On September 29, 2023, the SEC settled charges against an investment adviser in connection with the adviser’s violations of Rule 21F-17 under the Securities Exchange Act of 1934 (“Whistleblower Protection Rules”). As part of the settlement, the adviser agreed to pay a $10 million penalty.
Adopted by the SEC in 2011 pursuant to the Dodd-Frank Act, the Whistleblower Protection Rules prohibit any person from taking any action to impede an individual from communicating directly with the SEC about a possible securities law violation, including by “enforcing, or threatening to enforce, a confidentiality agreement. . . .”
Specifically, the SEC’s order noted that the adviser required new employees to sign employment agreements that prohibited them from disclosing confidential information, including any information gained through employment that could be deleterious to the adviser, to anyone outside the firm unless authorized by the adviser or required by law or an order of a court or other regulatory or governmental body. The employment agreements did not include any exception to this confidentiality provision for voluntary communications with the SEC concerning possible securities laws violations.
The SEC also found that the adviser required many departing employees to sign releases that included affirmations that such employees had not filed any complaints with any governmental agency, department or official in order to receive certain deferred compensation and other benefits.
The adviser had previously (i) notified all employees via email that nothing in any of its policies or agreements prohibited employees from communicating with government regulators, agencies or commissions regarding possible securities law violations by the adviser and (ii) updated its internal policies with similar language. However, the adviser failed to simultaneously update its form employment agreements and releases to include similar whistleblower protection language.
This settlement, as well as deficiencies noted in recent examinations of advisers, evidence an SEC focus on the Whistleblower Protection Rules. In response, advisers should carefully review their policies, employee agreements and any other related materials for compliance therewith.