On June 23, 2016, Merrill Lynch Pierce Fenner & Smith settled SEC allegations involving violation of the SEC’s customer protection rule by misusing customer cash for its own profits rather than placing that cash in appropriate reserve accounts. As part of the order settling the administrative proceeding, the SEC noted that Merrill Lynch had violated Rule 21F-17 through certain provisions in severance agreements with employees. Those agreements prohibited a former employee from disclosing any aspect of confidential information, except pursuant to formal legal process or unless the employee first obtained written approval of Merrill Lynch. In addition, the offending agreements were amended to provide that a former employee was not precluded from initiating communication with the SEC, but that the former employee could only provide information about the severance agreements or “its underlying facts and circumstances.” While the SEC said it had no evidence that any employee actually was prevented from providing information to the SEC or that any of the subject provisions had been enforced, the SEC found that the provisions violated Rule 21F-17.

In its order, the SEC noted that Merrill Lynch had performed “substantial remedial acts” to address the Rule 21F-17 violations. Among other things, Merrill Lynch had agreed to modify the confidentiality provisions in the agreements to allow the disclosure of confidential information to the SEC in connection with any suspected violations of law. The language also makes clear that the employee does not need permission to engage in the protected whistleblower activity. In addition, all employees are now required to participate in annual training that includes a summary of employee rights to report possible violations of law. Finally, Merrill Lynch updated its code of conduct to ensure that employees understand that there is no restriction on their rights under Rule 21F-17.