SEC Developments in Whistleblower Enforcement Actions and Amendments to Beneficial Ownership Rules

In today's episode, we're taking a look at some recent developments from the SEC.

Read the full articles:
Recent Whistleblower Enforcement Actions Highlight SEC Focus On Employee Agreements

About the authors:
Jane Jeffries Jones
Rajiv Radia

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SEC Adopts Amendments to Beneficial Ownership Rules

About the authors:

F. Reid Avett
Rajiv Radia

Transcript

Welcome to Womble Perspectives, where we explore a wide range of topics, from the latest legal updates to industry trends to the business of law. Our team of lawyers, professionals and occasional outside guests will take you through the most pressing issues facing businesses today and provide practical and actionable advice to help you navigate the ever changing legal landscape.
 
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So far this month, our cybersecurity tips have been focused on technology and electronics. But there’s another risk when it comes to cybersecurity: children.

It’s all fine and well to lock down your passwords and remember the red flags for a phishing attempt, but children can be targets as well. With less experience with and knowledge of cybercrimes, kids and teenagers may be more likely to fall for scams. Make sure to let your kids know the signs of potential cyberattack and what they can do should they fall victim.

Now, on to the episode.

Today, we’re exploring two recent developments by the SEC. First, we’ll break down recent whistleblower enforcement actions, followed by some amendments to beneficial ownership rules. For those wanting to jump directly to the second half of the episode, skip to the seven minute mark.

In September, the SEC announced the settlement of three enforcement actions for violations of SEC whistleblower protection laws. In the actions, the SEC asserted that the companies – both public and private – had violated whistleblower protection laws in various types of separation, confidentiality, employment and other agreements, and imposed penalties of up to $10 million. The recent actions are particularly notable because certain of the companies had taken some action to comply with the rule by updating agreements and/or notifying employees of their rights under the rule, but the SEC found the actions to be incomplete or inconsistent. The actions also emphasize the importance of company remedial actions as a potential means to minimize penalties. Companies are advised to review their existing agreements to confirm whether action is needed to comply with the SEC rules. 

The SEC’s whistleblower protection rule, Rule 21F-17 under the Securities and Exchange Act of 1934, as amended, prohibits any person from taking any action to impede an individual from communicating directly with the SEC about a possible securities law violation, including enforcing or threatening to enforce a confidentiality agreement related to such communications. The SEC brought a number of enforcement actions in the years following the rule’s 2011 adoption, and many companies modified their agreements as a result. Generally, the updated provisions clarify that employees have a right to communicate with the SEC or other regulatory agencies regarding potential claims, the employees do not need to notify the company of such communications, and the employee is not prohibited from receiving a whistleblower award from the SEC in connection with such communications. The recent actions charged each company with violations of Rule 21F-17. 

Following is a summary of the three enforcement actions: 

In the enforcement action against D.E. Shaw & Company, the SEC charged D.E. Shaw with impeding whistleblowing by requiring employees to sign agreements prohibiting the disclosure of confidential corporate information to third parties, without an exception for potential SEC whistleblowers, and by requiring departing employees to sign releases affirming that they had not filed any complaints with any government agency in order for the employees to receive certain compensation. After the SEC settled several actions against other companies for whistleblower violations, D.E. Shaw sent a firm-wide e-mail to all employees advising them of their whistleblower rights, notwithstanding the terms of any agreement. While the company also revised its internal policies, no updates were made to employment agreements or releases affirming that departing employees had not filed any complaints with any governmental agencies, which employees were required to sign in order to receive certain compensation and other benefits. D.E. Shaw updated its employment agreements in 2019, requiring employees to sign revised employment agreements, and updated its releases in June 2023, after the SEC had already begun its investigation that led to the recent action. In connection with the settlement, D.E. Shaw agreed to pay a civil penalty in the amount of $10 million, which far exceeds prior penalties.

In the enforcement action against CBRE, Inc., a Dallas-based commercial real estate services firm, the SEC asserted that CBRE Group, Inc., a wholly-owned indirect subsidiary of CBRE, required employees to sign a release saying that they had not filed a complaint against CBRE with any federal agency, which the SEC believed impeded potential whistleblowers from reporting complaints. According to the SEC order, once CBRE was notified of the investigation, the company began taking remedial action, including (1) revising over 300 template agreements to bring them into compliance with whistleblower protections; (2) updating their standards of business conduct; and (3) recertifying over 100,000 employees worldwide in a mandatory recertification process in which employees attested to their understanding that they were not limited in their “ability to file a charge or complaint or fully cooperate with any government agency, including the SEC, without notice to or approval from CBRE.” CBRE also agreed to cease and desist from causing any violations of the same rule and to pay a civil penalty of $375,000. 

In the enforcement action against Monolith Resources LLC, a Nebraska-based privately held energy and technology company with 250 employees, the SEC charged Monolith with requiring certain departing employees to explicitly waive their right to any monetary whistleblower rewards, despite language indicating that nothing impeded the employees’ right to file a whistleblower claim. After being notified by the SEC of the investigation, Monolith undertook remedial action including voluntarily revising its separation agreements to include language providing that “nothing in this Agreement shall bar or impede in any way your ability to seek or receive any monetary award or bounty from any governmental agency or regulatory or law enforcement authority in connection with protected ‘whistleblower’ activity.” In connection with the order, Monolith agreed to cease and desist from committing further violations under the same law and to pay a civil penalty of $225,000. 

In the cases of both CBRE and Monolith, the SEC considered the remedial actions taken by each company in determining its civil penalties. 

These actions should serve as a reminder to employers to review relevant company policies and agreements to ensure they are in compliance with whistleblower protection laws.

Now, let’s focus in on the amendments regarding beneficial ownership.

On October 10th, 2023, the SEC adopted amendments to its rules regarding the reporting of beneficial ownership.1 The amendments primarily focus on beneficial ownership reporting as required under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, along with Regulation 13D-G. 

These amendments include:

Reducing the deadlines for initial and amended Schedule 13D and 13G filings; Defining the Schedule 13D disclosure requirements regarding derivative securities; and Enforcing the use of a structured, machine-readable data language for Schedules 13D and 13G filings.

The adopting release also provides guidance from the SEC regarding what activities amongst two or more persons may be considered to be acting as a group under Sections 13(d) and 13(g).

To the extent issuers are proactive, the amendments will provide increased transparency and more timely information about significant ownership changes, enabling them to have a better understanding of their investor base and anticipate potential effects of the ownership changes. 

As background, sections 13(d) and 13(g) require persons who possess more than 5% of a company’s registered class of voting securities to disclose their beneficial ownership on either Schedule 13D or Schedule 13G, depending on the characteristics of the person as well as if the person has the intent to control or influence the activities of the Company. 

The amendments reflect the SEC's effort to modernize the reporting criteria, ensuring prompt and comprehensive information disclosure, marking the most comprehensive changes to Schedules 13D and 13G in several decades.

Under the current rules, any person obligated to submit a Schedule 13D must do so within 10 calendar days after crossing the threshold of owning 5% of a class of registered voting equity securities and revise it promptly in case of any significant changes. The amended rules require an initial Schedule 13D filing within five business days of crossing the threshold and amendments to be filed within two business days of any material change in the previously reported information.

Under the current rules, the deadlines for Schedule 13G filings differ depending on whether a person files as a qualified institutional investor – a QII - an exempt investor, or a passive investor. The new rules accelerate the deadlines for filing an initial Schedule 13G for QIIs and exempt investors, to 45 days after the end of the quarter, and for passive investors, to five business days. Subsequent amendments are generally required within 45 days after the end of the quarter that a material change occurs. Shorter deadlines apply to QIIs or passive investors with over 10% beneficial ownership.

While the SEC stopped short of defining what constitutes a “material” change for these purposes, it referred to the general concept of materiality under Rule 12b-2.2 However, the SEC indicated that any acquisitions or dispositions of 1% or more of the outstanding class of securities will be deemed “material” for amendment purposes.

Given the tightened filing deadlines, the amendments also extend the filing cut-off times for Schedules 13D and 13G from 5:30 p.m. to 10:00 p.m. Eastern Time.

While the SEC proposed amendments to deem holders of cash-settled derivatives as beneficially owning the underlying securities, they opted against adopting these changes. Instead, the SEC provided guidance outlining the limited circumstances under which a holder of cash-settled derivatives would be deemed as beneficially owning the underlying shares under the current rules.

With respect to formations of a “group” under sections 13(d)(3) and 13(g)(3), the SEC clarified that no express agreement is required to form a group but instead two or more persons could be deemed to have acted together if they take concerted actions for the purpose of acquiring, holding (including voting) or disposing of issuer securities, which depend significantly on facts and circumstances related to the actions taken by the persons. The SEC clarified that communications alone are not sufficient to form a group.

The new rules require Schedules 13D and 13G to be filed using a machine-readable, structured data format as EDGAR XML filings to enhance accessibility, compilation, and analysis of the disclosure.

The amendments will take effect 90 days after publication in the Federal Register, with compliance for new Schedule 13G deadlines starting on September 30, 2024. Compliance with the structured data requirements is not required until December 18, 2024, with voluntary compliance permitted from December 18, 2023.

Thank you for listening to Womble Perspectives. If you want to learn more about the topics discussed in this episode, please visit The Show Notes, where you can find links to related resources mentioned today. The Show Notes also have more information about our attorneys who provided today's insights, including ways to reach out to them.
 
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