Enforcement News: SEC Charges Numerous Companies With Violation of The Whistleblower Protection Rule

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Posted on: Sep 11 2024

“Ensuring that potential whistleblowers can communicate directly with the Commission is a critical part of the SEC’s oversight mandate”[1]

On numerous occasions, we have written about the Securities and Exchange Commission’s (“SEC” or the “Commission”) whistleblower program and, in particular, the success of the program with respect to detecting and preventing violations of the federal securities laws. The success of the program depends, in large part, on the ability of would-be whistleblowers to have the freedom to report wrongdoing without fear of reprisal. Taking steps to impede a person, such as an employee or former employee, from sharing information with the SEC impairs this free flow of information to the Commission. To ensure the freedom to communicate, the SEC has cracked down on companies that use severance agreements, employment contracts, and other types of agreements to silence and discourage people from reporting wrongdoing to the Commission.[2]

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) to combat illegal and fraudulent conduct on Wall Street and promote compliance with the federal securities and commodities laws. The Dodd-Frank Act contains whistleblower provisions that authorize the Commission to pay substantial cash rewards to whistleblowers that voluntarily provide the SEC with information about securities fraud and other violations of the securities laws, including the Foreign Corrupt Practices Act.

To fulfill the purpose of the Dodd-Frank Act, the Commission adopted Rule 21F-17, which provides in relevant part:

(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.

Rule 21F-17 applies to any policy or procedure, or agreement, such as confidentiality, severance, and non-disclosure agreements, that may impede a person from providing information to the SEC about a securities law violation.

Rule 21F-17 became effective on August 12, 2011. Since its adoption, the SEC has vigorously enforced Rule 21F-17.

Despite being effective for more than 13 years, many companies have ignored the mandate of Rule 21F-17. In this regard, they have used employment contracts, severance agreements and other types of agreements to silence and discourage people from reporting violations of the securities laws to the Commission.

Recently the SEC announced that it had settled charges against numerous companies for violation of Section 21F.

The first action was announced on September 4, 2024 (here). In that action, the SEC brought charges against three affiliated registrants, Commission-registered broker-dealer Nationwide Planning Associates, Inc. and investment adviser NPA Asset Management, LLC, and state-registered investment adviser Blue Point Strategic Wealth Management, LLC, for impeding brokerage customers and advisory clients from reporting securities law violations to the SEC. The firms agreed to pay combined civil penalties of $240,000 to settle the SEC’s charges.

According to the SEC’s order (here), from May 2021 through February 2024, Nationwide, NPA, and Blue Point collectively asked 11 retail clients to sign confidentiality agreements in connection with payments made by the entities to the clients’ investment accounts. The payments were intended to compensate the clients for losses caused by the firms’ alleged breaches of federal or state securities laws. The SEC found that the agreements contained provisions that impeded clients from reporting potential securities law violations to the SEC by permitting communications only where the SEC first initiated an inquiry. As described in the order, some of the agreements further required the clients to represent that they had not reported the underlying dispute to the SEC or to another securities regulator and would forever refrain from such reporting.

Commenting on the enforcement action, Corey Schuster, Co-Chief of the Enforcement Division’s Asset Management Unit, stated: “Pure and simple, investors need to be able to report complaints or evidence of wrongdoing to the SEC without impediment. We will continue to hold firms accountable for putting roadblocks between us and their investors.”

The SEC claimed that Nationwide, NPA, and Blue Point each violated Rule 21F-17(a) under the Exchange Act. Without admitting or denying the SEC’s findings, Nationwide, NPA, and Blue Point each agreed to be censured and to cease and desist from violating the whistleblower protection rule. They further agreed to a combined penalty, which was apportioned according to their relative size and financial condition, with NPA agreeing to pay $160,000, Nationwide $70,000, and Blue Point $10,000.

The second set of actions was announced on September 9, 2024 (here). In those actions, the SEC brought charges against seven public companies for using employment, separation, and other agreements that violated rules prohibiting actions to impede whistleblowers from reporting potential misconduct to the SEC. To settle the SEC’s charges, the companies agreed to pay more than $3 million combined in civil penalties.

Each of the companies was charged with violating whistleblower protection Rule 21F-17(a).[3] In settlement of the actions, each of the firms agreed not to violate Rule 21F in the future and has taken steps to remediate the violations, including making changes to the relevant agreements.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] Creola Kelly, Chief of the SEC’s Office of the Whistleblower (here).

[2] In April 2015, the SEC brought the first enforcement action for a violation of the whistleblower protection rule based on a company’s use of a restrictive confidentiality agreement. See In the Matter of KBR, Inc., Exchange Act Release No. 74619 (Apr. 1, 2015). This Blog wrote about that enforcement action here. Since 2015, the SEC has instituted numerous enforcement actions charging violations of the rule. This Blog has examined some of those enforcement actions here, here, here, here, and here.

[3] The SEC orders can be found: here, here, here, here, here, here, and here.