BD/IAs Settle Charges for Violating Whistleblower Protection Rules
Commentary by Kevin Harnisch
A broker-dealer and two of its affiliated investment advisers settled SEC charges for requiring clients to sign confidentiality agreements that impeded the clients from reporting potential securities law violations.
In its Order, the SEC found that the respondents asked eleven clients to sign confidentiality agreements before receiving compensatory payments related to investment account losses. These agreements contained provisions that restricted clients from reporting potential violations to regulators unless the regulator had initiated an inquiry. The SEC found that some of the agreements also required clients to confirm that they had not previously reported, nor would they ever report, the matter to the SEC or any other securities regulator.
The SEC determined that by including these clauses, the firms violated SEA Rule 21F-17(a) ("Staff communications with individuals reporting possible securities law violations").
To settle the charges, one firm agreed to (i) cease and desist from future violations, (ii) a censure and (iii) pay civil money penalties of $70,000; $160,000; and $10,000.
Commentary
The SEC takes hardline and aggressive views on what constitutes impeding a person's ability to communicate freely with the SEC. When negotiating confidentiality provisions in separation and settlement agreements, companies need to realize that the SEC will not hesitate to contort language in ways to suggest nefarious intentions.