Newsflash: OCIE Publishes Risk Alert on Examinations of Compliance with SEC Whistleblower Rule by Investment Advisers and Broker-Dealers

The Office of Compliance Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission (SEC) issued a National Exam Program Risk Alert on October 24, 2016 (Risk Alert) regarding examinations of registrants’ employment-related documents with respect to provisions that seek to limit: (1) the types of information an employee may provide to the SEC; or (2) the monetary reward a former employee may receive when reporting to the SEC as to possible securities law violations.¹ 

The Risk Alert states that, in OCIE staff examinations of registered investment advisers and registered broker-dealers, the staff will review, among other materials, “compliance manuals, codes of ethics, employment agreements, and severance agreements” to determine whether certain provisions in those documents may contravene whistleblower protections set forth in Rule 21F-17 (Whistleblower Rule) under the Securities Exchange Act of 1934. The Risk Alert further cautions that OCIE staff “is citing deficiencies and making referrals to the Division of Enforcement where appropriate.”

Background 

The Dodd-Frank Act amended the Exchange Act to add Section 21F, “Securities Whistleblower Incentives and Protection.” Section 21F empowers the SEC to pay monetary awards to “whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement” of “any judicial or administrative action brought by the Commission under the securities laws that results in monetary sanctions exceeding $1,000,000.” Section 21F also protects whistleblowers from retaliation by employers.² As part of implementing the Dodd-Frank whistleblower program, the SEC adopted the Whistleblower Rule, which states “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation.”³ In June of 2014, the SEC brought its first enforcement action related to anti-retaliation provisions, in a matter involving an investment adviser to a hedge fund.⁴ The following year, SEC Chair Mary Jo White referred to the SEC’s whistleblower program as a “game changer” and stated that “ambivalence about whistleblowers can indeed sometimes manifest itself in an unlawful response by a corporate employer and we are very focused at the SEC on cracking down on such misconduct.”⁵ So far this year, the SEC has brought four additional actions for violations of the Whistleblower Rule,⁶ and has announced that aggregate awards under the whistleblower program have surpassed $100 million. 

Risk Alert 

In addition to informing registrants as to the scope of the examination initiative, including the documents the OCIE will examine and the provisions that “may raise concerns” under the Whistleblower Rule, the Risk Alert provides OCIE staff observations regarding the conduct at issue in recent enforcement actions. 

OCIE staff characterized the enforcement actions as focusing on employment-related documents that “contained language that, by itself 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.” The Risk Alert indicates that “[t]his potential chilling effect can be especially pronounced” when a severance agreement provides that an employee “may forfeit all benefits” upon violation of its terms. The Risk Alert also provides an overview of the remedial measures provided for in recent enforcement actions, which have included requirements for registrants to: 

• revise documents to clarify that employees and former employees are not prohibited from (1) voluntarily communicating with authorities regarding possible violations of law or (2) recovering an award pursuant to a whistleblower program; 
• notify employees of “their right to contact” authorities; and
• inform former employees who have signed severance agreements that there are no prohibitions against (1) voluntarily communicating with authorities regarding possible violations of law or (2) recovering an award pursuant to a whistleblower program. 

The Risk Alert indicates that OCIE is concerned about provisions “similar to those ... found to violate” the Whistleblower Rule, including:

• limits on the types of information that may be communicated to the SEC by an employee; and 
• waivers of departing employees’ rights to collect awards related to communicating with the SEC. 

OCIE is also concerned about provisions that act as impediments to an employee or former employee who may seek to communicate with the SEC, in contravention of the Whistleblower Rule, such as provisions that: 

• require a representation that an employee has not assisted in any investigation related to the registrant; or 
• restrict disclosure of confidential information without an exception for voluntary communications with the SEC regarding possible securities laws violations through: prohibitions on disclosure of confidential information; notice and/or consent requirements prior to disclosure of confidential information; or statements that disclosures of confidential information are only as required by law. 

Implications for Registrants 

As the Director of the SEC’s Division of Enforcement has recently noted, the SEC staff believes that the whistleblower program has had a “transformative impact” on the SEC’s ability to detect and prosecute illegal conduct.⁷ Such statements, together with the uptick in enforcement actions and this latest Risk Alert, demonstrate the SEC’s continued focus on registrants’ practices with respect to the Whistleblower Rule. Registrants should consider evaluating their compliance manuals, codes of ethics, employment agreements, severance agreements and any other documents that may contain provisions that arguably could be deemed to interfere with a whistleblower’s rights under the Dodd-Frank Act, and take steps to remediate any material deficiencies. 

Footnotes 

_{1) Examining Whistleblower Rule Compliance, SEC OCIE National Exam Program Risk Alert, Volume VI, Issue 1 (Oct. 24, 2016).
2) Employers are prohibited from retaliation against whistleblowers who: provide information to the SEC; assist the SEC in its investigations; or make “disclosures that are required or protected” under the Sarbanes-Oxley Act of 2002, the securities laws and other SEC regulations. Dodd-Frank Act at Section 21F(h). Please refer to Dechert OnPoint, The U.S. Supreme Court Extends Sarbanes-Oxley Whistleblower Protections to Employees of Mutual Fund Investment Advisers and Other Privately-Held Contractors to Public Companies.
3) Rule 21F-17(a). The rule became effective in August 2011 and specifically addresses confidentiality agreements.
4) For additional information regarding this enforcement action, please refer to Dechert OnPoint, SEC Charges Hedge Fund Adviser with Engaging in Prohibited Principal Transactions and Retaliating Against Whistleblower.
5) Chair Mary Jo White, The SEC as the Whistleblower's Advocate at the Garrett Institute-Northwestern University School of Law (Apr. 30, 2015).
6) For additional information regarding several recent enforcement actions, please refer to Dechert OnPoint, SEC Continues to Target Employer Agreements Restricting Whistleblower Rights.
7) Andrew Ceresney, Director, Division of Enforcement, U.S. Sec. & Exch. Comm’n, The SEC’s Whistleblower Program: The Successful Early Years at Sixteenth Annual Taxpayers Against Fraud Conference (Sept. 14, 2016).}