cause companies and banks subject to SEC regulation to have their severance and confi- dentiality agreements scrutinized, and potentially found to be to be in violation of whistleblower laws. Without appropriate review and revision of such agreements, this development could subject your bank to monetary penalties and other actions by the SEC. On August 10, 2016, the SEC issued an order pursuant to Section 21C of the Securities and Exchange Act of 1934, imposing a $265,000 penalty and entering a cease-and-desist order against BlueLinx Holdings Inc., stemming from language in BlueLinx’s severance, separation, and settlement agreements. The SEC claimed that the flagged language violated the whistleblower provisions of Rule 21F-17 of the Exchange Act. Rule 21F-17, amended on July 10, 2010, via the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.” Several of BlueLinx’s agreements contained clauses that required employees to provide written notice to the company before making any disclosures of confidential information, or to obtain written consent from the company before making a disclosure, without providing an exemption for voluntary disclosures to the SEC. As such, the SEC asserted that these agreements dissuad- ed the employees from reporting violations to the Commission. Examples of the language flagged by the SEC included: • a requirement that an employee contact the legal depart- ment in writing for written clarification of “confidential information,” if the employee was uncertain if informa- tion was considered confidential; • a clause prohibiting an employee from divulging confiden- tial information “without the prior written consent of the company, or as may otherwise be required by law or legal process;” • a statement that an employee could disclose confidential information as required by law, but adding a requirement that the employee must first provide the company’s legal department with prompt written notice of such disclosure in order to permit the company to seek a protective order; and • a requirement that an employee waived the right to any type of monetary award for disclosing information to the SEC. Because the SEC found that these provisions impeded participa- tion by BlueLinx employees in the SEC’s whistleblower program and removed the “critically important” financial incentives in- tended to encourage participation, the SEC instituted an adminis- trative proceeding against BlueLinx. Without admitting or denying the SEC’s findings, BlueLinx en- tered into a settlement agreement with the SEC that required it to pay a $265,000 penalty, contact former employees to clarify that BlueLinx does not prohibit former employees from communicat- ing with the SEC or accepting whistleblower awards, and include a provision in all of its future agreements that makes clear that no portion of any agreements limits an employee’s right to file charges or complaints with government agencies. The SEC’s order could have a significant impact on current sever- ance and confidentiality agreements used by banks and compa- nies that are under the Commission’s regulatory oversight. This order further indicates that the SEC is beginning to look at such agreements with more scrutiny, and intentional or unintentional attempts by companies or banks to impede SEC whistleblowing incentives could result in severe penalties. If your bank is subject to SEC regulation and your agreements contain any terms or limitations that are similar to the language flagged by the SEC in its recent order, it is imperative that you take action to remove or modify such language immediately. n Whistleblower Incentives and Confidentiality: Recent SEC Ruling Impacts Severance and Settlement Agreements By Pamela Ferrell, Bowles Rice LLP Pamela J. Ferrell is an attorney in the Parkersburg office of Bowles Rice LLP. Ms. Ferrell focuses her practice in the areas of litigation and labor and employment law. Should you require more information, please feel free to contact the author directly. She can be reached at (304) 420-5590 or by e-mail at pferrell@bowlesrice.com.