Late last month, the SEC announced that its Office of Compliance Inspections and Examinations (“OCIE”) is closely looking at whether registered investment advisors and broker-dealers are complying with the agency’s whistleblower regulations under Rule 21F-17 of the Securities Exchange Act of 1934. These regulations became effective on August 12, 2011 following the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As part of this legislation, Congress authorized the SEC to make monetary payments to individuals who provide information that lead to significant enforcement actions.
Whistleblower Rule 21F-17
Rule 21F-17 provides that “no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.” OCIE has been reviewing, in particular, registrants’ employment and severance agreements, policies and procedures, and Code of Ethics, among other documents, to determine whether they contain language that could restrict or deter an employee or former employee from disclosing potential violations about their employers.
In the Matter of KBR, Inc.
In recent cases brought by the SEC, firms were found to be in violation of Rule 21F-17 because their agreements with employees limited the type of information an employee could disclose to SEC staff or required a forfeiture of potential monetary rewards as a result of reporting a violation. In its enforcement action against KBR, Inc. in April 2015, the SEC found that a confidentiality agreement used by the company with its employees during internal investigations violated the Rule because it required employees to agree to not discuss any particulars from the investigations without first obtaining the approval of the company’s legal department. Furthermore, the agreement stated that failure to comply with this requirement could result in termination. KBR ultimately amended its confidentiality agreement by adding language that specifically stated that employees were permitted to make disclosures protected under whistleblower provisions and that no prior authorization or notification with respect to such disclosures was required on the part of employees.
Watch for Restrictive Language
In addition to the language noted above, other provisions that may trigger a violation of Rule 21F-17 include (a) requiring an employee to represent to their employer that they have not assisted in any investigation of the firm; and (b) permitting an employee to disclose confidential information if required by law but not allowing such communications with regulators on a voluntary basis.
Ensuring Compliance with the Rule
So what actions can your firm take to comply with the whistleblower regulations under Rule 21F-17? To begin with, you should review all documents that could contain provisions impeding employees from disclosing potential violations to the SEC. If documents are found to be non-compliant, you should amend them so that they explicitly state that employees and former employees are not prohibited from voluntarily discussing potential violations with regulators or from receiving a whistleblower reward. For those employees who have already signed agreements or other documents that violate the whistleblower regulations, you can notify them of their right to contact regulatory authorities. You should do the same with respect to former employees who have signed restrictive severance agreements.
Summary
Overall, in light of OCIE’s current focus on Rule 21F-17 compliance and the recent cases brought by the Division of Enforcement, it is critical that registered investment advisors and broker-dealers give this Rule the attention it deserves.
Hayley Nelson is the President and Principal Consultant of NCA Compliance, Inc., a compliance consulting firm specializing in SEC mock audits and forensic testing. Previously, she worked for the Securities and Exchange Commission and a large investment manager in New York.
