On September 4, the Securities and Exchange Commission (SEC) issued an order against three investment adviser firms for violating the whistleblower protections of Rule 21F-17(a) under the Securities Exchange Act of 1934. This rule prohibits any person from taking action to impede an individual from communicating directly with the SEC about possible securities law violations, including enforcing or threatening to enforce a confidentiality agreement with respect to such communications.

According to the SEC’s order, from May 2021 to February 2024, the firms asked certain retail customers to sign release agreements in connection with payments for losses caused by the firms’ alleged breaches of federal or state securities laws. The SEC alleged that these agreements contained confidentiality provisions that restricted such clients from proactively reporting potential securities law violations to the SEC or other regulatory authorities. Additionally, some of the confidentiality agreements required clients to affirm they had not reported and would not report the underlying disputes to any securities regulator.

Without admitting or denying the SEC’s findings, each firm agreed to be censured and to cease and desist from violating the whistleblower protection rule. They further agreed to a combined penalty of $240,000, which was apportioned among the firms according to their relative size and financial condition. This SEC order underscores the importance of adhering to whistleblower protection regulations, whether with employees or outsiders, including customers. Firms should review their confidentiality agreements to ensure compliance with Rule 21F-17(a) to avoid similar enforcement actions.

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Photo of Stephanie Costantino Stephanie Costantino

Private investment funds rely on Stephanie for all aspects of strategic advice related to fund formation and complex compliance issues. Her experience as in-house counsel allows her to bring a different perspective to many issues her clients face.

Photo of Jay Dubow Jay Dubow

Jay co-leads the firm’s Securities Investigations + Enforcement Practice Group. He focuses his practice on complex business litigation, with a special emphasis on defending against shareholder derivative and securities class action litigation. He also represents clients involved in investigations by the U.S. Securities…

Jay co-leads the firm’s Securities Investigations + Enforcement Practice Group. He focuses his practice on complex business litigation, with a special emphasis on defending against shareholder derivative and securities class action litigation. He also represents clients involved in investigations by the U.S. Securities and Exchange Commission (SEC), the Pennsylvania Department of Banking and Securities, and various self-regulatory organizations, including the Financial Industry Regulatory Authority, Inc. (FINRA). He also conducts internal investigations on behalf of clients. Such investigations have included allegations involving the Foreign Corrupt Practices Act (FCPA), whistle blower claims, financial fraud, and civil and criminal violations of various federal and state laws.

Photo of Genna Garver Genna Garver

Genna provides targeted, practical advice to investment advisers and their proprietary private investment funds. She represents institutional investors, funds of funds and family offices in connection with their private fund investments. Genna routinely advises clients on formation and offering matters for both domestic…

Genna provides targeted, practical advice to investment advisers and their proprietary private investment funds. She represents institutional investors, funds of funds and family offices in connection with their private fund investments. Genna routinely advises clients on formation and offering matters for both domestic and offshore funds; SEC and state investment adviser, broker-dealer and private fund regulation; Investment Advisers Act compliance programs, annual reviews and ongoing compliance matters; and regulatory examinations and investigations.

Photo of Ghillaine Reid Ghillaine Reid

Ghillaine co-leads the Securities Investigations + Enforcement Practice Group at Troutman Pepper. She focuses her practice on government and securities regulatory investigations, financial services litigation, commercial litigation, and corporate compliance. Drawing on her experience in government service and private practice, Ghillaine regularly represents…

Ghillaine co-leads the Securities Investigations + Enforcement Practice Group at Troutman Pepper. She focuses her practice on government and securities regulatory investigations, financial services litigation, commercial litigation, and corporate compliance. Drawing on her experience in government service and private practice, Ghillaine regularly represents corporations and individuals in investigations conducted by the Securities & Exchange Commission, the Department of Justice, the Financial Industry Regulatory Authority, and other government and regulatory agencies. Ghillaine has successfully defended several high profile SEC investigations and enforcement proceedings involving a wide range of significant issues, including insider trading, accounting fraud, market manipulation, and broker-dealer sales practice violations. Prior to entering private practice, Ghillaine was a Branch Chief and Staff Attorney in the New York Regional Office of the Securities & Exchange Commission’s Division of Enforcement, where she investigated and litigated a wide range of securities enforcement matters.

Photo of Casselle Smith Casselle Smith

Casselle counsels individuals and entities in high-stakes matters across a variety of sectors and routinely represents clients in connection with allegations of wrongdoing that have enterprise-wide implications and the potential for catastrophic reputational harm.

Photo of Theodore Edwards Theodore Edwards

Theodore counsels registered funds, private funds, their managers and sponsors in connection with organizational, offering, transactional, and compliance matters. He regularly works with a variety of different fund structures, including open-end and closed-end funds, private equity and hedge funds. Theodore also counsels investment…

Theodore counsels registered funds, private funds, their managers and sponsors in connection with organizational, offering, transactional, and compliance matters. He regularly works with a variety of different fund structures, including open-end and closed-end funds, private equity and hedge funds. Theodore also counsels investment advisers on various matters, particularly with respect to registration and disclosure issues. He has significant experience with investment company status issues under the Investment Company Act of 1940.