SEC Settles with Securities Company Over Whistleblower Restrictions

The SEC has recently announced its success in settling charges with a major securities company over allegedly restricting employees from contacting regulators.

This sends a strong message that companies are forbidden from prohibiting employees’ ability to contact regulators and that the SEC intends to enforce Rule 21F-17 to its fullest extent.

The SEC alleged that the company training materials had contained language in its training material and compliance manual that prohibited employees from contacting regulators prior to receiving the employer’s approval. The SEC’s allegations state that from the years 2016 to 2020, the company’s compliance manual stated that employees may be subject to disciplinary action should they discuss any subject matter with government regulators. This includes a discussion of individual registration with FINRA. 

The SEC alleges that this manual was updated on an annual basis, and all employees were required to sign a written agreement to abide by its provisions. According to the SEC’s allegations, this message was extended to annual compliance training given in 2018 and 2019 as well.

These alleged rules and training would violate rule 21F-17 which prohibits employers from impeding a worker’s ability to contact the SEC and report potential violations of security laws. This rule was passed in the wake of the Dodd-Frank Act in 2010. The SEC takes violations of this rule quite seriously due to their dependence on whistleblowers as a primary tactic to enforce existing securities regulations.

According to the SEC they know of no instances when this company took action to enforce this policy or directly prevent communication. Additionally, they have stated that there are no recorded instances of a time in which an employee was prevented from communicating with the SEC. Soon after, the SEC contacted the company, and they removed this rule and released a new provision notifying employees of their right to notify regulators of violations and assist in any government investigations.

According to the SEC, the company has agreed to a settlement without admitting to any fault and agreed to a cease-and-desist order, censure, and to a penalty of $208,912. Though SEC actions over similar issues have been warnings in recent years, it is possible that this could signal their intent to return to heavier enforcement of Rule 21F-17 violations under the current administration. Companies would be well advised to review their policies to ensure that no language could indicate employees are not free to report violations as they see them or assist investigators.