It’s a common misconception amongst private companies; the belief that the Securities and Exchange Commission (SEC) does not impact them. This month, however, such beliefs have been called into question as the SEC made it clear that their reach extends beyond public corporations and into the heart of privately held entities.
The SEC announced two settled actions, in one month, against entities for violating SEC Rule 21F-17(a). This rule pertains to the language used in separation agreements and, notably, one of the actions was against a privately held company. This signifies a key shift in the SEC’s attitude towards privately held entities, not to mention, the potential for significant legal challenges for such companies moving forward.
SEC Rule 21F-17(a) was designed to prevent companies from taking action to impede individuals from directly communicating with the SEC concerning potential securities law violations. In light of this, if a separation agreement includes language that could suppress such communication, it could be a violation of this rule. The recent settled actions by the SEC make it emphatically clear that they are prepared to enforce this rule, regardless of whether the company in question is publicly or privately held.
This move is not only significant for private companies but also serves as a reminder for all companies, private or public. Legal professionals should take this development into consideration when drafting separation agreements, and more broadly, any agreements where the issue at hand may directly or indirectly fall under the SEC’s purview.
For private companies, this development dictates the need to review their current and future separation agreements to ensure compliance with SEC Rule 21F-17(a), lest they find themselves the target of the SEC’s enforcement actions.