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The SEC has adopted a firm position in enforcing a restriction on Wall Street banks and other regulated entities hindering whistleblowers from… [+] talking to the SEC. (Photo courtesy of Getty Images/Spencer Platt)
courtesy of Getty Images
The recent fine and reprimand of Guggenheim Securities by the US Securities and Exchange Commission served as a stark message to Wall Street: Employees cannot be prevented from reporting potential securities law violations to the SEC or any other regulator. Whistleblowers with detailed information about significant financial fraud by their employers have become a critical weapon in the SEC’s enforcement arsenal, and any effort to limit employees’ ability to contact federal regulators undermines financial market enforcement as well as the effectiveness of the SEC whistleblower program.
The Securities and Exchange Commission (SEC) has been rigorous in protecting whistleblowers and prosecuting corporations that limit whistleblowers’ ability to report securities law violations to the SEC through employment contracts, nondisclosure agreements, corporate rules, or separation agreements.
According to the SEC, Guggenheim employees were not allowed to contact regulators without first getting approval from the firm’s legal or compliance departments. Guggenheim’s will be open from at least 2016 to 2020 “The “prohibition extends to any subject matter that might be discussed with a Regulator, including an individual’s registration status with FINRA,” according to the “core compliance” guideline for staff. The Firm may take disciplinary action against any employee who violates this policy.”
The prohibition was emphasized in Guggenheim’s annual compliance training for workers in 2018 and 2019, according to the SEC.
On June 23, the Securities and Exchange Commission (SEC) sanctioned Guggenheim and fined the brokerage $209,000. In order to comply with the law, Guggenheim altered the language in its manual.
ADDITIONAL INFORMATION FOR YOU
The SEC’s action against Guggenheim was one of many taken by the agency against publicly traded firms and other regulated entities for breaching Rule 21F-17.
“No person may take any action to prevent an individual from interacting directly with Commission staff about a probable securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement… with respect to such conversations,” according to the rule.
In 2011, as part of the Dodd-Frank Act’s implementation, the commission enacted Rule 21F-17, which established the SEC and the Commodity Futures Trading Commission whistleblower programs.
KBR Inc., a global defense contractor, was the first business to be sanctioned by the SEC for violating the restrictive-language regulation. According to the SEC, KBR ordered witnesses in certain internal investigative interviews to sign confidentiality agreements, which specified that if they discussed the material with outside parties without KBR’s prior approval, they may risk discipline and possibly termination.
KBR agreed to pay $130,000 to settle the claims and amend the text of its confidentiality agreements to remove the requirement for pre-approval to engage with the SEC and other regulators.
Following a rash of enforcement actions against companies for breaking the rule, the SEC issued a “risk alert” in 2016, informing businesses that it would be reviewing their compliance manuals, ethics codes, employment agreements, and severance agreements to see if the wording in those documents violated Rule 21F-17 and prevented employees from reporting concerns.
Since the KBR case, the SEC has brought enforcement actions against at least 12 regulated businesses for limiting individuals’ capacity to report securities law violations through restrictive language in written rules, contracts, and agreements. Merrill Lynch, SandRidge Energy, Anheuser-Busch InBev, and Blackrock were among the companies targeted by the enforcement action.
The Securities and Exchange Commission is also pursuing cases in which investors, not just employees, are made to sign agreements that prevent them from reporting securities law violations.
The SEC, for example, filed a complaint against Collectors Cafe and its owner, Mykalai Kontilai, in 2019. The SEC claimed that Collectors Cafe and Kontilai attempted to resolve investors’ allegations of wrongdoing against them by conditioning the return of their investment on agreements with signed confidentiality clauses that prohibited communications with law enforcement, including the SEC, about the all-important matter of the all-important matter of the all-important matter of the all-important matter of the all-important
Collectors Cafe and Kontilai had the guts to sue one claimed victim for breaching the confidentiality guarantee by speaking to the Securities and Exchange Commission. They demanded punitive and compensatory damages, as well as reimbursement of the funds used to settle the purported victim’s lawsuit.
The SEC is enforcing Rule 21-7F even when there is no proof that the restrictive language prevented someone from filing a report. That was also the case with Guggenheim and previous cases. However, it’s impossible to tell how many people want to report infractions to the SEC but are afraid of retaliation.
The SEC has drawn a line in the sand for corporations that may be obstructing whistleblowers in any form. Companies would be wise to avoid doing so./nRead More

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