Investment Adviser Settles Charges for Violating Whistleblower Protection Rules
Commentary by Kevin Harnisch
An investment adviser settled SEC charges for using non-disclosure agreements ("NDAs") and a settlement agreement that impeded individuals from reporting potential securities law violations to the SEC.
According to the SEC's Order, the firm required twelve job candidates to sign NDAs that prohibited them from disclosing confidential information, including to regulators. The SEC found that these agreements explicitly prevented the individuals from voluntarily reporting potential securities violations without prior notice to the firm. The SEC also found that a settlement agreement with a former employee—who had indicated an intention to report alleged securities violations to the SEC—contained provisions that restricted the individual from initiating any contact with regulators and required the withdrawal of any statements already made that could lead to an investigation.
The SEC found that these provisions violated SEA Rule 21F-17(a) ("Staff communications with individuals reporting possible securities law violations").
To settle the charges, the firm agreed to (i) cease and desist from future violations, (ii) a censure and (iii) pay a civil money penalty of $500,000.
Commentary
Firms that enter into inappropriate NDAs with departing employees risk creating more problems for themselves. (See, e.g., Whistleblowers Request SEC Investigation into OpenAI's Non-Disclosure Agreements.) Employers should review their forms of NDAs, particularly for departing employees, to ensure that they are not opening themselves up to an enforcement action.