Possible Penalties for violating SEC Rule 21F-17(a)
This was generated by Google Gemini, unsure how fully accurate the numbers are, but thought it could be interesting, especially since it seems penalties might not go to who currently works there but possibly any previous employees, contract and anything.
Legally, the SEC calculates fines based on a "Tier" system under Section 21B of the Securities Exchange Act of 1934. These limits are adjusted for inflation annually.
As of January 15, 2025, here is the technical breakdown of how the fines are calculated:
1. The Statutory Maximums (Per Violation)
Most Rule 21F-17(a) violations (bad wording in contracts) fall under Tier 1, because they usually don't involve fraud or significant financial loss to investors—they just break the rules.
| Violation Tier | What is covers | Max Penalty (Individual) | Max Penalty (Company) |
| Tier 1 | Standard rule violations (Technical infractions) | $11,823 | $118,225 |
| Tier 2 | Violations involving fraud, deceit, or manipulation | $118,225 | $591,127 |
| Tier 3 | Fraud resulting in substantial losses to others | $236,451 | $1,182,253 |
(Note: These figures reflect the 2025 inflation adjustment multiplier of roughly 1.02598.)
2. How the Fine Becomes Millions (The Multiplier)
You might wonder: "If the max is $118,225, how did J.P. Morgan get fined $18 million?"
The SEC counts each specific instance as a separate violation
If a company has 500 employees sign a severance agreement with illegal language, the SEC can theoretically view that as 500 separate violations.
The Math: 500 contracts × $118,225 (Tier 1 max) = ~$59 Million theoretical maximum.
This gives the SEC massive leverage in settlement negotiations. They typically settle for a lower "lump sum" (e.g., $18M instead of $59M) to avoid a court battle, but the threat comes from the per-violation count.
3. Real-World Settlement Tiers
In practice, the SEC settles for amounts that send a message relative to the company's size, rather than sticking strictly to the calculator:
Small/Micro-Cap Companies: $19,500 – $50,000 (Often treated as a single administrative penalty).
Mid-Sized Corporations: $200,000 – $400,000 (Standard penalty for having the clause in standard employment contracts).
Financial Institutions/Large Caps: $1 Million – $18 Million+ (Aggressive penalties for systemic "gag orders" affecting thousands of employees or clients).
Summary
The Statutory Limit: ~$118,225 per contract signed.
The Practical Settlement: Usually negotiated down, but scales with the number of employees who signed the bad agreement.
