The SEC recently fined GQG Partners, a Florida based investment adviser, $500,000 for language in their agreements with employees, candidates and a former employee that did not provide Whistleblower protection. These employment agreements agreements included confidentiality language that restricted the counterparties from freely communicating with the SEC.
What is the Whistleblower Protection Rule?
Rule 21f-17 prohibits any person from taking action to forbid or discourage a party from communicating to the SEC about potential securities law violations. It is also illegal to require a party to waive their right to receive a potential Whistleblower award.
The SEC has prosecuted more than 20 companies for noncompliance with the rule. These actions don’t allege that the companies actually stopped or impeded any potential SEC communication. The issue is the confidentiality terms of the agreements that the companies use with employees and other counterparties that do not explicitly permit SEC communications.
How did GQG violate the rule?
GQG Partners – an investment adviser -- had even adopted policies and procedures to comply with the rule. However, GQG (i) required employment candidates to sign an NDA which did not comply with the rule (ii) entered into a settlement agreement with a former employee, requiring the employee to make representations that they hadn’t and wouldn’t file a claim with the SEC, and (iii) used another confidentiality agreement for employees that was unclear regarding the employees’ ability to communicate with the SEC.
Any language which can be read to impede or restrict the process of communicating with the SEC may be problematic. Some of the terms in GQG’s agreements required notice to the Company, disclosure (to the Company) if the employee received a request for information or subpoena from the SEC, or cooperation with the GQG to seek a protective order -- all restricting voluntary disclosures to the SEC.
How to comply with the Whistleblower Protection Rule?
The Whistleblower Rule requires language that unequivocally provides the freedom to communicate with the SEC, including participating in an investigation or proceeding and providing documents and other information. The rule also prohibits language restricting a would-be whistleblower from receiving an award. Explicit permission to communicate with the SEC must be clear and is typically “carved-out” of the “Confidentiality” part of an agreement.
An example of carve-out language to comply with the Whistleblower Protection Rule:
“Notwithstanding anything to the contrary contained in this Agreement, nothing in this section shall be construed or deemed to interfere with any protected right to file a charge or complaint with any applicable federal, state or local governmental administrative agency charged with enforcement of any law, or with any protected right to participate in an investigation or proceeding conducted by such administrative agency, or to recover any award offered by such administrative agency associated with such charge or complaint.”
Compliance officers and HR professionals should evaluate whether their firms may be (inadvertently) violating the Whistleblower Rule by reviewing ALL agreements that include confidentiality provisions, whether they are agreements with employees, former employees, candidates, consultants, clients, vendors or other third parties.