SEC charges firm with Whistleblower Rule Violations -Time to Review those Contracts

As we find ourselves immersed in ADV Season, a period when registered firms are diligently managing the Annual Update Amendment to Form ADV, it's crucial to recognize that this presents an opportune moment to review both internal and external contracts. This diligence extends beyond routine compliance tasks and intersects with regulatory actions, such as the SEC's enforcement against whistleblower protection violations within the industry.

A registered investment adviser was charged by the SEC last year with violating the whistleblower protection rule.

The violation involved requiring employees to sign agreements that impeded their ability to report possible securities law violations to the SEC.

The language in the agreements required employees to:

Waive their right to any monetary recovery in connection with any complaint or charge filed with an administrative agency.

Represent that they have not been a whistleblower and have not reported any matters to a regulator.

Notify and obtain consent from the firm’s legal department prior to disclosing any confidential information to regulators.

These provisions could potentially discourage employees from reporting securities law violations to the SEC, which is a violation of the whistleblower protection rule.

The SEC’s action against the firm was not based on any actual whistleblowing incidents or ongoing investigations. Rather, the action was taken solely because of the language in the firm’s agreements that could potentially impede employees from reporting securities law violations to the SEC. The SEC’s order did not find that any employee was prevented from communicating directly with the SEC, or that the firm took action against any employee under these provisions.

The firm agreed to pay a civil penalty of $10 million to settle the SEC’s charges, without admitting or denying the findings.

To ensure compliance with the Whistleblower Protection Rules, firms should consider all of their disclosures, agreements, communications, and policies and procedures. Avoiding language that could discourage employees from reporting potential violations, and explicitly stating employees’ rights to report to regulators without the firm’s consent or knowledge.