Who may be interested: Investment Advisers, Broker-Dealers

Quick Take: The SEC settled charges against a firm that allegedly prevented brokerage customers and advisory clients from reporting potential securities law violations to the SEC, in violation of whistleblower protections afforded under the Exchange Act. According to the SEC’s order, the firm asked more than 300 retail advisory clients and brokerage customers (clients) who received credits or settlements over $1,000 from the firm to sign confidential release agreements (Agreements) that contained provisions prohibiting the client from voluntarily disclosing potential violations of the federal securities laws to a regulator unless responding to an inquiry by the regulator.

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The Agreements contained a provision that prohibited a client from soliciting “others to institute any action or proceeding” against the firm and, if breached, allowed the firm to take legal action, including injunctive and monetary relief, against the client. The Agreements provided that the client could respond to inquiries made by regulators related to a settlement and its underlying facts, but otherwise required the client to keep all information relating to a settlement confidential.

According to the SEC’s order, these provisions in the Agreements violated Exchange Act Rule 21F-17(a), which prohibits any person from taking any action to impede an individual from communicating directly with the SEC staff about a possible securities law violation. Confidentiality agreements that prohibit individuals from communicating with the SEC run afoul of this rule.

Without admitting or denying the findings, the firm agreed to a cease-and-desist order, a censure, and to pay a civil penalty of $18 million.

The SEC's order can be found here.