SEC Settles Charges Against Adviser/Broker-Dealer for Alleged Whistleblower Protection Rule Violations
On January 16, 2024, the SEC announced that it had settled charges against a dually registered investment adviser and broker-dealer for allegedly impeding its advisory clients and brokerage customers from reporting potential violations of the federal securities laws to the SEC, in violation of whistleblower protections under the Securities Exchange Act of 1934. The firm agreed to pay a record $18 million civil penalty to settle the charges.
According to the SEC’s order, from March 2020 through July 2023, the firm had asked certain clients that had been issued a credit or settlement of more than $1,000 to sign a confidential release agreement, which required the clients to keep the agreement confidential, including the existence and terms of the agreement, the underlying facts and other related information. Although such agreements expressly permitted the clients to respond to SEC inquiries, the terms of the agreements effectively prohibited clients from voluntarily contacting the SEC. The SEC found that the firm had willfully violated Rule 21F-17(a) under the 1934 Act, which prohibits any person from taking action to impede an individual from communicating directly with the SEC staff about possible securities law violations, including enforcing, or threatening to enforce, certain confidentiality agreements with respect to such communications.
In the settlement of the charges, without admitting or denying the findings set forth in the SEC’s order, the firm agreed to be censured, to cease and desist from committing or causing violations of Rule 21F-17(a) and to pay an $18 million civil penalty. The $18 million penalty represents the largest civil penalty imposed for standalone whistleblower protection rule violations. The SEC’s order also follows two other recent enforcement actions for whistleblower protection rule violations that were settled in September 2023.
The SEC’s order is also notable for its application of whistleblower protections to client agreements, as charges for alleged violations of Rule 21F-17(a) have historically been brought in the context of employee agreements. In the press release announcing the settlement, Gurbir Grewal, the Director of the SEC’s Division of Enforcement, stated that, “[w]hether it’s in your employment contracts, settlement agreements or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing.”
The SEC’s order is available here. A related press release is available here.
Vedder Thinking | Articles SEC Settles Charges Against Adviser/Broker-Dealer for Alleged Whistleblower Protection Rule Violations
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March 12, 2024
On January 16, 2024, the SEC announced that it had settled charges against a dually registered investment adviser and broker-dealer for allegedly impeding its advisory clients and brokerage customers from reporting potential violations of the federal securities laws to the SEC, in violation of whistleblower protections under the Securities Exchange Act of 1934. The firm agreed to pay a record $18 million civil penalty to settle the charges.
According to the SEC’s order, from March 2020 through July 2023, the firm had asked certain clients that had been issued a credit or settlement of more than $1,000 to sign a confidential release agreement, which required the clients to keep the agreement confidential, including the existence and terms of the agreement, the underlying facts and other related information. Although such agreements expressly permitted the clients to respond to SEC inquiries, the terms of the agreements effectively prohibited clients from voluntarily contacting the SEC. The SEC found that the firm had willfully violated Rule 21F-17(a) under the 1934 Act, which prohibits any person from taking action to impede an individual from communicating directly with the SEC staff about possible securities law violations, including enforcing, or threatening to enforce, certain confidentiality agreements with respect to such communications.
In the settlement of the charges, without admitting or denying the findings set forth in the SEC’s order, the firm agreed to be censured, to cease and desist from committing or causing violations of Rule 21F-17(a) and to pay an $18 million civil penalty. The $18 million penalty represents the largest civil penalty imposed for standalone whistleblower protection rule violations. The SEC’s order also follows two other recent enforcement actions for whistleblower protection rule violations that were settled in September 2023.
The SEC’s order is also notable for its application of whistleblower protections to client agreements, as charges for alleged violations of Rule 21F-17(a) have historically been brought in the context of employee agreements. In the press release announcing the settlement, Gurbir Grewal, the Director of the SEC’s Division of Enforcement, stated that, “[w]hether it’s in your employment contracts, settlement agreements or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing.”
The SEC’s order is available here. A related press release is available here.
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