October 27, 2016: The U.S. Securities and Exchange Commission (“SEC” or “Commission”) has been proclaiming near and far that its whistleblower program has surpassed $100 million in awards and payments to whistleblowers. Enforcement chiefs have touted the value of the whistleblower program for generating quality leads since the whistleblower rule became effective in 2011.
Advisers and Broker-Dealers Take Note
Well…what exactly does this mean for advisers and broker-dealers?
In two words – actionable intelligence. The SEC perceives whistleblower tips as very valuable intel relative to the Commission’s mission to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” The Office of Compliance Inspections and Examinations (“OCIE”), the Commission’s primary compliance asset, is intent on protecting and promoting whistleblower privilege for employees and other insiders pursuant to Rule 21F-17.
To this end, the OCIE issued a new Risk Alert on October 24, 2016, “Examining Whistleblower Rule Compliance.”
The OCIE is currently focusing on broker-dealer and investment adviser whistleblower compliance, scrutinizing policies, procedures, and practices which contravene Rule 21F-17 of the Securities Exchange Act of 1934. Specifically, the broker-dealer or adviser is noncompliant if policies, procedures, or practices prohibit or impede the ability of current or former employees, vendors, board members or other associated persons from “communicating directly with the Commission staff about a possible securities law violation(s), including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”
Recent enforcement actions have identified certain provisions of confidentiality or other business practices as contributing to violations of Rule 21F-17 because these practices contained language or procedures that, by themselves or under the circumstances in which the agreements were used, impeded employees and former employees from communicating with the Commission concerning possible securities law violations.
While always a point of scrutiny by the OCIE during examinations, compliance manuals, codes of ethics, employment agreements, and severance agreements are receiving additional scrutiny relative to 21F-17 compliance. The OCIE is looking for evidence that the firm’s confidentiality objectives supersede those of the Commission relative to facilitating the reporting of suspected violations of securities laws to the SEC.
The SEC’s motivation is clear … they want to preserve the information pipeline that many firms have sought to squelch, either knowingly or unknowingly relative to the preservation of the latter’s confidentiality objectives. The Commission has no intention of letting the golden egg of informed conjecture become a casualty of adviser and broker- dealer privacy and confidentiality policies.
Examination Focus
The SEC’s documentation review relative to Rule 21F-17 focuses primarily upon whether documents (compliance manual, code of ethics, confidentiality agreements and terms of resignation or separation) contain prohibited provisions that the Commission has found to be in violation of Rule 21F-17. Problematic practices include: (a) purporting to limit the types of information that an employee may convey to the Commission or other authorities; and (b) requiring departing employees to waive their rights to any individual monetary recovery for reporting information to the government.
The Staff also assesses whether these documents contain other provisions that may contribute to violations of Rule 21F-17 in circumstances where their use impedes employees or former employees from communicating with the Commission, such as provisions that:
- Require an employee to represent that he or she has not assisted in any investigation involving the registrant;
- Prohibit disclosures of confidential information, without any exception for voluntary communications with the Commission 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 Commission 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 Commission concerning possible securities laws violations.
Enforcement Lessons
Remedial actions taken in recent enforcement actions to date have included:
- Revising documents on a going-forward basis to make it clear that nothing contained in those documents prohibits employees or former employees from voluntarily communicating with the Commission or other authorities regarding possible violations of law or from recovering a whistleblower award;
- Providing general notice to employees, or notice to employees who signed restrictive agreements, of their right to contact the Commission or other authorities; and
- Contacting former employees who signed severance agreements to inform them that the company does not prohibit them from communicating with the Commission or seeking a whistleblower award.
The OCIE is intent upon preserving the pipeline of information from registrant advisers, broker-dealers, and other industry professionals which has led to over $100mm worth of leads and SEC enforcement actions.
Action Plan
Outlined below is an action plan for registrants to respond to the SEC’s whistleblower rule:
- Adopt a whistleblower policy which:
- Provides a mechanism and process for employees to report potential wrongdoing;
- Articulates in no uncertain terms that whistleblowers who report in good faith will be protected; and
- Calls for the Chief Compliance Officer’s review of all employment and separation agreements to ensure whistleblower protection.
- Re-evaluate policies, procedures and practices (compliance manual and code of ethics) which address firm confidentiality objectives and overlay them with the language of 21F-17 to ensure that whistleblowers are protected.
- Distribute the whistleblower policy to all employees and make sure they clearly understand their rights and protections.
- On a go-forward basis, remove any provisions in employment and separation agreements which restrict voluntary reporting to regulatory authorities, making it clear that nothing contained in those documents prohibits employees or former employees from voluntarily communicating with the Commission or other authorities about possible violations of law or from recovering a whistleblower award.
- Contact former employees who signed restrictive separation agreements to inform them that your firm does not prohibit them from communicating with the Commission or seeking a whistleblower award.
In all cases, registrants should encourage employees to come forward to the firm first. After all, it is best to learn about non-compliant events from an associate or related person than from the SEC.
For More Information
Follow this link to the Risk Alert: https://www.sec.gov/ocie/announcement/ocie-2016-risk-alert-examining-whistleblower-rule-compliance.pdf.
October 27, 2016
This alert has been prepared by Horrigan Resources, Ltd. for your information only.
This is not legal advice.
Contact us at 724-934-0129 or www.horriganresourcesltd.com.
