A recent SEC action (June 23, 2021) regarding Guggenheim Securities, LLC (“Guggenheim”) extended the Dodd-Frank Act whistleblower protections to include employee manuals and training materials.
Whistleblower protections have existed for many years. The term refers to several federal statutory provisions intended to keep employers (private employers or federal agencies) from retaliating against employees (and certain other persons) who report company violation of multiple federal laws. These laws are intended to allow for a kind of internal policing of companies, by allowing employees who have internal information about statutory violations to provide the information to government agencies without fear of retaliation.
From an employee’s point of view, this is an opportunity to report corporate wrongdoing. From an employer’s point of view, this provides a disgruntled employee an opportunity to cause the employer trouble. Employers would naturally like to limit the ability of employees to report on them.
For years, lawyers who advise businesses have generally been careful to include a “whistleblower exception” in their confidentiality agreements. This clause allows a person with confidential information about a company’s violations of law, that would otherwise not be disclosable, to disclose the information to applicable federal regulatory agencies. By doing this, the companies permit disclosure, and the employees are free to disclose reportable information to government authorities if required or permitted by whistleblower statutes or regulation.
Dodd-Frank Act and Federal Securities Law Violations.
The Dodd-Frank Act of 2010, a central part of the Obama administration’s financial reforms, added a new Section 21F to the Securities Exchange Act, entitled “Securities Whistleblower Incentives and Protection.” This provision is specifically designed to incentivize whistleblowers to report to the SEC possible securities law violations. New Section 21F and Rule 21F-17 requires the SEC to pay monetary awards to individuals who voluntarily provide information about violations of the federal securities laws that leads to successful enforcement actions if they meet certain defined criteria. This goes beyond protecting against retaliatory treatment. It provides a direct incentive to blow the whistle on securities law violations.
The Guggenheim Securities Action.
The Guggenheim SEC action deals with a registered broker dealer, Guggenheim, whose compliance manual included a section that specifically prohibited employees from initiating contact with government regulators (specifically the SEC, FINRA, and state securities commissions) without prior approval from their Legal or Compliance Departments, warning that any employee that violates this policy may be subject to disciplinary action. Guggenheim also provided annual compliance training and training materials to its employees that contained similar language.
The securities brokerage business is highly regulated. Brokers want to funnel anything to do with regulatory compliance through their compliance and legal departments. One can imagine Guggenheim’s goal in having this very strict requirement was to learn about and coordinate responses to (and yes, probably “manage”) potential violations of law through their compliance and legal departments. At the same time, employees of a brokerage firm are in a prime position to learn about securities law violations, and the SEC would like them to have the unfettered ability to report potential violations.
As we saw above, Rule 21F-17 under the Exchange Act prohibits any person from taking any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation. While the SEC did not find any instances where a Guggenheim employee was deterred from communicating with the SEC, the SEC determined that the language in Guggenheim’s compliance manual and training materials constituted a “willful” violation of Rule 21F-17.
The SEC accepted a settlement offer with Guggenheim, including censure, a monetary fine, and a “cease and desist” order to cease from committing or causing any violations of Rule 21F-17.
Check your Employee Handbook.
This SEC action indicates that companies should not only check their confidentiality agreements for whistleblower provisions, but also review their employee handbooks, training materials, and other documents. If there are any provisions that might be seen as an attempt to limit the ability of employees, officers, directors, and certain other persons to “communicate” (including report violations of law) directly with the SEC or other government agencies, consider making changes.
A small investment in time now could keep you from being the object of an SEC action.
David Peteler works with entrepreneurs in technology, impact and sustainable businesses and projects.