Increased Focus on Whistleblowers

January 30, 2017

The number of whistleblower tips received by the SEC has increased dramatically in recent years. As reported in the SEC’s Fiscal 2016 Annual Dodd-Frank Whistleblower Program Report, the agency received over 4,200 tips over the past two years, a rise of more than 40 percent since FY 2012 (the first year for which the SEC collected full-year data).

Coinciding with the growing number of tips is an increasing amount of cash payouts to whistleblowers: more than $57 million was paid to 13 whistleblowers in 2016. In total, the SEC has issued more than $111 million in awards to 34 whistleblowers since the agency’s whistleblowing program was established in August 2011.

Recent Enforcement Case - Improper Employee Separation Agreements 
To ensure that potential whistleblowers are free to “whistle,” the SEC has cited firms that have attempted to impede employees and former employees from communicating with the SEC concerning possible securities law violations. Most recently, on January 17, the SEC announced that a New York-based asset manager agreed to pay a $340,000 penalty to settle charges that it improperly used separation agreements to force exiting employees to waive their ability to obtain whistleblower awards. Specifically, the employees acknowledged that they would “waive any right to recovery of incentives for reporting of misconduct.” According to the SEC order, more than 1,000 departing employees had signed separation agreements containing this type of prohibited language. The firm had voluntarily revised its separation agreements in March 2016, prior to the SEC reaching out to them on the issue. As part of the settlement, the firm agreed to contact former employees who signed separation agreements over an approximately five-year period ending March 31, 2016 and provide them with an Internet link to the SEC order, along with a statement that the firm does not prohibit former employees from seeking and obtaining whistleblower awards from the SEC.

Increase in Whistleblower-focused Exams 
ACA has observed that the SEC exam staff continues to cite deficiencies in this area. The staff also has conducted numerous whistleblower-focused exams, some of which have been referred to the Division of Enforcement. In light of the SEC’s actions in this area, investment advisers should review their employment, settlement, and separation agreements, as well their employee handbooks and compliance policies and procedures, to ensure that restrictions on employees are not overly restrictive. During these reviews, advisers should keep in mind that common standard provisions in such agreements and policies may be interpreted in a manner that could run afoul of the SEC’s whistleblower rule, Rule 21F-17 under the Securities Exchange Act of 1934.

Questions about Whistleblower Topics
ACA can assist Investment Advisers in reviewing their compliance policies and procedures to ensure that they are aligned with the SEC’s whistleblower policy. For more information please contact Michelina Cuccia or your ACA consultant, or visit www.acacompliancegroup.com.