On September 29, the SEC settled an administrative proceeding with investment adviser D.E. Shaw regarding Shaw’s violation of whistleblower protection rules. This settlement demonstrates the SEC’s determination to prevent employers from impeding employees and former employees from reporting misconduct.
Rule 21F-17(a) of the Securities Exchange Act of 1934 prohibits taking any action to impede an individual from communicating directly with the SEC staff about a possible securities law violation. Unfortunately, Shaw did the exact opposite. From 2011 through 2023, it required new employees to sign agreements prohibiting them from disclosing confidential information to anyone outside the company without its authorization unless required by law or court order. In addition, according to the SEC’s order, Shaw made it a condition for departing employees to receive deferred compensation, sometimes worth millions of dollars, to sign releases stating that they had not filed any complaints with any governmental agency, department, or official. Shaw did start including whistleblower protection language in its employment agreements in 2019 and in its releases in 2023, but only after the SEC’s investigation had begun.
These breaches of the whistleblower protection rule were overt and obvious. I suspect other employers are using more subtle means to discourage employees from reporting misconduct. It’s a bad practice that the SEC and other regulators frown upon. The solution is to encourage a culture that gives employees confidence that when they raise concerns they will be taken seriously and investigated honestly. And companies should have strong controls in place that let them do just that. That’s the best way to lessen the chance of winding up in the SEC’s crosshairs, either for discouraging whistleblowing, or for a substantive violation of the securities laws.
