SEC Whistleblower Program Impacts Exam Program

The Securities and Exchange Commission (SEC) is including enforcement of the Whistleblower provisions enabled by Frank Dodd in its exam program, and as such is directly impacting broker/dealers and investment advisers.  To that end, whistleblower issues have recently arisen in SEC exams of investment advisers.   In those exams, confidentiality agreements, registered representative and Investment adviser representative agreements, written policies and procedures manuals and adviser’s code of ethics were put to question due to reporting language regarding misconduct contained in the respective documents.

Frank Dodd authorized amendments to the whistleblower protection provided by the Securities Exchange Act Rule 21F (“the “Whistleblower Act”) , and the SEC subsequently enacted the following rule to enable legislation of: (i) Securities Exchange Act Rule 21F-17(a) of the Commission’s Whistleblower regulations which states in part “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation …”; (ii) Securities Exchange Act Section 21F(h)(l)(A) which prohibits any employer from discharging, demoting, suspending, threatening, or harassing any employee for providing information to the Commission; and (iii) Securities Exchange Act Section 21F(h)(l)(B) allows a person to bring an action in district court for discharge or discrimination in connection with violations of Section 21F(h)(l)(A).

The current impact on broker/dealers and investment advisers is the direct result of the Whistleblower Act coming of age, and a number of successful SEC enforcement actions that have made it clear that actions taken by an employer to restrict an employee’s whistleblower rights under federal law will result in enforcement action.  This has been reflected in a number of enforcement actions of the SEC where public companies were sanctioned for illegally using severance agreements requiring outgoing employees to waive their ability to receive severance payments and or obtain monetary awards from the SEC’s whistleblower program. To that end, in one SEC cease-and-desist order, it was noted that the subject company violated federal securities laws by taking away from departing employees who wanted to receive severance payments and other post-employment benefits, the ability to file applications for awards under the SEC Whistleblower Program.  The company consented order and agreed to make reasonable efforts to inform former employees who signed the severance agreements during the period in question, that the company does not prohibit former employees from seeking and obtaining a whistleblower award from the SEC under Section 21 F of the Securities Exchange Act.

In another cease-and-desist order with like facts, the sanctioned company was required to adopt the following text in a confidentiality statement that it required for employees who were interviewed in the course of internal investigations:

“Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.”

Ultimately, while the enforcement actions set out above were focused on confidentiality and severance agreements, the underlying relevant provisions of the Whistleblower Act do in fact cover any document that impedes, either directly or indirectly, an individuals’ rights under the Whistleblower Act to report misconduct directly to the SEC or other governmental agencies.

With that said, as the SEC further develops and relies on its SEC Whistleblower Program, the primary takeaway for broker/dealers and investment advisers should be to conduct a comprehensive review of any confidentiality language in the various agreements, policies, procedures, compliance manuals, codes of conduct, employment agreements, independent contractor agreements, confidentiality and non-compete agreements, severance agreements, compliance manuals, LLC partnership and shareholder agreements, procedures for internal investigations, and consulting agreements that are utilized across the organization and then revise any provisions that directly or indirectly impedes their associated persons, employees and vendors from reporting potential violations pursuant to the SEC Whistleblower Program.