On January 16, the U.S. Securities and Exchange Commission (SEC) announced settled charges against New York-based investment advisers Two Sigma Investments LP and Two Sigma Advisers LP. The settlement, which includes $90 million in civil penalties, resolves allegations that Two Sigma failed to address known vulnerabilities in its investment models and violated the SEC’s whistleblower protection rule, Rule 21F-17(a).

Rule 21F-17(a) prohibits companies from impeding the ability of individuals to blow the whistle to the SEC, including through restrictive language in non-disclosure agreements, separation agreements, and other employment agreements.

According to the SEC, “Two Sigma violated the Commission’s whistleblower protection rule by requiring departing individuals, in separation agreements, to state as fact that they had not filed a complaint with any governmental agency.”

“This requirement, in effect, could identify whistleblowers and prohibit whistleblowers from receiving post-separation payments and benefits, both of which are actions to impede departing individuals from communicating directly with Commission staff about possible securities law violations, in violation of the whistleblower protection rule,” the SEC claims.

Notably, according to the SEC order, Two Sigma did include carve-out language in the agreements which stated “Nothing in this Agreement (including without limitations Sections 5(g), 6, 7 and 8), the Company’s policies or any other agreement between you and the Company prohibits you from making a good faith reporting of possible violations of law or regulation to any governmental agency or entity or making other disclosures that are protected under whistleblower laws or regulations.”

However, the SEC determined that this carve-out language “did not remedy the impeding effect of the Employee Representation, which addressed past employee conduct (i.e., it required disclosure of already-made complaints), because the Carve Out was prospective in application (i.e., it did not prohibit departing employees from making future complaints).”

As demonstrated in this case, the SEC is taking seriously both the retaliatory potential and chilling effect of restrictive agreements, which undermine the purpose of the SEC Whistleblower Program, and is taking a hard-line stance on Rule 21F-17(a) violations.

Increased Enforcement of Rule 21F-17(a)

While the SEC instituted Rule 21F-17(a) in 2011 and first took an enforcement action over alleged violations of it in 2016, the Commission’s enforcement efforts around the rule have increased dramatically over the past year.

Notably, in January 2024, the SEC sanctioned J.P. Morgan $18 million for utilizing confidentiality agreements which impeded clients from blowing the whistle to the SEC Whistleblower Program. This was the largest penalty ever levied for Rule 21F-17(a) violations.

“Whistleblowers play a valuable role in helping to protect the U.S. financial markets by bringing the Commission information about potential securities law violations,” Creola Kelly, Chief of the Office of the Whistleblower, stated in the SEC Whistleblower Program’s annual report to Congress for the 2024 Fiscal Year. “The Commission sent a strong message that agreements and conduct that impede communication with the SEC will not be tolerated.”

“Corporations should be looking at the SEC’s recent 21F-17 rulings as a sign that the age of blocking whistleblowers from disclosing in contractual agreements is over — it is now more expensive for a corporation to try to cover up fraud and corruption by silencing whistleblowers than it is for them to do the right thing,” wrote whistleblower attorney Benjamin Calitri of Kohn, Kohn & Colapinto in an article for NYU Law’s Compliance and Enforcement blog.

Geoff Schweller also contributed to this article.