SEC examiners on hunt for RIA and broker-dealer whistleblower violations

Firms' compliance manuals and contracts will be scrutinized to ensure employee protection.

The U.S. Securities and Exchange Commission issued a risk alert Monday, preempting the next item on the examiner’s checklist: whistleblower protection.
Compliance manuals, codes of ethics, employment agreements and severance agreements are some of the documents within the scope of the examination. These documents will be combed through by the agency for any provisions that could restrict an employee or former employee from speaking out about potential securities-law violations.
The SEC Office of Compliance Inspections and Examinations issued the alert in the wake of recent enforcement actions where they identified violations of confidentiality by employers.
“When the provision was first introduced, it went largely under the radar of most advisers and B-Ds,” said Timothy Silva, partner and chair of the investment management practice at WilmerHale. “But when the KBR action was published in 2015, it caught the attention of the industry.”
According to the alert, the SEC is particularly concerned about clauses that require departing employees to “waive their rights to any individual monetary recovery” if they decide to give the government information — a restriction that undermines the incentive to report.
Other areas of scrutiny can include overarching confidential information clauses in the employee’s contract and policies requiring employees to alert their employer before they go to the authorities.
It is relatively easy for advisers to update their current compliance policies and agreement templates to comply with the whistleblower provisions, but it’s the retrospective ones that are the challenge.
“It is difficult enough to try to amend documents that were executed years ago with people who are no longer employees, and even more challenging when the communication is to remind them that they can bring a whistleblower claim against their former employer,” Mr. Silva said. “This is not something that most advisers and BDs are especially enthusiastic about doing.”
The whistleblower program was introduced through the Dodd-Frank Act in 2011. It allows the SEC to award whistleblowers 10% to 30% of monetary sanctions collected on $1 million or more for information that lead to a successful enforcement action. The current record payouts to whistleblowers are $30 million in 2014 and $22 million this year.