On September 4, the SEC announced settled charges against a broker-dealer and two affiliated investment advisers over the use of restrictive language in confidentiality agreements which violated a whistleblower protection rule.

Key Takeaways

• The SEC alleges that the firms asked retail clients to sign confidentiality agreements which only permitted communications when the SEC first initiated an inquiry
• SEC Rule 21F-17(a) states that “no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement”
• The firms agreed to pay $240,000 to settle the charges

On September 4, the U.S. Securities and Exchange Commission (SEC) announced settled charges against a broker-dealer and two affiliated investment advisers over the use of restrictive language in confidentiality agreements which violated a whistleblower protection rule. The order is the latest in a series of enforcement actions over Rule 21F-17(a), which prohibits entities from impeding the ability of individuals to blow the whistle on securities violations to the SEC.

According to the SEC, the broker-dealer, Nationwide Planning Associates, Inc., and the investment advisers, NPA Asset Management, LLC and Blue Point Strategic Wealth Management, LLC, asked 11 retail clients to sign confidentiality agreements which contained language “that impeded clients from reporting potential securities law violations to the SEC by permitting communications only where the SEC first initiated an inquiry.”

These confidentiality agreements were connected to payments made to the clients’ investment accounts in order to compensate the clients “for losses caused by the firms’ alleged breaches of federal or state securities laws.” 

The SEC’s order details that these agreements included language which stated:

“The Recipient represents that [she / he] shall forever keep completely confidential all of the above terms of this Agreement and shall direct all those in privity with them (including their attorneys, CPAs, etc.) to keep the same completely confidential. The Recipient further represent[s] that [she / he] will forever refrain from any discussion, narration, or disclosure of any transaction, circumstance, conversation, or any other aspect of the Recipient relationship with any and all of the Company, with any person or entity.”

“The confidentiality and non-disclosure provision does not prohibit the Recipient from responding to any unsolicited inquiry (i.e., an inquiry not resulting from or attributable to any actions taken by Recipient or by any third party at Recipient’s direction) about the Agreement or its underlying facts and circumstances initiated by any state, federal or self-regulatory commission or authority that regulates the business or activities of registered investment advisers or their representatives.”

According to the SEC, the agreements “expressly limited a client’s ability to voluntarily report potential securities law violations to the Commission, notwithstanding the inclusion of a limited carve-out for responding to unsolicited inquiries from government entities and self-regulatory organizations that oversee investment advisers and their employees. Under the limited carve-out, the client signer was not permitted to communicate with the Commission unless the Commission initiated an unsolicited inquiry that must not have originated from any action by or at the direction of the client.”

The SEC further claims that some of the agreements “required the clients to represent that they had not reported the underlying dispute to the SEC or to another securities regulator and would forever refrain from such reporting.”

“By including clauses prohibiting unauthorized disclosure of confidential information in their Agreement and Release, Respondents took action to impede signing clients from communicating directly with the Commission staff about possible securities law violations,” the SEC’s order states. “Similarly, by requiring clients to affirmatively certify that they had not previously nor would they ever voluntarily report the matter to the Commission, Respondents raised additional impediments to whistleblowing.”

The SEC charged Nationwide Planning Associates, Inc., NPA Asset Management, LLC and Blue Point Strategic Wealth Management, LLC with violating Rule 21F-17(a) which states that “no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.”

The firms agreed to pay combined civil penalties of $240,000 to settle the charges.

“Pure and simple, investors need to be able to report complaints or evidence of wrongdoing to the SEC without impediment,” said Corey Schuster, Co-Chief of the Enforcement Division’s Asset Management Unit. “We will continue to hold firms accountable for putting roadblocks between us and their investors.”

Recent Enforcement of Rule 21F-17(a)

The SEC first charged a company with violating Rule 21F-17(a) when whistleblower Harry Barko, represented by Kohn, Kohn & Colapinto, alleged that Kellogg Brown & Root (KBR) was forcing employees to sign restrictive NDAs as part of the company’s alleged “compliance.”

In recent months, the SEC has dramatically increased enforcement efforts around RuleF-17(a). The Commission has levied record sanctions against companies for impeding whistleblowing and even charged a privately-held company with violations of the rule.