September 8, 2023

SEC enforces Dodd- Frank whistleblower rule against privately held company

The US Securities and Exchange Commission has settled an investigation into violations of Rule 21F-17 of the Securities Exchange Act of 1934, with Monolith Resources, LLC, a privately-held clean technology company headquartered in Lincoln, Nebraska.  Rule 21F-17 is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  It prohibits those subject to the Act from taking action to impede anyone from communicating with the SEC about securities laws violations – i.e. whistleblowers.

The SEC’s investigation focused on 22 separation agreements that Monolith had signed with departing employees between February 2020 and March 2023; the separation agreements did not prevent the former employees from reporting to the SEC or other agencies, but purported to take away the employees’ right to “recover money damages or other individual legal or equitable relief awarded by any such governmental agency.”

The SEC found that Monolith’s inclusion of this language in the separation agreements had violated Rule 21F-17 by raising impediments to participation in the Commission’s whistleblower program, insofar as the agreements required the employees to forego the SEC’s financial incentives for such participation.  Despite mitigating factors such as Monolith’s voluntary amendment of the separation agreements after being contacted by the SEC,  the absence of any evidence that the separation agreements actually prevented anyone from complaining to the SEC, and the company’s notification to employees who had signed the original agreements, the SEC deemed it appropriate to impose a civil money penalty of $225,000 in addition to requiring Monolith to cease and desist from future violations of Rule 21F-17.

In the past, the SEC has enforced Rule 21F-17 against publicly-traded companies for language included in confidentiality and non-competition agreements (see our Insight analyzing these cases).  Announcing the settlement with Monolith, the Regional Director of the SEC’s Denver Office, Jason Burt, explained that “Both private and public companies must understand that they cannot … disincentivize employees from communicating with SEC staff,” and “[a]ny attempt to stifle or discourage this type of communication undermines [the SEC’s] regulatory oversight, and will be dealt with appropriately.”

SEC press release | Order