The SEC has announced settled charges against three affiliated registrants: an SEC-registered broker-dealer Nationwide Planning Associates, Inc, an investment adviser called NPA Asset Management, LLC, and state-registered investment adviser Blue Point Strategic Wealth Management, LLC.

The alleged violations revolved around impeding brokerage customers and advisory clients from serving as whistleblowers and being able to effectively report securities law violations to the SEC.

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

Agreements impeding whistleblowing

According to the SEC’s order, from May 2021 through February 2024, Nationwide, NPA, and Blue Point collectively asked 11 retail clients to sign confidentiality agreements in connection with payments made by the entities to the clients’ investment accounts.

The payments were intended to compensate the clients for losses caused by the firms’ alleged breaches of federal or state securities laws.

The order finds that the agreements contained provisions that impeded clients from reporting potential securities law violations to the SEC by permitting communications only where the SEC first initiated an inquiry. (More on that very limited carve-out is below.)

As described in the order, some of the agreements further required the clients to represent that they had not reported the underlying dispute to the SEC or another federal, state, or self-regulatory securities commission or authority, and would forever refrain from such reporting.

The SEC noted that the inclusion of this provision created the reasonable impression that a client presented with the agreement and release would be prohibited from reporting potential securities law violations to a securities regulator if they wished to accept the compensatory payment offered by their employer.

Limited carve-out for reporting

Under the limited carve-out, the client signer was not permitted to communicate with the SEC, unless the SEC initiated an unsolicited inquiry that did not originate from any action by or at the direction of the client.

“Pure and simple, investors need to be able to report complaints or evidence of wrongdoing to the SEC without impediment.”

Corey Schuster, Co-Chief, Enforcement Division Asset Management Unit

The SEC said the terms of the agreement thereby created the reasonable impression “that signing clients were prohibited from affirmatively reporting potential securities law violations to the SEC,” which is in violation of Rule 21F-17(a).

That rule, created pursuant to the Dodd-Frank Act of 2010, is expressly intended to encourage individuals to report to the Commission, the SEC noted in its order. Specifically, SEC Rule 21F-17, provides in relevant part: “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 … with respect to such communications.”

Cooperation credit

In determining the penalty in this case, the SEC considered the remedial acts promptly undertaken by the respondent firms and the cooperation afforded to the SEC’s staff.

The companies took the following remedial actions promptly, the SEC said:

• They ceased use of the violative provisions in their agreement and “agreement and release” templates.
• They sent communications to all clients who received these documents stating that the clients are not prohibited from voluntarily or otherwise communicating directly with or providing information to any governmental or regulatory authority about their accounts, the agreements at issue, the underlying facts or circumstances from which the agreements arose, or any other disputes or concerns.

Roadblocks not allowed

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

In September last year, the SEC announced settled charges against Monolith Resources LLC, a privately held energy and technology company, for using employee separation agreements that violated the whistleblower protection rules.

Two weeks later, it announced a settlement order with CBRE, Inc, the Dallas-based commercial real estate services and investment firm and a subsidiary of publicly traded CBRE Group, Inc, for using an employee release that violated the SEC’s whistleblower protection rule.

And in February, the SEC charged Activision Blizzard Inc, a video game developer and publisher, for requiring in its separation agreements that former employees “notify the company if they received a request from a government administrative agency in connection with a report or complaint.”

These enforcement actions are a reminder to businesses to fully review all employee agreements, codes of conduct, employee manuals, and all training materials addressing the reporting of misconduct, etc, for red flags of possible whistleblower protection violations. This includes templates and, now that we are on the topic of reusing material, anything your generative AI tool produces.