Recent SEC Enforcement Action Stresses Importance of Not Impeding Whistleblower Communications with Regulators
The Situation: The SEC has brought another in a growing list of whistleblower cases critical of entities for potentially attempting to impede an individual from communicating with the agency. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") added Section 21F, "Whistleblower Incentives and Protection," to the Securities Exchange Act of 1934 ("Exchange Act") to provide whistleblowers with financial incentives to report potential securities law violations. Subsequently, the SEC adopted Exchange Act Rules 21F-1 through 17 to implement this requirement, and created the Office of the Whistleblower to administer the whistleblower program ("Program").
The Result: Since the inception of the Program, the SEC has awarded approximately $938 million to 179 individual whistleblowers in connection with enforcement actions brought against issuers, broker-dealers, and investment advisers, among others. In particular, the SEC has brought a number of enforcement actions or administrative proceedings involving violations of Rule 21F-17, which prohibits any person from taking any action to impede an individual from communicating directly with SEC staff about potential securities law violations.
Looking Ahead: A recent SEC settlement should serve as a reminder to broker-dealers, investment advisers, and other entities, including issuers, of their obligations under the Whistleblower Incentives and Protections statute and rules, and spur them to review and update their policies and procedures to make sure that they could not reasonably be interpreted as interfering with their employees' ability to make whistleblower complaints to the SEC.
As noted above, previously the SEC brought a number of enforcement actions against various entities for violations of Rule 21F-17. Specifically, these actions have focused on entities attempting to prevent or discourage employees from contacting regulators directly through compliance procedures, confidentiality provisions, and severance agreements (such as by requiring employees to waive whistleblower awards).
Most recently, on June 23, 2021, the SEC and a registered broker-dealer ("BD") with over 600 registered representatives and 16 branch offices, settled an enforcement action alleging violation of Exchange Act Rule 21F-17. Specifically, BD provided its employees with a compliance manual ("BD Manual") and required each employee to agree to adhere to the policies therein. Notwithstanding Rule 21F-17, from at least April 15, 2016 through July 2020, the BD Manual expressly prohibited employees from communicating with any regulator without seeking prior approval from the BD legal or compliance departments, noting that violations of the policy could result in disciplinary action by BD. BD also included this prohibition in at least two of its annual compliance training programs.
Employees of BD also were required to comply with the code of conduct of BD's parent company ("Parent Code"), which provided that nothing in the Parent Code should be interpreted "to restrict or interfere with any employee's rights, free speech, or any whistleblower protections under applicable laws, regulations and requirements." Despite this provision, however, the BD Manual provided that in circumstances where a BD policy was more restrictive than a Parent policy, employees were required to follow the more restrictive policy absent explicit instruction to the contrary.
Importantly, though the SEC found no instances where BD prevented an employee from speaking with the SEC or another regulator about possible securities law violations, and found nothing to indicate BD enforced the prohibition in the BD Manual to prevent any related communications, the SEC still found that BD violated Rule 21F-17 by including the prohibition in the BD Manual and compliance training materials.
In addition to issuing a cease and desist, the SEC censured BD and fined it over $200,000.
Three Key Takeaways
- Self-audit existing policies. Broker-dealers, investment advisers, and other entities should review and update existing policies and procedures, as needed, to ensure compliance with whistleblower laws and regulations, including harmonizing all applicable codes of conduct, policies, and procedures, to ensure they cannot reasonably be interpreted as discouraging or preventing communications about possible securities laws violations with regulators.
- Identify and resolve conflicts among policies. Entities should be aware of the various policies and procedures that apply across various business lines to identify and rectify any internal conflicts that might exist. Even if a policy on its face is not unlawful, when read in conjunction with other policies, it might be susceptible to a legal challenge.
- Be clear about whistleblower rights. Anti-retaliation programs, policies and procedures, as well as any training for managers and employees, should clearly and consistently explain employees' rights to report potential violations of the law externally and that retaliation for either external or internal reporting is against the law.
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