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Guest Post: SEC to Examine Compliance with Whistleblower Provisions

As even casual followers of SEC enforcement actions are aware, whistleblower provisions under Dodd-Frank remain a hot-button topic among investment advisers and the investing public in general–the SEC awarded over $57 million to 13 whistleblowers during the 2016 fiscal year, which is more than in all previous years combined. In light of a recent risk alert on the subject issued by the SEC, below is a guest post by Todd Kaplan of Cloudbreak Compliance Group, LLC (“Cloudbreak”), re-posted here with Cloudbreak’s permission. Cloudbreak is a boutique consulting firm that provides fund managers with regulatory compliance support. For more information regarding Cloudbreak’s services, please see their contact information below the post.  

SEC to Examine Compliance with Whistleblower Provisions

On October 24, 2016, the Securities and Exchange Commission (the “SEC”) issued a Risk Alert stating that it is examining advisers’ compliance with key whistleblower provisions under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Whistleblower Provisions”).

As part of this initiative, the SEC will focus on a variety of documents to assess whether they violate the Whistleblower Provisions, including Compliance Manuals, Codes of Ethics, employment agreements and severance agreements.  In particular, the SEC is seeking any provisions that:  (a) purport to limit the types of information that an employee may convey to the SEC or other authorities, and (b) require departing employees to waive their rights to any individual monetary recovery in connection with reporting information to the government.  The Risk Alert highlights certain provisions that may cause concern, including those that:

  • Require an employee to represent that he or she has not assisted in any investigation involving the adviser;
  • Prohibit any and all disclosures of confidential information, without any exception for voluntary communications with the SEC concerning possible securities laws violations;
  • Require an employee to notify and/or obtain consent from the adviser prior to disclosing confidential information, without any exception for voluntary communications with the SEC concerning possible securities laws violations; or
  • Purport to permit disclosures of confidential information only as required by law, without any exception for voluntary communications with the SEC concerning possible securities laws violations.

In light of the Risk Alert, advisers may wish to ensure that they have adopted policies and procedures to comply with the Whistleblower Provisions.

Advisers may also wish to review their Compliance Manuals, Codes of Ethics, employment agreements, severance agreements and any other documents imposing confidentiality obligations on employees to determine whether they contain any provisions that are inconsistent with the Whistleblower Provisions.  Potential remedial actions could include:

  • Revising documents on a going-forward basis to make it clear that nothing contained in them prohibits employees/former employees from voluntarily communicating with the SEC or other authorities regarding possible violations of law or from recovering a SEC whistleblower award;
  • Providing general notice to employees, or notice to employees who signed restrictive agreements, of their right to contact the SEC or other authorities; and
  • Contacting former employees who signed severance agreements to inform them that the company does not prohibit them from communicating with the SEC or seeking a whistleblower award.

For more information regarding Cloudbreak Compliance Group, LLC, please visit their website or contact Todd Kaplan at todd@cloudbreakcompliance.com.


Legal Disclaimer: Cloudbreak is a compliance consulting firm and does not provide legal advice.  This guest post contains general information only.  Cloudbreak is not, by means of this guest post, rendering professional advice or services.  Before making any decision or taking any action that might affect your business, you should consult with your legal counsel and other qualified professional advisers.  This guest post is presented without any warranty or representation as to its accuracy or completeness.  Cloudbreak assumes no responsibility to update this guest post based on events after its publication.