SEC Enforcement Takes Broad View of Anti-Whistleblower Rule in Latest Action Targeting Investment Advisers and Broker-Dealer

On 4 September 2024, the US Securities and Exchange Commission (SEC) announced that it settled charges against affiliated investment-advisers and a broker-dealer over the use of restrictive language in confidentiality agreements, in violation of Rule 21F-17(a) of the Securities Exchange Act of 1934. The firms agreed to pay a combined $240,000 in civil penalties to settle the charges. The enforcement action is the latest in the SEC’s ongoing focus on confidentiality provisions in release agreements; an emphasis that has increasingly focused on investment advisers and broker-dealers.

Rule 21F-17(a) prohibits companies from impeding an individual’s ability to communicate with the SEC regarding possible violations of the US securities laws. The SEC has read the Rule broadly and objected to what it views as restrictive language in the confidentiality provisions of a variety of agreements. In January 2024, for example, the SEC announced a $18 million civil penalty against a dual registered investment adviser and broker-dealer based on a confidentiality provision in release agreements with retail clients that the SEC interpreted as not permitting affirmative reporting.

The agreements at issue in today’s settlement similarly included language the SEC viewed as limiting an individuals’ ability to report. The SEC viewed these agreements as permitting a response to a Commission inquiry only if the “inquiry [was] not resulting from or attributable to any actions taken by [client].” The SEC also took issue with language that it viewed as requiring clients to certify both they had not made previous reports and that they would refrain from future reporting.

The Order makes clear that the SEC is aggressively enforcing Rule 21F-17(a), interpreting carveouts in confidentiality provisions narrowly and focusing instead on a client’s “reasonable impression” after reviewing the agreement. Firms should take a second look at the confidentiality provisions in their agreements, using the SEC’s strict standard, to ensure that they measure up.