SEC Penalizes Tech Company for Violating Rule 21F-17

January 18, 2017
Matthew LaGarde

The U.S. Securities and Exchange Commission (SEC) announced last month that it was assessing a $180,000 penalty against Virginia-based technology company NeuStar Inc. for requiring its employees to sign severance agreements that violated SEC rule Rule 21F-17, which “prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC.” The penalty marks a continuation of the SEC’s ongoing efforts to curb the use of employment or severance agreements to prevent or dissuade employees and former employees from reporting their employers’ wrongdoing to the government.

About the NeuStar Case

Beginning in 2008 and continuing through 2015, Neustar entered into severance agreements with hundreds of employees leaving the company that included a “nondisparagement clause” containing the following language:

I agree not to engage in any communication that disparages, denigrates, maligns or impugns NeuStar . . .  including but not limited to communications with . . . regulators (including but not limited to the Securities and Exchange Commission[)] . . . .

The agreements went on to provide that if the employee breached the nondisparagement clause, she would be responsible for reimbursing the employer all but $100 of any severance compensation she received.

As the SEC made clear in its Order, agreements like the one Neustar required departing employees to sign violated Rule 21-F-17 because they impeded whistleblowers from reporting securities violations to the SEC. To remedy its actions, Neustar agreed to take the following steps:

  1. Revise its severance agreement to remove “any reference to ‘regulators’ from its prohibition on ‘disparaging’ communications and replacing it with language affirmatively advising former employees of their right to contact regulators with concerns about potential legal or regulatory violations”;
  2. “[C]ontact former NeuStar employees who signed a severance agreement at any time between August 12, 2011, and May 21, 2015, and provide them with an Internet link to the Order and a statement that NeuStar does not prohibit former employees from communicating any concerns about potential violations of law or regulation to the Securities and Exchange Commission”; and
  3. Pay the SEC $180,000 as a penalty for its violation of the Rule.

The Importance of Rule 21F-17

Katz Banks Kumin has been at the forefront of the fight against Rule 21F-17 violations for years. In May 2013, firm partners Debra Katz and David Marshall wrote a letter to the SEC and an accompanying op-ed in Law360 in which they set forth the importance of the issue. As Ms. Katz and Mr. Marshall explained, “the inclusion of such terms in severance agreements and settlement agreements has a chilling effect on individuals who would provide information to the SEC about potential securities violations.” They then called on the SEC to make clear that these sorts of actions violate Rule 21F-17 and will result in consequences for employers who continue to engage in such violations.

The SEC’s actions in recent years suggest that Ms. Katz and Mr. Marshall’s voices were heard, and the result has had a meaningful impact. For years, it was common for the first draft of severance agreements to include a clause similar to the one used by NeuStar, which would have dissuaded an employee from reporting violations to the SEC. More recent draft severance agreements have omitted such restrictions or provided explicit carveouts clarifying employees’ rights to report wrongdoing to the government. The effect of this is two-fold: (1) employees who do not retain experienced counsel can identify and seek to remove such provisions from their severance agreements, creating a less chilled environment for reporting securities violations; and (2) employees who do retain counsel will not have their attorneys’ time and energy wasted fighting to remove a provision that should never have been included in the first place. The SEC’s actions are therefore making a tangible positive impact on employees’ lives.

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