The Office of Compliance Inspections and Examinations (OCIE) announced it is examining registrants' compliance with key whistleblower provisions arising out of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).

Specifically, OCIE, a unit of the Securities and Exchange Commission (SEC), said that in examinations of registered investment advisers and registered broker-dealers, staff are reviewing their use of compliance manuals, codes of ethics, employment agreements and severance agreements – among other aspects of their operations – to determine whether provisions in those documents pertaining to confidentiality of information and reporting of possible securities law violations may raise concerns under Rule 21F-17 (the Rule) of the Securities Exchange Act of 1934.

Implemented as a part of the Dodd-Frank Act and effective since 2011, the Rule prohibits "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." Protecting whistleblowers providing tips and evidence of wrongdoing to the SEC has been an ongoing priority for the agency, which has brought several enforcement actions recently charging violations of the Rule. As of July 2016, it had issued more than $85 million in monetary recovery to 32 whistleblowers since the program's inception. See our recent article for a summary of whistleblower-related developments.

The OCIE risk alert says staff are focusing on investment advisers' and registered broker-dealers' compliance manuals, codes of ethics, employment agreements and severance agreements to see if they contain provisions similar to those uncovered in recent enforcements that were found to violate the Rule. Examples have included provisions that purport to limit the types of information an employee may convey to the SEC or other authorities and those requiring departing employees to waive their rights to any individual monetary recovery resulting from reporting information to the government. Staff will also be on the lookout for problematic provisions that:

  • Require an employee to represent that he or she has not assisted in any investigation involving the registrant.  
  • 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 registrant prior to disclosing confidential information, without any exception for voluntary communications with the SEC concerning possible securities laws violations.  
  • 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.

Due to OCIE's stated focus on registered investment advisers' and registered broker-dealers' documentation, covered entities should review their compliance manuals, codes of ethics, employment agreements, severance agreements and other documents with a specific eye for language that may contravene whistleblower protection rules.

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