The Securities and Exchange Commission’s Whistleblower Program under the Biden administration has picked up where it left off under President Obama, aggressively enforcing Rule 21F-17(a) against employers whose policies may impede employees from communicating with the SEC. On June 23, 2021, the SEC fined Guggenheim Securities, LLC (“Guggenheim”) for maintaining a policy that it contended impeded potential whistleblowers from communicating with the SEC by requiring employees to obtain permission before reporting securities violations. Even though the SEC was unaware of any instances in which a Guggenheim employee was prevented from reporting a potential securities law violation or in which Guggenheim acted to enforce the policy, the SEC nevertheless found that the company had violated Rule 21F-17(a).
THE SEC’S HISTORY WITH RULE 21F-17(a)
Implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act, SEC Rule 21F-17(a) provides that “[n]o 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.” Under the Obama administration, the SEC made Rule 21F-17(a) enforcement a top priority, fining employers for requiring employees to sign confidentiality agreements in connection with being interviewed in an internal investigation; including bounty waivers, confidentiality provisions, and non-disparagement clauses in severance agreements; and attempting to unmask a whistleblower. Although the SEC under President Trump brought charges under Rule 21F-17(a) against a company for conditioning the return of money to investors who raised concerns on their entering into confidentiality agreements, Rule 21F-17(a) enforcement largely took a backseat to other initiatives. However, as the fine against Guggenheim shows, that hiatus is over, and the SEC is poised to return to aggressive enforcement of Rule 21F-17(a) under President Biden.
THE GUGGENHEIM CONSENT ORDER
The Guggenheim matter arose from an SEC investigation into whether the company’s compliance manual impeded employee access to the SEC in violation of SEC Rule 21F-17(a). From April 2016 to July 2020, Guggenheim’s compliance manual contained a policy that prohibited employees from contacting regulators without prior approval from the company’s legal or compliance departments and that threatened disciplinary action for violating the policy. Upon hire and annually thereafter, Guggenheim required employees to sign an acknowledgement that they had received, had read, and would adhere to the compliance manual. Guggenheim further reinforced the policy by including it in the company’s annual compliance training.
Guggenheim denied impeding whistleblower access, pointing to the whistleblower rights disclaimer the company added to its Code of Conduct in July 2016. The disclaimer provided that no company policy was “intended to prohibit [employees] (with or without prior notice to the Company) from reporting to or participating in an investigation with a government agency or authority about a possible violation of law, or from making other disclosures protected by applicable whistleblower statutes.”
The SEC rejected Guggenheim’s argument, reasoning that the company’s compliance manual undermined the whistleblower rights’ disclaimer. Specifically, the compliance manual contained a directive requiring employees to “follow the more restrictive of the policies or procedures, absent explicit direction to the contrary,” and the SEC considered Guggenheim’s prohibition on contacting regulators without prior approval the more restrictive policy. The SEC expressly acknowledged there was no indication that Guggenheim’s policy actually impeded any employee from communicating with the SEC about perceived violations of the securities laws or that Guggenheim actively enforced the restrictions on employee communications with regulators. The SEC found, however, that the mere fact that Guggenheim’s policy potentially impeded employee access to the SEC undermined and violated SEC Rule 21F-17(a).
After the SEC contacted Guggenheim about its investigation, Guggenheim removed the language at issue from its compliance manual and inserted language “affirmatively advising employees of their right to contact regulators” regarding potential securities law violations. It subsequently agreed to pay a penalty of $208,912 to resolve the SEC action, without admitting or denying the SEC’s findings.
Guggenheim is a significant development because it demonstrates that the SEC is taking up the activist gauntlet it carried during the Obama administration in instituting administrative proceedings against employers that maintain policies or procedures that have the potential to chill or restrict an employee’s right to communicate with the SEC—even in the absence of any evidence that the policies ever actually had that effect or were ever enforced. To avoid being swept up in the SEC’s Rule 21F-17(a) enforcement initiative, employers should review, and if necessary revise, their employment policies, procedures, training materials and form agreements to ensure that they do not contain any language that might chill or deter employee whistleblowing activity, and may also wish to consult with counsel.
Ashley Krezmien, a 2021 Summer Associate (not admitted to the practice of law) in the firm’s Boston office, contributed to the preparation of this post.