What, If Anything, Impedes The SEC’s Whistleblower Rule?

by Allen Matkins
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As I suspected, law firms are churning out memoranda on the SEC’s recent enforcement actions involving alleged impediments to whistleblowers. While accurately, summarizing these actions, I’m not sure that some of the authors have adequately captured the breadth of the rule and the SEC’s even broader reading of the rule.

First, the rule itself:

(a) 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.

Rule 21F-17.  Second, what is not in the rule:

  • Any requirement that a person intend to impede;
  • Any limitation to the employment context;
  • Any limitation on the type of persons subject to the rule;
  • Any exceptions for privileged or otherwise protected communications;
  • Any definition of “impede”.

Does Canon Law violate Rule 21F-17?

Section 983, § 1 of the Code of Canon Law of the Catholic Church provides: “The sacramental seal is inviolable; therefore it is absolutely forbidden for a confessor to betray in any way a penitent in words or in any manner and for any reason.”  A confessor who violates the seal of confession may be subject to automatic (latae sententiae) excommunication.  Canon 1338, § 1 (“A confessor who directly violates the sacramental seal incurs a latae sententiae excommunication reserved to the Apostolic See; one who does so only indirectly is to be punished according to the gravity of the delict.”)

As noted above, the SEC did not include any exception in Rule 21F-17(a) for legally recognized privileges (California has codified a penitent privilege at Evidence Code Sections 1030-40).  However, in footnote #409 to the adopting release, the SEC asserts “Paragraph (a) of the proposal is not intended to prevent professional or religious organizations from responding to a breach of a recognized common-law or statutory privilege (e.g., psychiatrist-patient, priest-penitent) by one its members.”  If that was the intent, the absence of any exception in the rule itself is inexplicable.  Moreover, this sub silentio recognition of common law privileges in Rule 21F-17 contrasts sharply with SEC’s decision to exclude only attorney-client information in Rule 21F-4(b)(4) (defining what constitutes eligible information):

We have determined to exclude (subject to the exceptions set forth in these rules) only information received in breach of the attorney-client privilege, not the other confidential relationships recognized at common-law.  Although we recognize the significant public policies underlying all of these confidential relationships, we believe that for purposes of the whistleblower program the attorney-client privilege stands apart because of the significance of attorney-client communications for achieving compliance with the Federal securities laws. We will continue to address assertions of other evidentiary privileges through our normal investigative and litigation processes. See e.g., SEC Division of Enforcement Manual § 3.3.1.

In sum, the SEC appears to be saying that it does not “intend” to enforce Rule 21F-17(a) against professional or religious organizations but that it won’t categorically exclude information received in breach of penitential or other privileges from eligibility to receive a whistleblower award.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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