The SEC says employee severance agreements included a ‘non-disparagement’ clause
Marketing technology company NeuStar has agreed to pay a $180,000 fine after the SEC accused it of having agreements with departing employees that violated a whistleblower protection rule.
The Dodd-Frank Act added Section 21F to the Securities Exchange Act with the aim of encouraging employees to report possible securities law violations by providing, among other things, financial incentives and confidentiality guarantees.
Under this, the SEC adopted Rule 21F-17, which in part states: “No 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.”
In the administrative proceeding at issue, the SEC says Sterling, Virginia-based NeuStar from around 2008 through roughly May 21, 2015 entered into voluntary severance agreements with employees who were leaving the company.
The agency says these severance agreements included a ‘non-disparagement’ clause via which the signing employee agreed not to engage in any communication that ‘disparages, denigrates, maligns or impugns NeuStar or its officers, directors, shareholders, investors, potential investors, partners, predecessors, subsidiaries, employees, consultants, attorneys or any others associated with NeuStar.’ The communications covered by this clause included those with bankers, reporters and regulators such as the SEC, the agency alleges.
A separate provision of each agreement required the former employee to acknowledge that a breach of the non-disparagement clause would cause ‘irreparable injury and damage to Neustar,’ and would require the former employee to forfeit all but $100 of any severance compensation they received, the SEC says.
According to the agency, the company continued to enter into voluntary severance agreements with departing employees, but started removing the alleged wording at issue beginning around May 21, 2015.
From August 12, 2011 to around May 21, 2015, at least 246 employees signed severance agreements that contained the non-disparagement and forfeiture clauses, the SEC says. ‘Although the Commission is unaware of any instances in which NeuStar took steps to enforce the non-disparagement clause, at least one former NeuStar employee was impeded by the non-disparagement Clause from communicating with the Commission,’ officials write in a related filing.
Shortly after the Commission staff’s investigation began - and on its own accord - NeuStar revised its severance agreement template by removing 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, according to the SEC.
As part of the settlement, the company also agreed to make reasonable efforts to contact former NeuStar employees who signed a severance agreement between August 12, 2011 and May 21, 2015, and to give them both a link to SEC order in the administrative proceeding, as well as a statement that NeuStar does not prohibit former employees from communicating any concerns about potential violations to the SEC.
The company settled without admitting or denying wrongdoing. A spokesperson for Neustar did not respond immediately to a request for comment.
‘Public companies cannot use severance agreements to impede whistleblowers from communicating with the SEC about a possible securities law violation,’ Antonia Chion, associate director of the SEC’s enforcement division, says in a statement. ‘NeuStar’s severance agreements broadly prohibited former employees from communicating any disparaging information about the company to the SEC, and unsurprisingly at least one former NeuStar employee was chilled by such language.’
The SEC has been active in promoting its whistleblower award program - and the accompanying protections. In August, BlueLinx Holdings agreed to pay a $265,000 penalty to settle charges that it used severance agreements that required outgoing employees to waive their rights to monetary recovery should they file a charge or complaint with the SEC or other federal agencies. BlueLinx did not admit or deny wrongdoing.
Ben Maiden
Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...
