With regulators blowing the whistle on whistleblower retaliation, financial firms face stiff penalties for policies and procedures (P&Ps), including employment agreements, that could discourage or de-incentivize whistleblowers from reporting violations to regulators.
Just this week, for instance, the Securities and Exchange Commission announced that BlackRock Inc. agreed to pay a $340,000 penalty for using separation agreements that waived departing employees' rights to whistleblower awards.
And in December, the SEC announced a $1.4 million settlement in a first-of-its-kind whistleblower retaliation case in which a company fired an internal whistleblower, and used overly prohibitive separation agreements that restricted departing employees from cooperating in government investigations.
While that case involved SandRidge Energy Inc., an oil-and-gas company, it nonetheless is germane to the financial advisor industry because the SEC has issued a Risk Alert to encourage investment advisors and broker-dealers to assess compliance with a provision of the Securities Whistleblower Incentives and Protection (the "Whistleblower Rule"), established under Section 922 of the Dodd-Frank Act.
This protective provision 21F-17 of the of the Securities Exchange Act of 1934 stipulates that "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." In addition to rule 21F-17, Section 21F(h)(1) prohibits employers from taking retaliatory actions, either directly or indirectly, against whistleblowers who report possible violations of securities laws.
In recent sweep examinations, the SEC has found issue with the language in a firm's P&Ps or employment agreements that may have the unintended effect of discouraging whistleblowers from reporting malfeasance. According to the SEC's Risk Alert, this "chilling effect" can be especially pronounced when documents state that an employee may forfeit benefits if he or she violates terms of employment.
In 2016, the SEC issued awards totaling over $57 million, which is higher than all awards given in the previous years combined. The number of whistleblower tips have been increasing as well, and are at an all-time high. In 2016, the SEC received 4,218 tips, a 40% increase since 2012, the first year the data was tracked. To date, the SEC's Whistleblower program has awarded more than $136 million to whistleblowers who have voluntarily provided the SEC with information leading to successful enforcement actions.
Firms that fail to comply with rule 21F-17 and Section 21F(h)(1) face stiff penalties. In addition to the December case, for example, the SEC recently announced a company agreed to pay $265,000 to settle charges that its severance agreements required outgoing employees to waive their rights to monetary recovery should they file a complaint with authorities.
Financial firms are advised to review their P&Ps, compliance manuals, Codes of Ethics, confidentiality and employment agreements to ensure compliance with the Whistleblower Rule and protective provisions. If necessary, firms must modify language that could have the unintended consequence of discouraging whistleblowers from reporting a regulatory breach.
Guy F. Talarico is the founder and Chief Executive Officer of Alaric Compliance Services LLC, a regulatory compliance consulting firm that works with RIAs, broker-dealers and other financial services companies.