Thursday, October 27, 2016

OCIE issues risk alert on compliance with whistleblower rule

By Amanda Maine, J.D.

The SEC’s Office of Compliance Inspections and Examinations (OCIE) has issued a Risk Alert for registered broker-dealers and investment advisers on registrants’ compliance with the Dodd-Frank Act’s whistleblower protection rule. The alert identifies several documents that OCIE staff will analyze for compliance with the rule, including compliance manuals, codes of ethics, employment agreements, and severance agreements. The alert comes on the heels of recent SEC enforcement actions against companies that had included whistleblower “chilling” language in severance and other employment agreements.

Recent enforcement actions. Rule 21F-17 under the Dodd-Frank Act provides 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.” The SEC has brought several recent enforcement actions against companies (KBR, Merrill Lynch, Anheuser-Busch, Health Net, BlueLinx) that violated the rule because confidentiality or severance agreements included language that would impede current and former employees from communicating with the SEC about possible securities law violations. These agreements have a potential “chilling effect” because they provide that an employee could forfeit all benefits if he or she violates the terms of the agreement by communicating with the SEC, according to the alert.

Examinations. The alert advises that when OCIE staff reviews a registrant’s compliance with Rule 21F-17, it may analyze compliance manuals, codes of ethics, and employment and severance agreements to determine if they contain provisions that purport to limit the types of information an employee may provide to the SEC or require departing employees to waive their rights to a whistleblower reward under Dodd-Frank’s whistleblower provision.

The staff will also assess whether these documents contain provisions that require an employee to represent that he or she has not assisted in any investigation involving the registrant or to either notify or obtain the consent of the registrant prior to disclosing confidential information to the Commission. Other provisions that face staff scrutiny include those that prohibit any disclosures of confidential information, without any exceptions for voluntary communications with the SEC, and those that purport to permit disclosures of confidential information only as required by law.