Category: Alerts

Alaric Compliance Alert: Addressing Unintended "Chilling Effect" on Whistleblowers

Firms Must Amend Language in their P&Ps to Address Unintended “Chilling Effect” on Whistleblowers

The Securities and Exchange Commission (“SEC”) has issued a Risk Alert1 to encourage registered investment advisers and registered broker-dealers (“firms”) 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.

Highlights of the Alert
Protective provision 21F-17 of the Whistleblower Rule 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.”2

In recent sweep examinations, the SEC has found issue with the language in a firm’s policies and procedures (“P&Ps”) or employment agreements that may have the unintended effect of discouraging whistleblowers from reporting malfeasance. According to the 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.

Firms are advised to review their P&Ps, compliance manuals, Codes of Ethics, confidentiality and employment agreements to ensure compliance with Rule 21F-17. And if needed, firms should modify language that could have the unintended consequence of discouraging whistleblowers from reporting a regulatory breach.

In 2016, the SEC issued awards totaling over $57 million, which is higher than all awards given in the previous years combined. Whistleblower tips have been increasing as well and are at an all-time high. In 2016, the SEC received 4,218 tips, a 40 percent increase since 2012, the first year the data was tracked.3

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 provisional Rule 21F-17 may face stiff penalties. In August, for example, the SEC announced that an Atlanta-based 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.4

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