SEC Continues to Pursue Whistleblower Agenda

The Foot Locker Enforcement Action
According to the Commission’s May 22 settled order, Foot Locker entered into separation agreements with approximately 148 departing employees in which they were required to “waive[] the right to receive any award of monetary or other benefits” based on filing a charge with, or participating in an investigation conducted by the SEC, Department of Justice or other enforcement authorities. The waiver provisions did not purport to prohibit employees from providing information to the Government—they only restricted their ability to obtain monetary rewards, which arguably removes any incentive to share such information.  

According to the Commission, Foot Locker began to voluntarily phase out the use of these provisions before the SEC staff contacted the company in connection with the investigation. The order also noted that the Commission was unaware of any instances in which Foot Locker enforced the purported restriction or any instances in which impacted employees declined to report misconduct to the Government.

In light of Foot Locker’s violations of SEC Rule 21F-17, which prohibits impeding an individual from communicating with the SEC staff about potential securities law violations, the Commission imposed a $148,000 civil monetary penalty and ordered the company to cease and desist from any further violations of the whistleblower-protection rule. The order indicated that the Commission considered the company’s remedial measures as well as the company’s cooperation with the SEC staff during the investigation.    

Whistleblower-Related Enforcement May Remain a Priority
This enforcement action is noteworthy for several reasons. First, although the Commission and high-level Enforcement personnel have indicated that the Atkins-led SEC will largely focus on matters involving fraud, investor harm or knowing violations of regulatory requirement, the Foot Locker matter seemingly checks none of those boxes. And while a $148,000 penalty (which appears to be $10,000 for each of the 148 identified violations) may seem de minimis for an $8 billion revenue company, the Commission’s willingness to impose any monetary penalty on the facts of this case is interesting, particularly in light of the lack of any obvious benefit to Foot Locker that resulted from the violations.

The Commission’s willingness to bring this matter suggests that the Division of Enforcement will continue to pursue enforcement actions for violating the SEC’s Whistleblower Protection Rule. This was a priority under the Chair Gensler-led SEC, which brought several high-profile enforcement actions against broker-dealers, investment advisers and public companies for, among other things: (1) including language in compliance manuals and training materials that purported to restrict the circumstances under which personnel can contact the SEC staff; (2) purporting to require employees to notify the company prior to contacting the SEC; and (3) requiring investors to sign agreements indicating that they will not file regulatory complaints. In addition to those individual enforcement actions, the SEC announced a sweep in September 2024 against seven public companies for various violations of the whistleblower protection rule, including by requiring employees to waive their rights to collect monetary awards. Interestingly, the $148,000 penalty imposed on Foot Locker is higher than the amounts paid by several public companies charged in that sweep, notwithstanding the fact that the sweep was conducted in an era in which the Commission was setting—and then breaking—various penalty-related records.

More generally, the Foot Locker enforcement action highlights that whistleblowers will continue to remain an important part of the SEC’s enforcement program. The Commission’s Office of the Whistleblower continues to receive voluminous tips, and the Commission has continued to issue monetary payments to whistleblowers. 

Market Participants Should Continue to Be Vigilant About Whistleblower-Related Risk
The Foot Locker enforcement action highlights two areas of risk that market participants should address. The first relates to actions that companies may be taking, perhaps inadvertently, that may impede individuals from reporting violations of the securities laws to the SEC. While many companies may have remediated potential issues following the spate of whistleblower-related enforcement actions during the Biden administration, to the extent that companies are relying on legacy employment agreements or separation agreements that may not have been recently updated, compliance or legal should consider reviewing those materials. Based on the enforcement actions that the Commission has brought to date and our experience with whistleblower matters, companies may consider reviewing the following materials to identify problematic language:

• Employment and separation agreements
• Stock settlement agreements
• Employee handbooks
• Codes of conduct/ethics, written supervisory procedures, and other compliance manuals
• Training materials

Second, it is clear that the Commission will continue to rely on whistleblowers as a source of leads to open investigations. Likewise, both the Department of Justice and the Commodity Futures Trading Commission are also continuing to financially incentivize whistleblowers to report violations to the government. Critically, notwithstanding the monetary awards, many government whistleblowers only become government whistleblowers after they report internally, and they believe their concerns are ignored. Because Government whistleblower regimes are likely here to stay, companies should ensure that their whistleblower programs are sufficiently resourced and structured in a manner that will enable the company to triage, assess and respond to complaints on a timely basis.

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If you have any questions regarding the SEC’s whistleblower rules, how to design an effective whistleblower reporting regime or how to respond to a whistleblower complaint, please feel free to contact any of the coauthors of this alert.