The U.S. Securities and Exchange Commission (SEC) is making good on its promise to reign in employers’ use of employment agreements that restrain employees from freely disclosing information to the SEC about securities fraud and other wrongdoing. The March 30 securities filing of Sandridge Energy, Inc., reveals a recent example of the SEC’s efforts on this front.

Sandridge and the SEC

In the filing, Sandridge discussed its investigation into allegations that the company fired an employee after he objected to the levels of oil and gas reserves disclosed in Sandridge’s previous public filings. These allegations prompted the SEC to issue a subpoena to Sandridge seeking employment-related agreements. Discussions between Sandridge and the SEC followed, resulting in Sandridge sending “corrective letters” to employees who had entered into agreements with Sandridge that “may have been inconsistent with SEC rules.”

Rule 21F-17(a)

What SEC rule might Sandridge have violated with its employee contracts? Rule 21F-17(a) provides that no employer may take any action—including the enforcement of confidentiality agreements—to impede an individual from reporting a securities law violation to the SEC. Though Sandridge’s annual filing does not specify any particular agreements, a form Separation Agreement attached as an exhibit to its annual filing provides the likely culprit. That agreement template includes a provision requiring departing employees to promise they “will not at any time in the future voluntarily contact or participate with any governmental agency in connection with any complaint or investigation pertaining to the Company, except to the extent required by applicable law.” This provision almost certainly runs afoul of the spirit and text of the SEC rule aimed at preventing such contractual disincentives to sharing pertinent information with the SEC.

SEC Is “Actively Looking” for Rule 21F-17(a) violations

Sandridge’s corrective letters modifying its agreements, likely at the strong urging of SEC staff, represents the latest in a trend of SEC moves against companies trying to skirt Rule 21F-17(a). The chief of the SEC’s Office of the Whistleblower, Sean McKessy, warned employers in 2014 to avoid the very types of behavior engaged in by Sandridge. Mr. McKessy made clear that the SEC is “actively looking for examples of confidentiality agreements, separat[ion] agreements, employee agreements that . . . in substance say ‘as a prerequisite to get this benefit you agree you’re not going to come to the commission or you’re not going to report anything to a regulator.’”

In 2015, the SEC issued a cease and desist order against KBR Inc. related to the company’s practice of forcing employees to sign restrictive confidentiality agreements. KBR also agreed to pay a $130,000 penalty to settle the SEC’s charges that it violated Rule 21F-17(a).  Time will tell if Sandridge is required to pay a similar sanction.

SEC Whistleblower Rules

The SEC’s increased enforcement of Rule 21F-17(a) is part of its continuing efforts to encourage and increase participation in its whistleblower program. The program, established by the Dodd-Frank Act of 2010, provides for a whistleblower to receive between 10 and 30 percent of the amount the SEC recovers from wrongdoers if the SEC’s enforcement action was triggered by the whistleblower’s information. The enforcement must bring in more than $1 million in order to trigger the whistleblower reward.

Rule 21F-17(a) is an important tool protecting employees’ ability to freely report information to the SEC and receive their rewards under the whistleblower program. The rule addresses the employer practice of aggressively crafting employment agreements to discourage employees from submitting whistleblower tips. These suspect provisions can appear in agreements signed by employees at the beginning of employment or in separation agreements executed at the end of employment conditioning severance payments on promises not to alert the SEC about the company’s activities.

Some employer-drafted provisions which run afoul of Rule 21F-17(a) can attempt to completely prohibit an employee from volunteering any information to the SEC. Others try a less direct route by seeking to have the employee forego any financial awards the employee receives from a whistleblower reward program, thereby removing much of the incentive to submit information in the first place. Either way, the SEC is on the lookout for these sorts of agreements and is actively seeking to discipline the employers that implement them. Regulatory bodies in different fields are taking comparable actions and proposing similar rules as 21F-17(a) to protect whistleblowers from these sorts of unfavorable provisions.

The SEC’s actions against companies such as Sandridge and KBR reflect its continued commitment to the whistleblower program. Employees that do have pertinent information to share with the SEC should not feel intimidated by the existence of employment agreements seeking to curb their rights. Katz Banks Kumin has been leading the fight against such tactics and will continue to do so.