SEC ANNOUNCES EXAMINATIONS OF RIAS FOR WHISTLEBLOWER RULE COMPLIANCE

On October 24, 2016, the staff in the Office of Compliance Inspections and Examinations (the “Staff“) of the U.S. Securities and Exchange Commission (the “SEC“) issued a risk alert announcing that it is examining registered investment advisers (“RIAs”) and registered broker-dealers for compliance with Rule 21F-17 under the Securities Exchange Act of 1934, as amended (the “Whistleblower Rule“). The following briefly summarizes the Staff’s risk alert and offers some practical guidance regarding steps that RIAs can take to help them comply with the Whistleblower Rule.

Background

In short, the Whistleblower Rule prohibits a person from taking any action to impede an individual from communicating directly with the SEC staff about a possible securities law violation, including by enforcing or threatening to enforce a confidentiality agreement.

Compliance with the Whistleblower Rule has been an area of focus recently for the SEC. Indeed, the SEC has brought at least four enforcement actions in 2016 alone for violations of the Whistleblower Rule and touted that total whistleblower awards to date have exceeded $100 million.

According to the risk alert, the Staff is reviewing various documents during its RIA examinations, including compliance manuals, codes of ethics, employment agreements and severance agreements, to determine whether any provisions in those documents may raise concerns under the Whistleblower Rule. In particular, the Staff is concerned with provisions that: (i) purport to limit the types of information that an employee may convey to the SEC or other authorities; and (ii) require departing employees to waive their rights to any individual monetary recovery in connection with reporting information to the government. In addition, the Staff indicated that it would assess whether an RIA’s documents include other language that could, under the circumstances that such language is used, result in a violation of the Whistleblower Rule, such as provisions that:

  • require an employee to represent that he has not assisted in any investigation involving the RIA;
  • prohibit any and all disclosures of confidential information, without any exception for voluntary communications with the SEC concerning possible securities laws violations;
  • require an employee to notify and/or obtain consent from the RIA prior to disclosing confidential information, without any exception for voluntary communications with the SEC concerning possible securities laws violations; and
  • purport to permit disclosures of confidential information only as required by law, without any exception for voluntary communications with the SEC concerning possible securities laws violations.

The Staff noted that it is both citing deficiencies and making referrals to the SEC’s Division of Enforcement, as appropriate, when it encounters provisions in an RIA’s documents that it believes run afoul of the Whistleblower Rule.

Practical Tips for RIAs to Comply with the Whistleblower Rule

In light of the concerns raised in the Staff risk alert and the SEC’s recent enforcement trend concerning the Whistleblower Rule, RIAs should take immediate action to ensure that they are in compliance with the Whistleblower Rule. For example, RIAs should notify all current employees without delay that the RIA does not prohibit them from reporting possible violations of federal securities laws or regulations to the SEC, making other disclosures that are protected under the whistleblower provisions of federal law or regulation, or recovering any individual monetary award from the SEC or other government authority in connection therewith. RIAs should also send the notice to former employees with severance agreements to the extent that any language in those agreements could be interpreted as being inconsistent with the Whistleblower Rule. A sample notification for current employees that an RIA may use after modifying as appropriate for its particular circumstances (this notice can also be conformed for former employees with severance agreements) can be accessed here and is included as an exhibit below. [1]

Subsequently, RIAs should promptly review their compliance manuals, employment manuals, codes of ethics and forms of employment and severance agreements for compliance with the Whistleblower Rule. In addition, because the application of the Whistleblower Rule is not limited to employees, RIAs should also review their vendor agreements and other agreements and documents for compliance with the Whistleblower Rule. If an RIA finds any language that is inconsistent with the Whistleblower Rule, it should consult with counsel to appropriately amend or supplement these documents as soon as possible.

E Wagner
E Wagner

By Eric Wagner and Jamie Nash from Kleinberg Kaplan.

Eric Wagner chairs the Corporate Department at Kleinberg Kaplan. Eric focuses his practice on the financial services industry, specializing in advising both start-up and seasoned private investment funds, SEC registered investment advisors, family offices, commodity pool operators and commodity trading advisors on regulatory and strategic issues related to their formation, operation and investments. He has extensive experience in structuring management company ownership agreements and seed capital arrangements, as well as advising clients with respect to marketing agreements, employment matters, and general securities matters.

J Nash
J Nash

Jamie Nash is a partner at Kleinberg Kaplan where he focuses his practice on the investment management industry.  Jamie advises start-up and mature private investment funds and investment advisors on issues related to their formation, structure and operation.  He also advises clients with respect to management company operating agreements, seed capital arrangements, employment and consulting agreements, general securities law matters, commodities issues, third-party marketing agreements, soft-dollar arrangements and blue sky compliance. Jamie also spends a significant portion of his practice advising investment advisors with respect to establishing, implementing and monitoring compliance programs, as well as counseling clients through SEC investment advisor examinations.

[1] This sample notification is provided for informational purposes only.  It does not constitute legal advice.  Parties should consult with legal counsel familiar with their particular circumstances before distributing this notification.

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