Broker-Dealer Agrees to Pay $18 Million for Whistleblower Protection Violations

A dually registered broker-dealer/investment adviser ("firm") settled SEC charges for violating the whistleblower protection rule by requiring that clients sign release forms prior to receiving settlements.

According to the SEC Order, the firm asked clients "to whom it had issued a credit or settlement over $1,000 in value to sign a confidential release agreement that impeded the clients from disclosing potential violations of the federal securities laws to the Commission unless responding to an inquiry from the Commission." The SEC said that the release required the clients to keep confidential "all information relating in any way to the specified account" at the firm. The SEC found that the release provisions "did not permit voluntary communications with the Commission concerning potential securities law violations."

The SEC concluded that the confidentiality provisions of the release violated whistleblower protections under Exchange Act Rule 21F-17(a) ("Staff communications with individuals reporting possible securities law violations").

To settle the charges, the firm agreed to (i) a civil penalty of $18 million, (ii) a censure and (iii) issue a revised release agreement to comply with whistleblower protection laws.