The agency will pay the money to Gary Aguirre who was abruptly fired nearly five years ago after he alleged that officials at the SEC had improperly interfered in his investigation into Pequot Capital Management.
Aguirre had tried unsuccessfully to interview John Mack, who was tapped to head Morgan Stanley and was a friend of the hedge fund firm's founder.
SEC Spokesman John Nester said, The settlement resolves all outstanding litigation between the parties and reflects the agency's determination to focus on its core mission of protecting investors.
Last month Pequot, which abruptly went out of business in 2009, agreed to pay $28 million to settle regulators claims that it illegally used inside information to trade Microsoft Corp shares.
The SEC initially dropped the Pequot case but later reopened it.
(Reporting by Svea Herbst-Bayliss; Editing by Bernard Orr)