June 28, 2021
SEC Says Employee Manual’s Whistleblower Restriction Violates Exchange Act
Last week, I blogged on TheCorporateCounsel.net that the SEC has issued a record amount of whistleblower awards this year. Companies need to anticipate the possibility of whistleblowers and encourage employees to raise concerns internally – but that doesn’t mean you can prohibit them from going directly to the SEC! Doing so would violate Rule 21F-17 of the Exchange Act.
Last week, the SEC announced that it had settled an enforcement action with a brokerage firm that tried to do just that, by including this provision in its employee manual and related training:
Employees are also strictly prohibited from initiating contact with any Regulator without prior approval from the Legal or Compliance Department. This prohibition applies to any subject matter that might be discussed with a Regulator, including an individual’s registration status with FINRA. Any employee that violates this policy may be subject to disciplinary action by the Firm.
The manual defined “Regulator” to include the SEC. Meanwhile, the Code of Conduct said:
Nothing in this policy or any other Company policy or agreement is intended to prohibit you (with or without prior notice to the Company) from reporting to or participating in an investigation with a government agency or authority about a possible violation of law, or from making other disclosures protected by applicable whistleblower statutes.
That wasn’t enough to save the company from being tagged in the enforcement action – nor was the finding that no employees were actually prevented from communicating with the SEC about potential violations, or that the company took no action to actually enforce the restriction or prevent communications. Although the company didn’t admit or deny the findings in the SEC order, as part of the settlement they agreed to pay about $210k, revise the manual, alert their employees to the change, and promise not to do it again. See this Stinson blog for more details.
If you haven’t reviewed your employee manual and code of conduct lately, this is a good reminder to do so. If your comp committee is evolving into a “people committee,” they might have a hand in that.
– Liz Dunshee