SEC Exams Looking for Whistleblower Violations
SEC staff in the Office of Compliance Inspections and Examinations are examining compliance with key whistleblower provisions arising out of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The staff is examining registered investment advisers and registered broker-dealers, reviewing, among other things, compliance manuals, codes of ethics, employment agreements, and severance agreements to determine whether provisions in those documents pertaining to confidentiality of information and reporting of possible securities law violations may raise concerns under Rule 21F-17.
Recent enforcement actions have identified certain provisions of confidentiality or other agreements required by employers as contributing to violations of Rule 21F-17 because they contained language that, by itself or under the circumstances in which the agreements were used, impeded employees and former employees from communicating with the SEC concerning possible securities law violations. According to the SEC this has a potential chilling effect that can be especially pronounced when such documents (e.g., severance agreements) provide that an employee may forfeit all benefits if he or she violates any terms of the agreement.
In examinations where the staff includes a review of registrants’ compliance with Rule 21F-17, the staff is analyzing a variety of documents, including:
- Compliance manuals;
- Codes of ethics;
- Employment agreements; and
- Severance agreements.
In this review, the staff assesses whether these documents contain provisions similar to those in agreements that the SEC has found to violate Rule 21F-17, including provisions that: (a) purport to limit the types of information that an employee may convey to the Commission or other authorities; and (b) require departing employees to waive their rights to any individual monetary recovery in connection with reporting information to the government.
The staff also assesses whether these documents contain other provisions that may, according to the SEC, contribute to violations of Rule 21F-17 in circumstances where their use impedes employees or former employees from communicating with the SEC, such as provisions that:
- Require an employee to represent that he or she has not assisted in any investigation involving the registrant;
- Prohibit any and all disclosures of confidential information, without any exception for voluntary communications with the DEC concerning possible securities laws violations;
- Require an employee to notify and/or obtain consent from the registrant prior to disclosing confidential information, without any exception for voluntary communications with the SEC concerning possible securities laws violations; or
- Purport to permit disclosures of confidential information only as required by law, without any exception for voluntary communications with the SEC concerning possible securities laws violations.
When examining registrants’ compliance with Rule 21F-17, the staff is citing deficiencies and making referrals to the SEC Division of Enforcement where appropriate.
Contact Steve Quinlivan for more information.