SEC Expands its Focus on Whistleblower Protection Rules

The SEC has continued and expanded its focus on violations of Rule 21F-17 of the Securities Exchange Act of 1934 (i.e., the whistleblower protection rule).

The SEC began actively enforcing the whistleblower protection rule many years ago, although enforcement actions in late 2023 reflected an intensified focus on whistleblower protections in separation agreements and other employment documents.

However, the SEC has recently made it clear that whistleblower protections apply not just in the context of agreements with employees and former employees but also to arrangements with other third parties.

Background on the Whistleblower Protection Rule

The whistleblower protection rule, implemented by the SEC in 2011 to fulfill its mandate under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), prohibits a company from taking “any action to impede an individual from communication directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.”  Such section of Dodd-Frank and the whistleblower protection rule encourage whistleblowing on potential securities law violations by providing confidentiality, protections against retaliation and financial rewards for tips that lead to successful SEC actions.

Recent Developments

Recent actions and speeches by the SEC indicate how broadly the SEC is interpreting the word “individual” in the whistleblower protection rule to afford whistleblower protections to a broader universe of parties than just employees/former employees.

In January 2024, J.P. Morgan Securities LLC settled charges brought by the SEC for impeding its advisory clients and brokerage clients from reporting potential securities law violations to the SEC through provisions J.P. Morgan included in settlement agreements with clients. In a press release issued by the SEC in connection with this settlement, Corey Schuster, the Co-Chief of the Enforcement Division’s Asset Management Unit, expressed the SEC’s view that “[i]nvestors, whether retail or otherwise, must be free to report complaints to the SEC without any interference”.  The SEC has also issued deficiency letters to registered investment advisers to private funds that have confidentiality provisions in their funds’ operative documents that do not contain appropriate carve outs for whistleblower protections.

In recent speeches the SEC has further indicated its view that third party consultants are also afforded whistleblower protections.

The SEC is currently conducting a broad whistleblower related sweep of registered investment advisers and we anticipate that there could be enforcement actions relating to confidentiality provisions with private fund investors, consultants and other third parties as a result of such sweep.

Next Steps

These recent developments emphasize that investment advisers to private funds should carefully review and revisit their agreements with fund investors (e.g., subscription agreements, limited partnership agreements and side letters)  and with other third parties such as consultants. In addition, such advisers should consider sending a notice to fund investors, consultants and other third parties (as well as employees and former employees to the extent they have not previously done so) to clarify their whistleblower protections.

For further information regarding the whistleblower protection rule and for assistance in preparing notices and developing policies and procedures designed to comply with this rule, please contact your regular Kleinberg Kaplan attorney.