On August 16, 2016, the SEC announced that Health Net, a California-based health insurance provider, will pay $340,000 to settle charges that it illegally used severance agreements requiring outgoing employees to waive their ability to obtain monetary awards from the SEC’s whistleblower program. This is the third enforcement action the SEC has brought for violations of Rule 21F-17 of the Exchange Act, which promotes whistleblowing to the SEC by providing in relevant part, “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.”

The SEC alleges that Health Net’s severance agreements included a Waiver and Release of Claims that listed potential claims against Health Net that the departing employee waived as a condition to being paid monetary severance payments and benefits from Health Net. After the SEC adopted Rule 21F-17 in August 2011, Health Net revised its agreements to amend the Waiver and Release of Claims section to require an employee to waive “the right to file an application for award for original information submitted pursuant to Section 21F of the Securities Exchange Act of 1934.” In June 2013, Health Net revised its agreements again, this time by removing the language that expressly prohibited employees from applying for whistleblower awards pursuant to Section 21F. It also added a clause that provided “[n]othing herein shall be construed to impede the employee from communicating directly with, cooperating with or providing information to any government regulator.” However, the agreements retained restrictions that removed the financial incentive for its former employees who executed the agreement to communicate with the SEC about possible securities law violations by Health Net. Specifically, the Waiver and Release of Claims included the following provision, “While Employee may file a charge, provide information, or participate in any investigation or proceeding, by signing this Release, Employee, to the maximum extent permitted by law . . . waives any right to any individual monetary recovery . . . in any proceeding brought based on any communication by Employee to any federal, state or local government agency or department.”

In the administrative order, the SEC noted that it was not aware of any instances in which Health Net took steps to enforce the Waiver and Release of Claims. Nonetheless, the SEC asserted that the provisions impermissibly targeted the SEC’s whistleblower program by removing the financial incentives that are intended to encourage employees to communicate with the SEC about potential securities law violations.

Health Net has agreed to cease and desist from further violations of Rule 21F-17 of the Exchange Act and to make reasonable efforts to contact its former employees who signed the Waiver and Release of Claim and provide them with a link to the order and a statement that Health Net does not prohibit former employees from seeking and obtaining a whistleblower award from the SEC. The Firm will pay a civil monetary penalty in the amount of $340,000 to the SEC. A copy of the Order is available here.

Earlier this month, the SEC announced that Atlanta-based BlueLinx Holdings, Inc. had agreed to pay a $265,000 penalty for using severance agreements that 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. In April 2015, the SEC entered into a “no admissions” resolution with KBR, Inc., under which it agreed to pay a $130,000 penalty to resolve charges that the language it used in its confidentiality agreements during internal investigations violated SEC Rule 21F-17. As a voluntary “remedial action,” KBR also amended its internal investigation confidentiality agreements to expressly state that employees are not prohibited from reporting, without prior company consent, violations of federal law to the Department of Justice, SEC, or other relevant federal agencies.