Last week, the Securities and Exchange Commission announced the settlement of charges against a registered investment adviser for violating Rule 21F-17(a) of the Securities Exchange Act of 1934. Rule 21F-17(a), a whistleblower protection rule prohibits taking any action to impede an individual from communicating directly with the SEC staff about a possible securities law violation. The charges claimed that the adviser required employees to sign agreements that prohibited the disclosure of confidential corporate information to third parties, without an exception for individuals to communicate with the SEC. Also the firm required departing employees to sign releases affirming that they had not filed any complaints with any government agency in order for the employees to receive deferred compensation or other benefits. The adviser agreed to be censured, cease and desist from violating the whistleblower protection rule, and pay a $10 million civil penalty.
The SEC found that from 2011 through 2019, the firm required new employees to sign agreements that prohibited them from disclosing confidential information to third parties unless authorized by the firm or under court order or by law. The definition of confidential information was loosely defined to cover any information that could be gained in the course of employment that could possibly disparage the firm. Additionally, from 2011 through 2023, the firm required approximately 400 departing employees to sign releases affirming that they had not filed any complaints with any governmental agency, department, or official in order for them to receive deferred compensation and other benefits. Furthermore, the SEC found that the firm did not include whistleblower protection language in its employment agreements until 2019 and in its releases until 2023.
In regard to “entities employing confidentiality, separation, employment and other related,” Gurbir S. Grewal, Director of the SEC’s Division of Enforcement has forewarned that “the Commission takes seriously the enforcement of whistleblower protections and those drafting or using these types of agreements should take equally serious their obligations to ensure that they don’t impede whistleblowers from contacting the Commission.” We may continue to witness additional cases brought against firms for violating whistleblower protections.
It is important to note that we have witnessed several cases related to whistleblower protections in one month. Firms should use caution and review all documents for impeding language. For example, a regulatory review is not limited to contracts, but could also include language in the policies and procedures manual, Code of Ethics, compliance training materials, and investor-related materials. In order to avoid a similar fate, firms should conduct a review of all firm-related documents, not just severance agreements to ensure that proper whistleblower protections are in-place and does not contain impeding language. It is not enough to simply update the language in one document. Firms must ensure that their language is consistent across all firm-related documents, and they are abiding by the adopted policies.
For more information, please contact us at info@sec3compliance.com, at (212) 706-4029 x 229, through LinkedIn or visit us on our website at www.sec3compliance.com.
