In the ever-evolving landscape of securities regulation, it is crucial for investment adviser firms registered with the United States Securities and Exchange Commission (“SEC”) to stay vigilant and informed about current enforcement actions. A recent cease-and-desist proceeding instituted by the SEC against a clean energy company has sent a clear message regarding whistleblower protections and the use of severance agreements. As a result, we’ll explore the implications of this enforcement action and how it relates to investment adviser firms in light of SEC Rule 21F-17.
The SEC’s Whistleblower Program and Recent Enforcement Action
Established under Section 21F of the Securities Exchange Act of 1934, the SEC Whistleblower Program encourages individuals to report possible violations of federal securities laws to the SEC while protecting them from retaliation. Subject to multiple requirements, whistleblowers who provide the SEC with original information leading to successful enforcement actions are eligible for monetary awards.
Earlier this week, the SEC published an enforcement proceeding against a privately held clean energy company for its alleged use of severance agreements that included a provision permitting the departing employee to participate in a governmental investigation and/or enforcement action but prohibiting the departing employee from recovering any monetary damages related to the proceeding. The SEC claimed that such severance agreements were used with approximately 22 employees. According to the cease-and-desist order, after being contacted by the SEC, the energy company “…voluntarily revised its separation agreement to make clear that in addition to not restricting a departing employee’s right to communicate with or provide information to governmental agencies, including the [SEC], the separation agreement did not in any way limit a separated employee’s ability to obtain an incentive award in connection with providing such information to governmental agencies.” The SEC found that the energy company violated Rule 21F-17 of the Securities Exchange Act of 1934 and imposed a fine of $225,000. Without admitting or denying the SEC’s allegations or findings, the energy company consented to the entry of the SEC’s order instituting the cease-and-desist proceeding. You can find the details of this enforcement action at https://www.sec.gov/files/litigation/admin/2023/34-98322.pdf .
Relevance to Investment Advisers
Investment adviser firms registered with the SEC need to take heed of this enforcement action. Even though this case pertains to a clean energy company, the principles behind it are applicable to all SEC-registered entities, including investment advisers.
SEC Rule 21F-17: A Crucial Consideration
One key takeaway from this SEC enforcement action is the importance of reviewing your investment adviser firm’s agreements and internal policies. SEC Rule 21F-17 is at the heart of the matter. This rule explicitly prohibits any person or entity from taking any action to impede an individual from communicating directly with the SEC staff about a possible securities law violation. As evidenced by this proceeding, the SEC interprets a limitation on receiving a monetary award for whistle blowing as inconsistent with Congressional intent and essentially an impediment from communicating directly with the SEC.
Compliance Is Key
The following are some action items to help your investment adviser firm comply with Rule 21F-17.
Review Agreements: Conduct a thorough review of all employment and investment adviser representative agreements currently in force and recent separation and severance agreements executed by your investment adviser firm. Look for any clauses or provisions that might discourage or restrict employees and investment adviser representatives from reporting potential securities law violations to the SEC.
Amend Agreements: If you identify problematic provisions in such an agreement, consult promptly with legal counsel and amend such agreements to remove any language that could be seen as impeding employees and/or investment adviser representatives from communicating with the SEC. Ensure that your investment adviser firm’s applicable agreements align with SEC Rule 21F-17.
Internal Policy Audit: Examine your internal policies and procedures related to whistleblowers and reporting. Make certain they align with SEC regulations and do not discourage employees from raising concerns internally or with the SEC.
Escalation Procedures: Establish clear procedures for employees and investment adviser representatives to report concerns internally. Encourage open communication channels and protect employees and investment adviser representatives who raise concerns.
Employee Training: Promote a culture of compliance within your organization which internally identifies and corrects potential violations of the applicable securities laws and rules. Educate your employees and investment adviser representatives about the need to report to chief compliance officer any possible violations.
Compliance Oversight: Establish ongoing compliance oversight mechanisms to monitor and review agreements and internal policies for provision which inhibit employees or former employees from communicating with the SEC. Ensure that there is no retaliation by management for such reporting.
Document Changes: Maintain clear records of the changes made to agreements and policies, including the date of revisions and the reasons for those revisions. This documentation can be valuable in demonstrating your investment adviser firm’s commitment to compliance.
This SEC enforcement action serves as a reminder that whistleblower protections are a fundamental aspect of securities regulation. Investment adviser firms must take proactive steps to ensure compliance with Rule 21F-17 and create an environment where employees and investment adviser representatives feel safe reporting potential violations within the firm.
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The information contained in this blog post is general in nature intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. This is merely a summary and does not necessarily include all material facts from the proceeding or order. RIA Compliance Consultants, Inc. has not verified the accuracy of the securities regulator’s order and is not offering any opinion whether the allegations made by the securities regulator in the administrative proceeding referenced above are accurate. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s order, rules and published guidance for more details about the topics referenced above. RIA Compliance Consultants, Inc. is not a law firm and does not provide legal services. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.